Understanding Jan/San Redistribution

“Understanding Jan/San Distribution” is a guide written for jan/san manufacturers and distributors — specifically those distributors who are considering using wholesalers as a source for certain lines, particular product types, or at various times throughout the year. The following are excerpts from Chapter 1 and 4 of the guide:

Chapter 1: Why Use A Wholesaler?
Redistribution of sanitary supply products has evolved to the point that most channel manufacturers and distributors recognize its value. Many jan/san distributors, both large and small, purchase from wholesalers; and many major manufacturers are taking advantage of the benefits offered by wholesalers.

At the same time, there are many distributors and manufacturers who are not yet taking full advantage of the benefits offered by wholesale redistributors. This chapter will help summarize the key reasons for working through wholesalers.

Successful wholesalers have grown because they are uniquely positioned to provide great value to both manufacturers and distributors.

To the sanitary supply manufacturer, a sound redistribution strategy will yield: outsourced management of small, high-cost-to-serve customer orders; access to new customers who are otherwise difficult to reach and serve; reduced credit risk; simplified logistics; additional sales support; and accelerated sampling response.

Jan/san distributors who source products from wholesalers likewise benefit from: faster inventory turns; shorter lead times; more frequent deliveries; no minimums per manufacturer; optimization of fill-rate economics; and the efficiency of one order, one delivery, and one invoice for multiple manufacturers.

How Does Wholesaling Work?
To the uninitiated, redistribution via a wholesaler would appear to be an unnecessary “extra step” in the jan/san supply chain, shoehorned between manufacturers and their distributor customers. Others have a hard time differentiating redistribution from their forward warehousing or distribution center network.

Perhaps it is easiest to grasp the role and value of redistribution by comparing it to sanitary supply distribution itself:

If you think through the supply chain, there are good reasons why manufacturers don’t have direct selling and shipping relationships with every customer who uses their products. To do so would require a colossal increase in the scope of all of their operations. Imagine receiving, shipping, billing, and collecting on several orders per week from tens of thousands of end-users — there is not a sanitary supply manufacturer who could handle it. What’s more, there is not a sanitary supply end-user who would welcome this arrangement with every manufacturer who supplies him. The sanitary supply distributor provides a clear value to both the manufacturer and the end-user by consolidating a lot of small orders into a few large shipments; wholesalers provide the same value, but one step back in the supply chain. Unlike a sanitary supply distributor, however, most wholesalers strictly avoid selling to end-users, as this would be akin to competing with their customers. And unlike a forward warehouse, wholesalers order, receive, and pay for products from manufacturers, then handle the order management, fulfillment, and billing functions for a set of distributor customers.

The most sophisticated wholesalers complete the cycle by reporting, in detail, their sales data back to the manufacturer. This step allows manufacturers to incorporate sales data into their internal systems, allowing seamless sales reporting, program management, and commission payments to sales rep agencies.

In return for these services, manufacturers generally pay an allowance to their wholesalers, which reflects the manufacturer’s cost avoidance and other factors which will be discussed in great detail in the coming chapters.

Two Good Reasons To Use Wholesaler Redistribution
Sanitary supply manufacturers enter into wholesaler redistribution programs for one or both of the following reasons: to reduce costs and to build volume.

The cost-reduction opportunity stems from the recognition that customers who submit small, infrequent orders cost a lot more to serve than those who submit regular large orders. As we shall see, these costs extend far beyond the freight premiums generated by multi-stop outbound loads. And although present-day accounting systems sometimes fall short of clearly quantifying these costs, there is growing awareness of the importance of digging below “company averages” to understand the true cost of serving these customers.

Of equal or greater interest to manufacturers is the opportunity to penetrate new distributors that would not be available through direct service. Wholesalers serve a wide range of accounts that are hard to reach via traditional supply chains. These include not only small distributors who lack the volume or space to meet order minimums, but various “non-mainstream” distributors who are often unknown even to the local sales force. The value of this access to incremental volume is another important factor in the cost/benefit calculation.

Successful manufacturers have designed and implemented wholesaler redistribution programs which accomplish both objectives.

Chapter 4: Building an Effective Redistribution Program — Distributors
“What should we buy from a wholesaler, and what should we buy direct from manufacturers?”

This is the key question for distributors to consider as they seek to optimize their supply chains. If price were the only consideration, virtually all products would move directly from manufacturers to distributors, as wholesalers generally have to charge more than their manufacturer suppliers.

