Jan/san distributors had it good in the late 1990s. Real good. They reaped the benefits of an economic boom period so robust that many doubt it will be duplicated anytime soon.

“Historically, margins have been thin in distribution,” says Scott Benfield, president of Benfield Consulting, Naperville, Ill., and author of three books on supply chain issues. “The difference is that in the early to mid 90s, the economy was growing by leaps and bounds and pricing pressure was low.”

For many businesses, including the sanitary supply industry, the livin’ was easy back then. Customers were more liberal in their product specification and spending. There wasn’t a lot of nitpicking over prices or haggling over business minutia. As distributors’ incomes grew, so too did internal capital and operations spending. Inefficiency in any one facet of business was often overlooked. Business was darn good.

Boom economic conditions allowed new competitors to spring up more easily, but there seemed to be more than enough business to go around.

Feeling the Squeeze
Then the recession hit — a rude awakening for many janitorial supply firms. Heightened competition and customer price pressure began to erode product profit margins, and ultimately, business profitability (or income minus operating expenses). On top of that, the internal inefficiency that marked many companies now was unacceptable in light of a more susceptible bottom line.

Some start-up distributors didn’t make it. Business as usual for the more established companies meant realizing and adjusting to the fact that “business as usual” was being redefined.


Eliminating Waste
“Profit margins are definitely getting squeezed, and a lot of it starts with the customer,” says Tim Underhill, president of Underhill & Associates, a consulting firm based in Tulsa, Okla.

Smaller profit margins mean distributors need to look at bigger issues. Foremost on the list: overall business profitability. By taking steps to eliminate redundancy and increase efficiency while cutting operating expenses where they can, distributors can salvage overall profitability of their businesses.

Underhill points to three of the biggest efficiency drains for distributor businesses, and says that if these processes don’t improve, profitability itself will suffer.

Poor manufacturer/distributor relationships are a big profitability drain, Underhill says. With 25 percent of the supply chain costs being redundant, there are many opportunities to trim fat. If wasted time and costs are alleviated, businesses could work on systems or areas that contribute to better overall profitability.

“[Manufacturer/distributor] relationships aren’t the best,” says Underhill, and points out that lack of effort may be the culprit. “Most people aren’t really working on the entire supply chain to reduce costs.”

Inventory is another area that produces excess costs, and manufacturers and distributors are doubling up on sales efforts, as well, says Underhill.

On top of that, there’s a proliferation of internal waste.

“Thirty percent of the gross margin in distribution is wasted, and we don’t see a lot of change there.” The major causes of the waste vary among organizations, he explains, but the strategy for dealing with it is universal.

“Distributors ought to form a steering or management team that looks for ways to increase efficiency. That’s their job.” For instance, Underhill once worked for a company where each employee was asked to come to a Monday morning meeting with an idea for improvement. If it was chosen, the employee got a candy bar as a symbolic reward. What came from these meetings were dozens of ideas on how to improve the organization. Employees were asked to identify time wasters, headaches, problems, frustration points, etc. “We were able to simplify a number of processes, reduce inventory, improve customer relationships, develop sales support teams and a number of other improvements.”

Root of the Problem
The economy may deserve most of the blame for how distributor businesses are struggling nowadays, but it’s possible the real problem is something bigger.

Fundamental, structural change is necessary for the long-term survival of the distribution segment, Benfield suggests. He believes there are problems rooted at the foundation of distributor businesses that contribute to decreasing profitability of distributor businesses.

“The customers are telling us we don’t necessarily want this business model,” he says. Although distributors have made improvements to their businesses (technology or warehousing systems, for example), they aren’t able to reassess their entire role in the supply chain and change accordingly, Benfield says.

Overall profitability in the distribution segment is suffering for a number of reasons, he adds. There are too many sellers in the marketplace, and surveys have shown that customers don’t need to see salespeople as often as they do.

Inherent flaws in the business model are what will impact profitability, he suggests.

“We’ve squeezed all the cost out of the old model, but if you make incremental improvements to the old model, and start finding different ways to do things, you find a new model.”

Charge For It
Distributors often balk at the concept of charging for the services they provide — customers expect them, right? But doing just that is another way distributors can boost profitability and shake up their traditional business plans, Benfield explains. This strategy can also help distributors determine whether the services they’re providing have value to the customer, or if they’re simply inefficient.

“Distributors really manufacture service, not products,” Benfield says. “If you take a service and you put it with a commodity product, you commoditize the service. People pay for products and think the service comes with it. Unless you separate it from the product and charge for it, you don’t know if the customer values it.”

Benfield points out that something needs to change — many distributors across a number of industries, industrial and electrical for example, aren’t selling enough to even keep up with the cost of sales.

