Glossary
Diversion
Tags: Glossary
The practice of selling goods to a competitor that the vendor assumes would be used to service that customer's store. Example: Grocery Store Chain A buys orange juice from Minute Maid. Grocery Store Chain A, because of their sales volume or because of promotion, can buy the product for $12.50 per case. Grocery Store Chain B, because of a lower sales volume, buys the same orange juice for $14.50 per case. Grocery Store Chain A and Grocery Store Chain B get together and make a deal. Grocery Store Chain A resells that product to Grocery Store Chain B for $13.50 per case. Grocery Store Chain A makes $1.00 per case, and Grocery Store Chain B gets the product for $1.00 less per case than it can buy from Minute Maid.
What is Diversion?
Diversion in Logistics
Diversion is a practice commonly used in the field of logistics, where goods are sold by a vendor to a competitor with the assumption that these goods will be used to service the competitor's store. This strategy allows both parties involved to benefit from the transaction.
To better understand diversion, let's consider an example involving two grocery store chains, Chain A and Chain B. Chain A purchases orange juice from a well-known brand, Minute Maid, at a discounted price of $12.50 per case due to their high sales volume or promotional agreements. On the other hand, Chain B, with a lower sales volume, has to buy the same orange juice for $14.50 per case.
In a diversion scenario, Chain A and Chain B collaborate to strike a deal. Chain A agrees to resell the orange juice to Chain B at a price of $13.50 per case. This way, Chain A makes a profit of $1.00 per case, while Chain B obtains the product at a reduced price, saving $1.00 per case compared to purchasing directly from Minute Maid.
Diversion can be a mutually beneficial strategy for both parties involved. Chain A, by selling to Chain B, can generate additional revenue by leveraging their purchasing power and taking advantage of their lower cost. Meanwhile, Chain B benefits from the reduced price, allowing them to improve their profit margins or offer competitive pricing to their customers.
It is important to note that diversion should be conducted within legal and ethical boundaries. Both parties must have a clear understanding of the terms and conditions of the diversion agreement, ensuring that it complies with all applicable laws and regulations. Additionally, maintaining transparency and open communication between the parties involved is crucial to building trust and fostering a successful diversion partnership.
In conclusion, diversion is a practice in logistics where goods are sold by one company to a competitor, with the expectation that these goods will be used to serve the competitor's store. This strategy allows both parties to benefit, with the selling company making a profit and the buying company obtaining the product at a lower cost. However, it is essential to conduct diversion within legal and ethical frameworks, ensuring transparency and open communication between the parties involved.