Manually Margining Bill of Goods

INTRODUCTION:

When analyzing purchases made via retail or wholesale venues, Margins become relevant. Since the prices paid to a wholesaler or retailer are purchaser prices and not producer prices, adjustments need to be made to the sales value. IMPLAN can automatically apply Margins for you - you simply need to select "Purchaser Price" in the Advanced Fields of your Event to let IMPLAN now your Event Value is a Purchaser Price. In some cases you may want to use different Margins than the Margins built into IMPLAN. To do so, you'll need to take the manual margining approach explained in this article. 

Manual margining may be appropriate when analyzing household spending or capital purchases made via retailers or wholesalers.  When you have an Industry's Bill of Goods (BOG) or line-item budget available, manually margining some of those purchases may be an appropriate step in your Analysis-by-Parts (ABP). This article explains the manual margining process in the context of analyzing Intermediate Inputs using the ABP Bill of Goods approach, which is only step 1 of an ABP analysis. Be sure to read on in the linked article for the additional steps. 

DETAILED INFORMATION:

ABP can be an incredibly useful technique for digging deeper into a firm's budgetary expenditures, but when we look at retail or wholesale purchases, it is important that these purchases are handled carefully. A retail or wholesale gross sales value (known as the purchase price) includes not only the production component of the retail or wholesale venue but also the production of all the elements of the Value Chain that proceed it. Thus, the gross sales value of a retail sale is a combination of the Retail Value, Wholesale Value, Transportation Value, and Producer Value. The wholesale gross sales value is actually a combination of the Wholesale Value, Transportation Value, and Producer Value. 

When a purchaser price is known, but the product purchased is unknown, the purchaser price can be analyzed via an Industry Output event, with the retailer or wholesaler from which the purchase was made specified as the Industry. The default margin setting of "Total Revenue" tells IMPLAN the value entered is a purchaser price. IMPLAN will estimate what portion of the purchaser price is kept by the retailer/wholesaler specified based on the margin coefficients in the IMPLAN data.

When a purchaser price is known, and the product purchased is known the purchaser price can be analyzed via a Commodity Output event, with the Commodity purchased specified as the Commodity. Applying margins to a purchaser price in IMPLAN is appropriate when IMPLAN's margins reflect the value chain of the purchase. Manual margining can be a helpful workaround when IMPLAN's margins are not appropriate for the purchase you are analyzing. 

Example: Item Purchased Is Known and was purchased from a wholesaler

Best of Grains also buys grain as one of the primary components of its production. Of their $15,000,000 annual Output, they spend $8,400,000 on grain, but they purchase the grain through a wholesale food provider.

We cannot directly attribute the $8.4 million in production to Sector 2 - Grains. When we look at the splits for Commodity 3002, we see that all elements of the Value Chain are included in the spreadsheet: Margin splits for Retail Value, Wholesale Value, Transportation Value, and Producer Value (2018 Margins). If the $8.4 million were analyzed via a Commodity Output Event in Grains as a purchaser price, then, using these margins, the purchase price value of the Grains would be multiplied by each "MarginValue" to calculate the Marginal Revenue or producer price for each Commodity in the Value Chain (the Commodity value can be converted to an Industry Value by multiply by the Commodity's Market Shares for each supplier).

With these standard margins, about 17% of the purchase price is assumed to be kept as Output by the retailer. With a purchase price of $8.4 million, that would be a Direct Output of .17 * $8.4 million, or about $1.42 million.

In this example there is a caveat: We know there is no retailer because the purchase was made through a wholesaler. We will need to recalculate the Margin splits by adjusting the provided values so that the portion of the Margin assigned to the retailer in the table is redistributed into the wholesale, transport, and production elements of the Margin.

To do this we will need to zero out the retail Margin and normalize the remaining Margin values. We can normalize the remaining Margins as follows:

Now that we have adjusted the Margins to account for the entire sales value without the retail component, we can apply the Margin values to the grain purchase to determine how much of the grain purchase goes to each of the other respective Sectors.

So now we split the Grain entry into the new margined pieces as shown here.

While this represents a simplified example, the same principles apply to Margining larger more complicated projects as well. Note that more than one component in a spending pattern will likely have Wholesale and Retail purchases. It is usually best, unless you want to create a single Event for each part of the Value Chain (retail, wholesale, transportation, production), to sum these coefficients on like Sectors (ie combining all the Wholesale) into their total component so you have only one Event for each.

Remember, in these cases capital expenditures should be modeled separately from any operations or construction of the business. 

 Read more here to follow steps 2 through 5 an ABP Bill of Goods Analysis.

ADDITIONAL CONSIDERATIONS:

What about the Local Purchase Percentage?

This should be set to SAM Model Value. This will allow the Model to make estimates of local purchasing ability of all Commodities. 

Thinking about Transportation

Typically there are two legs of transport: between the producer and the wholesaler and between the wholesaler and the retailer. If you are using the IMPLAN Margin splits as outlined in this article, both legs of transportation are included in the respective Margin components.  Keep in mind, however, that the first leg could be via ship from the producer to the wholesaler, while the second leg is via truck from the wholesaler to the retailer. 

Zeroing out the Retail Margin

In this case, we re-normalized across all Margin coefficients to remove the retail component in  the example. However, this is not the only option, though it is typically the most conservative one. In contrast, you could argue that the wholesaler and transporters do not get a larger cut when there is no retailer. Perhaps it is more likely that the producer gets to keep the difference or splits the difference with the wholesaler. You can make these adjustments based on what you know about the Industry, and then state how you handled the normalization process in your results.

RELATED ARTICLES:

ABP: Introduction to Analysis-By-Parts

ABP: Analysis-by-Parts & Bill of Goods Using Commodity or Industry Events with Labor Income Event(s)

ABP: Analysis-by-Parts Using an Industry Spending Pattern Event with Labor Income Event(s)

Hospitals: Modeling Private Hospital Impacts with Analysis-by-Parts

Hospitals: Modeling Public & Nonprofit Hospital Impacts with Analysis-by-Parts

Proving Analysis-By-Parts: A Comparison of Event Types

Written August 19, 2019

Updated February 22, 2021