If they handed out awards for outstanding product distribution, you can imagine an acceptance speech that goes something like this: “It’s all the people behind the scenes who really deserve credit for this great honor. Thanks to my banker for sticking with me in bad times, my wife (or husband) for putting up with all my late hours, and my wholesaler for taking all the worries of product selection and product delivery off my shoulders.”

Yet when all is said and done, you don’t call your banker or your wife when there’s a last-minute product that you need delivered to a big contractor customer — one who’s threatened to call your competitor if you don’t come through.

Some aspects of the wholesaler/distributor relationship never change. Wholesalers exist in part because distributors know they can help them with inventory and access to product lines. Shifting marketplace dynamics, however, have opened up new facets of the relationship. Not only are distributors and wholesalers working together in all the traditional ways — they’re continually looking for new ways to work together more effectively.

Seven years ago Schnaible Service & Supply, a $10-million distributor headquartered in Lafayette, Ind., made a daring decision that affected its relationship with wholesalers.

“We decided we were going to drop about a quarter of a million dollars in business and just not do anything about it,” says Donald Stein, the company’s president.

The company elected to stop selling certain paper supplies in favor of concentrating exclusively on cleaning products and equipment. Schnaible had good customers they wanted to continue to supply food service disposables and other paper products they depended on, but the small volume of product and infrequency of orders made it impossible for Stein to reach targeted profit margins. Similarly, he didn’t need his usual cadre of paper vendors to fill a relatively small product demand.

“We were about to drop the lowest 20 percent of our vendors. But an astute wholesaler came in and said, ‘Let our inventory be your inventory.’”

Today, Schnaible does about $1 million a year in business with its wholesaler, who has become the company’s fifth largest supplier. Schnaible was able to keep its warehouse free of bulky and slow-to-move items, and retain the business of his longstanding customers. “It has worked out exceptionally well,” says Stein.

A New Twist On Traditional Roles
Wholesalers have traditionally been viewed as beneficial to smaller distributors who can use the low minimum-order requirements and access to broader product lines to grow their business. Changing end-user buying patterns, escalating overhead costs, the growth of the so-called niche markets and the specialized inventory demands of building contractors have combined recently to place a new spin on the traditional wholesaler/distributor market synergy. On the other hand, some things never change. Many smaller distributors find there are a number of reasons — including certain product lines — for turning to a wholesaler.

“We’re small, so to put out the money to buy direct is not as feasible when I have a wholesale distributor that delivers here twice a week,” says Gilda Wettschurack, owner of Kinney Paper & Chemical Co., Inc., a $1.5- million plus distributor in Columbus, Ind. “I can turn my money a lot faster and not have to warehouse as much product,” she adds.

Traditionally, a distributor’s size does make a difference as to what the benefits of wholesalers are, says David Brown, president of the Sanitary Supply Wholesaler Association (SSWA).

“A larger distributor is looking at turns from a dollar efficiency standpoint. They’re not going to let it sit in the warehouse if they can buy it on a weekly basis.” It gives them greater flexibility as well, he adds, including a quick avenue to get new products to a customer.

“For the smaller distributor it’s more of a financial issue. Cash flow is very critical and if you can buy items at competitive levels and buy them on a weekly basis, you’re much better off from a cash-flow position,” Brown says.

Warehousing costs are one reason things like paper and food service disposables are commonly procured through wholesalers, who can handle the bulky, low-margin items at a lesser cost. Distributors also turn to wholesalers for commodity items, specialty products and items for which there is little demand (and therefore little movement), depending on what works for their individual business.

Most of Kinney’s paper, towel and tissue products, cups, napkins and liners come from one of three different wholesalers, according to Wettschurack, who says that the business she does with wholesalers has grown from 20 percent 10 years ago to 50 or 60 percent of the company’s business today.

The reason is pure economics. Many times, smaller companies just can’t justify the volume the manufacturers require.

“As far as the paper mills go, the minimums are high — you have to buy by the truckload if you want to deal direct, and for a small distributor that’s just not feasible,” says Wettschurack.

Growing Plans
Some companies outgrow the need for partnering extensively with wholesalers, but there are always product lines that seem tailor-made for wholesaler distribution, says Harry Schuster, former owner of Regal Maintenance Supply Co., in Little Falls, N.J. (He sold the company but is staying on board for a year to help in the transition.) Packaging supplies, corrugated paper and boxes and fill-in items are some of the items the company uses wholesalers for — it totals 30 percent of Regal’s business. That’s in sharp contrast to the 99 percent of business the company did through wholesalers when Schuster started Regal Maintenance.

When Regal’s doors opened in 1946, Schuster didn’t have the capital or the warehouse space he needed to buy direct. Over time, the business was able to grow through the use of wholesalers, and eventually the company was able to buy direct and acquire the warehouse space needed to store product. Still, limited space is the main reason the $2-million distributor remains reliant on its wholesaler-partners.

“We’re limited on warehouse space, so if we get in a trailer from Kimberly-Clark and we run short two or three items, we can’t place an order for another trailer — that’s why super-jobbers are important to us,” Schuster says.

Products bought through a wholesaler aren’t always money-makers, but they’re a great way to appeal to customers’ specialized needs, says Norman Dinsky, president of N&N Associates in Sarasota, Fla.

“It gives me the ability to not have my customer go to other suppliers. I can offer them a one-stop shop, and I can offer them a reasonable price,” says Dinsky.