Al Bates, president of the Profit Planning Group in Boulder, Colo., agrees that distributors should be scrutinizing their internal processes. He believes the recessionary economy is the main thing compromising business profitability. And since the economy can’t be helped, internal cost-cutting is a necessity.

“You have to look at the expense part of the business. Look at the services you provide that maybe you shouldn’t,” he says.

Real-Life Obstacles
Beyond the big-picture challenges distributors face, day-to-day conditions have also taken their toll on profit margins. Distributors face increased competition and unyielding price pressure from customers.

Customers are faced with tighter budgets, and distributor salespeople are faced with a harder sell. Because it’s more difficult, salespeople are succumbing more often to the pressure to reduce price in order to secure the sale.

“The easiest way to sell is to drop your price, and right now many [distributors] are more concerned about the sale than the amount of profitability they’re getting,” Underhill suggests. Price conscious customers make for a whole new competitive environment among distributors.

Dave Guzdzial is no stranger to price wars with the competition. Guzdzial is the manager of Janitor’s Supply Depot Inc., in Hudson, Fla., and says that even when manufacturers up their prices, “There’s always one competitor that keeps their price down for a certain period of time.” This is one factor contributing to the margin squeeze his company is feeling.

Increasing competition has cut into profit margins for Dale Rosenbery’s company, as well. He is the general manager of Janitorial Supplies Inc., a small janitorial supply distributor in Champaign, Ill.

Located in a university town, Rosenbery says competitors are all too eager to launch a price war. The business is too attractive.

More often, distributors prioritize volume over profit, he says. But in those cases, if the volume isn’t there, neither is the money.

Food service distributors are moving into the janitorial supply arena to secure food business; other distributors, as their margins shrink, are extending service boundaries, attempting to turn up new business, often at the expense of other distributors.

Guzdzial’s company has been influenced by a number of other elements that affect business profitability as well. Even more customers have turned to retailers for their supply needs, turning the latter into more formidable competitors.

In response, Janitor’s Supply salespeople put more emphasis on service than ever before. The company shies away from lowering prices. Rather, they’re looking at offering new and unique services to stand out from the competition.

“Other distributors are going to be in the same price category as we are, so what we have to do is sell service,” he adds.

Customers, of course, are all too happy to see the increased competition. For them, it means their budgets can stretch further.

“It’s just the times. Customers are constantly hunting for a place to buy it cheaper, and to get the business you start cutting your profit down to keep them,” Rosenbery says.

While there are more cost-conscious customers everywhere, new buying methods are an especially big issue in Illinois, says Rosenbery. In recent years, the state has taken advantage of a system where the state purchases huge quantities of products, then doles them out to schools and other state-run facilities. Area janitorial supply distributors are left with the fill-in orders.

“A lot of times they’re buying for less than I can,” he says.

What Works
Other companies have fared better despite customer demands and economic pressures. Many of them, however, already operate on business plans that require lesser margins and greater volume.

While Michael Nash’s company, which is heavy in food service packaging in addition to janitorial supplies, has not witnessed a decided drop in margins, business growth is a challenge, he says. Nash is president of Imperial Bag & Paper Co., a $75 million distributor in Bayonne, N.J.

Imperial’s size and vast inventory have allowed it to keep its pricing competitive, Nash says. It’s difficult for smaller companies to compete with Imperial when it comes to inventory, and unlike many distributors, the company can buy almost all its products direct from manufacturers. “It does give us some edge,” he admits.

Carl Land, owner of National Chemical Co., an industrial and janitorial supply distributor based in Shreveport, La., is feeling the squeeze because of competitors much like Imperial, he says.

More paper houses are broadening their reach to pick up business in the already tight market.

“Their margins have been squeezed so much that they have gotten into the industrial end,” he explains. “They have a tendency to sell at lower margins because of their size and buying power.”

Competitors that build their business models around high volume and inventory turnover pose a threat to National’s profit margins — Land focuses on a service-intensive, long-term approach while his competitors swap super-low prices for some extra services, he says.

Although this competition is apt to trigger a competitive pricing environment, Land sticks to his guns. His company’s mission is to get and keep customers for the long term. But, he admits, “It’s difficult to take a portion of your time to work with the long-range customers. We tend to look at profitability more than sales growth.”

Still, Land is confident this his company’s focus on long-term goals will guide them through the toughest of times.

“Companies that are really lean and efficient and have looked out for their customers long-term will survive. If you’ve helped [a customer’s] operation, you’re not going to be the first one they look at to knock a dime off of something,” he says.




POSTED ON: 11/1/2002