Supply & Demand Quandary

"Joe the Distributor” is in quite the quandary. One of his line items has been wiped out by a new customer account and he needs to replenish it quickly to service his other clients. Joe has two choices — he can either purchase the product direct from his manufacturer at a discounted price, but will have to meet a minimum order requirement and deal with a questionable lead time, or he can call on his wholesaler, whose price is a little higher, but can get the products delivered quickly. With his customers pressing him for the product, Joe must make the most economical choice for his company, while also keeping his customers’ needs in mind. Who should Joe choose?

Jan/san distributors across the United States are met with this same — or similar — supply and demand dilemma each working day. What products distributors should purchase from a wholesaler and what they should buy direct from a manufacturer is a key question for distributors to consider as they seek to optimize their supply chains. If price were the only matter, virtually all products would move directly from manufacturers to distributors. Unfortunately, today’s purchasing process for jan/san distributors is a lot more complex.

Turn And Earn

Often called a distributor’s profit center, a jan/san distributor’s warehouse is where money is made or lost. With distributors stocking a significant amount of inventory in their warehouses, inventory turns are a major driver of distributor profitability. So much so, that jan/san distribution’s mantra in the current day is “turn and earn” — not holding on to product for too long.

“With the current economy, it is more important than ever to make the right inventory investment decisions,” says Vikki McKay, purchasing manager for Renard Paper Co., Inc., St. Louis. “The goal is to make profit in the least expensive way and at the same time provide excellent service to customers.”

When it comes to turning inventory, many distributors say wholesalers offer a better proposition than what they typically receive from manufacturers. In fact, distributors say large well-stocked wholesalers can help distributors move inventory faster, quickly fill orders and lower overall inventory levels.

“Although you get better terms with manufacturers, the advantage financially with wholesalers is that they have product available and you don’t have to inventory it,” says Shelley Riley, president and owner of Maintenance Mart, Phoenix, Ariz. “So, you don’t have to tie up your money in inventory.”

Often referred to by distributors as their second warehouse, wholesalers also allow distributors to stock lines and items that otherwise would cost too much to purchase direct, tie up money in inventory, and increase warehouse space.

“There are always items that you need to stock but you do not want to stock a truck load,” says Jerry Garbett, general manager of Arkansas Bag & Equipment, Little Rock, Ark. “The wholesalers allow that. But you must look at your mix, cash flow and space to decide what is best for you.”

Wholesalers are also very advantageous to small sized distributors who don’t have the financial means to purchase direct, says Fritz Gast, president of P.B. Gast & Sons, Grand Rapids, Mich.

“I think wholesalers are a very necessary piece of the puzzle in our industry because there’s so many small distributors,” he explains. “Distributors don’t have to maintain a lot of inventory because they can rely on the wholesalers.”

Most manufacturers place order minimum restrictions on distributor purchases, so many distributors — regardless of size — find it more beneficial to go the wholesaler route. Because freight is expensive and volatile at this time, most distributors cannot meet minimums for prepaid freight, says McKay.

Besides the inventory advantages, wholesalers allow distributors to expand into new markets without any significant financial investments and are also there to help out with unexpected spikes in product usage.

“With wholesalers we don’t ever have to tell our customers no,” says Riley. “If it’s something that we don’t have, we can always use a wholesaler to get it. And they’re all about service and making things quicker. They fill our needs.”

Wholesalers also help satisfy special product requests from customers who insist on having a certain product, but from a vendor a distributor does not purchase direct from. By allowing distributors to purchase in small quantities, wholesalers help eliminate the possibility of tying up unnecessary inventory in a distributor’s warehouse.

For example, if a distributor goes direct to a manufacturer that has a minimum order requirement of 12 cases of a certain product, and the particular customer only wants two cases, the distributor is taking a risk that he can sell the other 10 cases. Those remaining cases could essentially turn out to be dead stock in the warehouse in due time unless another customer has a need for it. Thus, the distributor ends up on the losing end of the transaction.

“It makes more sense not to tie up a lot of capital on something that’s not going to move on a timely basis, so you’re better off paying a few more points to the wholesaler and turning it quicker,” says Gast. “You can use your inventory dollars better that way.”

Although going the wholesale route has its share of advantages, there are certain setbacks to purchasing from redistributors that distributors should be aware of.

Wholesale Setbacks: A Direct Gain

Although wholesalers are considered a profitable avenue for distributors to turn product quickly and appease customers, many distributors argue that purchasing from wholesalers takes away from a product’s uniqueness, as everyone who deals with a wholesaler has access to the same product lines. In turn, these products can become very low profit items, says Garbett. Thus, distributors who deal direct with manufacturers often have the upper hand in exclusivity and return on investment with product offerings.

“It helps you with your margins to have something unique, so you’re not selling a ‘me too’ item,” says Ryan Myers, vice president of Myers Supply & Chemical, Little Rock, Ark.

A true advantage to buying direct is the fact that most manufacturers give distributors the opportunity to private-label products. Private-label brands give jan/san distributors their own exclusive product or product line that no one else in the market has.

“We’re a private-label chemical company so I have to go direct to my manufacturer — a wholesaler’s not going to carry my private-label products,” says Gast. “You get the factory support on that, you get the advertising and marketing support, you get the technical support — there’s a lot of positives from that.”

Private-label manufacturers a lot of times will also — knowing a distributor’s buying history — pre-manufacture chemicals for them, says Gast.

“They don’t necessarily wait to get an order to manufacture the product,” he says.

Thus, a distributor is not forced to wait and delay shipment to customers while the product is being manufactured and then shipped to a distributor’s warehouse. If a manufacturer follows through with their pre-manufacturing promise, it in turn helps distributors with their inventory turns and drives profitability.

When purchasing through wholesalers, distributors say they risk potential cost savings as they don’t necessarily get manufacturer rebates on products that they otherwise would have received if they purchased direct.

Product prices are typically higher when purchasing through a wholesaler as well — in some cases as high as 10 to 15 percent more. Distributors also say manufacturers are more willing to negotiate better pricing than wholesalers.

By purchasing from vendors with lower costs, distributors can turn around and sell products to customers at manageable prices. Distributors can also win more customer bids.

Distributors also rely on manufacturers to lend a helping hand with customer bids, product information and support. In fact, distributors say manufacturer reps often make themselves available to make a sales call with them when introducing new products or trying to win new clients.

Most distributors purchase direct because they are able to meet order minimums without extending inventory beyond their company policies. However, as the price for goods have spiked and the price of gasoline has played a major factor over the last year, manufacturers have recently increased their order minimum sizes, which has decreased most distributors’ turns with certain vendors. Knowing a manufacturer’s order minimum policies is imperative when buying direct.

“Sometimes if we’re not meeting the minimums, then we’ll try to negotiate better pricing with the wholesalers and they’ll work with us until we get a sizeable enough order to buy direct,” Riley says.

Although most manufacturers have stringent minimum order requirements, distributors say if they sell enough volume and have a healthy supplier-vendor relationship, some manufacturers will make an exception and drop the order minimum.

Building A Solid Vendor Relationship

For many distributors, instead of focusing on just one method of purchasing, using a mix of both manufacturers and wholesalers gives them a better chance of finding the products that meet their needs.

Regardless of supply chain, establishing a healthy relationship with both manufacturers and wholesalers and not switching vendors just for minimal savings is one way to reap the rewards. Distributors say by staying true to their vendors, it in turn will help in the long run.

“By operating honestly and openly with your vendors, you will get extra benefits and support,” says Garbett. “We are very much in a people business and that is what really makes the big difference.”