Introduction

In the fast-moving consumer goods (FMCG) industry, profitability is often assessed through gross profit margin, which considers only the cost of goods sold (COGS). However, this metric fails to capture variable costs beyond production, particularly those associated with secondary distribution—the movement of goods from warehouses to retailers, wholesalers, and end customers.

For companies to truly understand and optimize profitability, they must shift their focus to net contribution margin, which accounts for secondary distribution costs such as transportation, warehousing, handling, and last-mile delivery expenses. Supply chain teams play a critical role in managing these costs, ensuring that logistics efficiency contributes to—not erodes—profitability.

What is Net Contribution Margin and Why Does It Matter?

Net contribution margin is the amount of profit remaining after deducting all variable costs from revenue. It is calculated as:

Net Contribution Margin = Revenue – (COGS + Variable Operating Costs)

For supply chain teams, the most significant variable costs impacting net contribution in FMCG are:

• Freight and secondary transportation costs (e.g., distributor to retailer, retailer to consumer).

• Warehousing and storage costs (e.g., stock-holding fees, order processing costs).

• Order fulfillment costs (e.g., picking, packing, last-mile delivery).

• Handling and shrinkage losses (e.g., damages during transport, expired stock).

By optimizing these costs, supply chain teams can directly enhance a company’s profitability and pricing competitiveness.

The Impact of Secondary Distribution Costs on FMCG Profitability

In FMCG, secondary distribution can account for a significant portion of variable costs, often overlooked when calculating profitability.

Ignoring these costs can lead to:

1. Misleading Profitability Assumptions – Products may appear profitable based on gross margin but become unviable after accounting for high last-mile delivery costs, storage inefficiencies, or frequent small-batch shipments.

2. Erosion of Promotional Gains – Marketing and sales teams often push promotions to boost volume, but if logistics costs increase disproportionately (e.g., due to higher frequency of deliveries), the actual net contribution may be lower than expected.

3. Cash Flow Strain – Poor secondary distribution planning can tie up cash in inefficient inventory locations, leading to stockouts in high-demand areas and excess inventory elsewhere.

4. Increased Waste & Returns – Inefficient supply chain operations can result in higher damage rates, expired products, and costly returns, reducing the net contribution margin even further.

How Supply Chain Teams Can Optimize Secondary Distribution to Improve Net Contribution Margin

1. Optimizing Transportation & Delivery Models

• Implement route optimization and load consolidation to reduce fuel and labor costs.

• Shift from fixed-route deliveries to dynamic, demand-based deliveries to avoid half-empty trucks.

• Leverage third-party logistics (3PL) providers strategically to manage peak demand periods cost-effectively.

• Reduce reliance on expedited shipping unless necessary, balancing speed with cost efficiency.

2. Warehouse & Fulfillment Cost Reduction

• Optimize warehouse locations to reduce the distance between distribution centers and key retailers.

• Implement cross-docking strategies to minimize storage costs and accelerate order fulfillment.

• Use automated picking and packing technologies to reduce labor expenses and order processing time.

• Improve inventory accuracy with real-time tracking and demand forecasting tools to prevent overstocking and understocking.

3. SKU Rationalization & Demand Planning

• Analyze which SKUs contribute positively to net contribution margin versus those with high logistics costs and low profitability.

• Work with sales and marketing teams to reduce unnecessary SKU proliferation, which increases distribution complexity and costs.

• Align production and distribution with real demand signals to avoid excess inventory in the wrong locations.

4. Negotiating Better Logistics Contracts

• Renegotiate freight rates and warehousing contracts to reflect actual shipment volumes and optimize pricing structures.

• Explore long-term partnerships with logistics providers for better cost predictability and volume discounts.

• Shift towards shared distribution networks with other FMCG brands to reduce last-mile delivery expenses.

5. Data-Driven Distribution Decisions

• Implement advanced analytics and AI-driven forecasting to predict demand patterns and optimize delivery schedules.

• Use real-time transport monitoring to reduce delays and improve efficiency.

• Develop cost-to-serve models to understand the true cost of delivering each SKU to each customer segment.

Case Study: How an FMCG Company Reduced Secondary Distribution Costs and Increased Net Contribution Margin

A leading FMCG company in the beverage industry was struggling with declining profitability, despite strong revenue growth. A deep dive into the financials revealed that secondary distribution costs were rising faster than sales, driven by:

❌ Frequent small deliveries to retail stores.

❌ High last-mile delivery costs due to inefficient routing.

❌ Overstocking in warehouses leading to increased storage fees.

❌ High case-picking costs due to inefficient order fulfillment processes.

Actions Taken:

✔️ Shifted from small-batch, high-frequency deliveries to consolidated shipments, reducing transport costs by 18%.

✔️ Implemented route optimization software, cutting last-mile expenses by 12%.

✔️ Negotiated better warehousing contracts, reducing inventory holding costs by 10%.

✔️ Redesigned case-picking operations by introducing:

• Zone picking to reduce picker travel time.

• Pick-to-light systems to increase speed and accuracy.

• Batch picking for high-demand SKUs to reduce handling costs.

✔️ Aligned sales incentives with net contribution margin, reducing unnecessary promotions that increased logistics strain.

✔️ When possible to agree direct deliveries. Straight from the plant and directly to customer.

Results:

✅ Net contribution margin increased by 9% within a year.

✅ Case-picking costs reduced by 15%, improving warehouse efficiency.

✅ Improved delivery efficiency led to faster order fulfillment and better retailer relationships.

✅ Cash flow improved due to reduced excess inventory and better demand planning.

Conclusion: Making Secondary Distribution Efficiency a Key Profitability Driver

In FMCG, where every cent matters, secondary distribution costs must be actively managed to maximize net contribution margin. While sales and marketing efforts drive revenue, it is the supply chain’s role to ensure that revenue translates into actual profitability.

By implementing cost-efficient transportation, warehousing, and order fulfillment strategies, supply chain teams can play a crucial role in:

• Reducing unnecessary variable costs without impacting service levels.

• Enhancing agility and responsiveness to market demand.

• Improving cash flow and working capital efficiency.

• Ensuring promotions and pricing strategies contribute to—not erode—profitability.

To thrive in today’s competitive FMCG landscape, companies must go beyond just selling more—they must sell profitably. And that starts with making net contribution margin a key performance metric across supply chain operations.