Dinsky’s company uses wholesalers for commodity products — items he says carry small margins. In fact, N&N didn’t sell paper at all until eight years ago when they chose to work with a wholesaler. The company also relies on wholesalers for specialty items that are notoriously slow movers.

And occasionally, a wholesaler will run a special that N&N can’t afford to pass up.

“I buy a brake cleaner from [our wholesaler] and every once in awhile they might run a special and I’ll stock it for awhile,” Dinsky says.

Wholesaler partnerships also better equip distributors to compete in a new-age economy that emphasizes personalized service and specialized market support.

Sun Sanitary Supplies counts on wholesalers to provide the $2-million distributor with access to product lines it couldn’t otherwise stock. About 10 years ago, the company adopted a marketing strategy that it would do what was needed to get customers whatever they requested, says Cher James, CEO of the St. Petersburg, Fla.-company.

“If a customer has a feeling that a product outperforms anything else on the market, we’re going to go and get that for them,” says James. “We’re trying to be a single source and we’ve been very successful with some larger organizations around here.”

James uses wholesalers for the majority of her paper and food service orders, mainly because of the space those items would occupy in her warehouse. About four years ago, James decided to reassess which items made the most sense to house, and paper was the first thing to go.

“Even though I’m bucking for a new warehouse, I’m not going to get one right now so I had to look at items that were more profitable for me to have in my warehouse,” James says.

What To Look For
Spending a big chunk of money with one wholesaler provides one thing: purchasing power. “There was a time when we were buying from 10 to 12 wholesalers,” says Stein. “It wasn’t very meaningful. By grouping it the way we have now we’re buying $1 million from a single wholesaler and that’s meaningful to them.”

The arrangement is one that is unique in the industry, says Stein (most distributors spread their business among a few wholesalers), but it works for his company.

Researching potential wholesalers helps Schnaible choose the one that can best suit the company’s needs.

Schnaible looks at things like a wholesaler’s ability to help increase the company’s turns. The vendor lines the wholesaler has available are also important, and Stein likes the fact its current wholesaler provides a pricing structure for the year-long term, rather than a price.

“The pricing structure is a list price less some percentage, so that we don’t have to negotiate it whenever there’s a change,” Stein explains.

Frequent delivery is also a draw.

“It’s the service time frame that converts into the number of turns we can get in a year,” he says. “If they come in twice a week we can realistically do 102 turns a year. We don’t, but we could.”

Improvements
Besides the quintessential wholesaler role that doesn’t change through time — including strategic product delivery and economical product cost— what added support might distributors derive from wholesalers, given current market demands?

When asked what they would change if they could, distributors agreed that wholesaler sales reps could be more attentive, and more knowledgeable about the products they sell.

“We used to have a salesperson come in on a regular basis but not anymore,” says Dinsky. “Now we call him if we have a problem.”

“I think that if their salespeople were more knowledgeable about what they sell it would help their business,” Schuster agrees.

And there are some “costs” when you go through a wholesaler rather than a manufacturer, says Stein.

“You lose something in the interim because you don’t have the contact with the mill reps and you don’t know what’s going on necessarily with new items. But if you’ve got a good wholesaler they stay abreast of these things,” he says.

Still, half the time a wholesaler can beat the (paper) mill’s pricing, he says, and that is too good to pass up. “It’s kind of disturbing but it’s understandable since freight is such a factor.”

The supply chain partners are also finding new ways to improve the way in which they communicate. Online ordering capabilities could help relationships along, most agree, but in general, distributors are just starting to use the capabilities more frequently, and wholesalers that aren’t yet offering them are working to get them.

Stein’s company is ahead of where many other distributors are.

“We’re directly online with the wholesaler and are contemplating whether we place the order, or they get into our inventory and predict what needs to be bought,” says Stein.

Dinsky’s company hopes to use the Internet to communicate more with its wholesalers in the future.

“We Web order and use the computer to download specials and stuff from them,” he says, adding that he tries to take advantage of what he can.

Wettschurack’s company will also look at using online ordering capabilities provided by her wholesaler partners in the future, she says.

Quick response time is what will drive the industry toward online communication, says Brown.

“In the wholesale community, time is compressed. When my distributor customer calls me on Monday, he wants it there Wednesday,” says Brown. By communicating online, channel partners have less worry about missed calls, waiting for returned calls, etc. “Time and information are very critical.”

What the Future Holds
Look for wholesalers and wholesaling to become more prevalent in coming years, says Brown. First, distributors are appreciating the advantages. Second, even more manufacturers see the merits of working with wholesalers as they face steadily rising freight costs.

“They’re finding that they can save a large amount of money by shipping larger quantities and having the wholesaler ship it out as opposed to the manufacturer keeping all these people on the books as direct customers.”

End-user business dynamics are continuously evolving, impacting the market structure for distributors. Wholesalers, in turn, must adapt to the changing needs of both of these partners.

“I think that any forward-looking wholesaler is looking at the bundle of products and services they offer,” he says. If [the wholesaler] has got six components to that bundle — whatever they may be — he should be analyzing each to make sure the distributor sees value in each one of them. If a distributor doesn’t value an aspect of that “package,” it’s merely an added cost.

Again, some things never change.

“The core elements of a wholesaler program are timely deliveries, competitive pricing, doing what you say you’re going to do and showing up on schedule,” says Brown.

Additional Resources:
Product Pipeline
Wholesale Changes

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POSTED ON: 6/1/2002