But savvy distributors know that wholesalers charge more because of the value they add to the jan/san supply chain. And distributors benefit from this value in three important ways: cost avoidance, fill rate economics and accelerated growth.

In this section, we will describe the specific ways in which sourcing from wholesalers can improve a distributor’s business results, and propose a method for analyzing the distributor’s sourcing options.

Cost Avoidance
“The wholesaler’s role is to act as our other warehouse.” This statement by a distributor captures the essence of the cost-avoidance potential of sourcing through wholesalers. Certainly, distributors who bring in a significant share of their volume via wholesalers would need to build and operate much more warehouse space to maintain their business if the wholesaler did not exist. Avoiding this cost frees up the distributor’s capital for higher-return investment.

In the same way, use of a wholesaler can significantly increase a distributor’s inventory turns. Because wholesalers do not require a minimum order “per manufacturer,” the distributor is free to bring in exactly what he needs on a much more frequent order cycle than he could if buying everything directly. With a sourcing strategy that approaches “just in time” inventory, a distributor can greatly reduce the amount of capital not tied up in slow-moving inventory.

Some wholesalers and distributors have worked out supply arrangements whereby the distributor essentially transmits his customer orders to the wholesaler. Given sufficient lead time, the wholesaler can sort and label the entire shipment based on the distributor’s orders, enabling what is essentially a “cross-dock” system. The distributor receives the wholesaler shipment first thing in the morning, and loads his outbound customer shipments on the same day.

What’s more, wholesalers can greatly reduce a distributor’s operational and administrative costs because they consolidate a lot of activity. Dock space and receiving time are reduced when multiple manufacturers are sourced through a single wholesaler. The administrative “paperwork” associated with credit applications, generating PO’s, reconciling pricing, and paying invoices is simplified and streamlined when many suppliers are bundled together by a wholesaler.

While it can be challenging to quantify these costs (and the cost avoidance provided by wholesalers), most distributors have a good sense of how sourcing through a wholesaler can reduce a lot of activity and improve ROI.

Service Improvement
The second benefit provided by wholesalers is their ability to support improved service from the distributor to his customers. The most obvious example is the significant reduction in order lead time, vs. sourcing from the manufacturer. Two factors drive this benefit: “no minimum per manufacturer” and “geographic proximity.” Because the wholesaler is making frequent deliveries to the distributor, it is a simple matter to add exactly what is needed to an outstanding order, and receive it within 24 to 48 hours. When dealing directly with a manufacturer, the distributor usually must wait until he can put together a minimum order, then wait for the manufacturer’s delivery lead time until the product is received. The geographic proximity of the wholesaler also contributes to short lead time from order to receipt, compared to longer transit times from most manufacturers.

The shorter, more frequent order cycles offered by wholesalers allow manufacturers to respond quickly to their customer’s needs.

The wholesaler also supports accelerated sampling response when a customer wants to try a new item. Rather than putting the sample on the next manufacturer order, then waiting for it to come in, the distributor can often find the product at a wholesaler, order it, and provide it to his customer quickly. The result is improved customer satisfaction and a higher likelihood of new volume for the distributor and manufacturer alike.

Of course, smaller, more frequent orders with no minimums and short lead times will mean fewer out-of-stocks for the distributor. In a direct-buying situation, the mix of inventory for a given manufacturer rarely matches the customer demand. As a result, when the distributor runs out of 3 of his 20 SKU’s from a given manufacturer, he must wait until his next order cycle to correct the stockout and balance his inventory. With a wholesaler, recovery from stockouts is simplified and accelerated, providing a higher level of service from the distributor to his customers.

Finally, wholesalers allow a distributor to market and sell a much wider variety of products than he could profitably warehouse in his own location. For product lines with a vast range of sizes, colors, and labels, the wholesaler is often the only logical source for a small-to-medium volume distributor. The distributor is able to offer a broad product portfolio “as if” it were in stock at his own facility, knowing that the product is within easy reach at his wholesaler whenever he needs it.

Accelerated Growth
Wholesalers also support distributor growth. While taking on new product lines is often a key growth strategy, it comes with risk. If buying directly from a new manufacturer supplier, a distributor must invest considerable time in establishing credit, providing data, and updating internal systems before going to market. Then he must be willing to invest in inventory while accepting uncertainty about product mix and volumes. And all of the problems associated with manufacturer order minimums and lead times are compounded by the small initial sales volume typical of a new product line.

By turning instead to a wholesaler, the distributor can virtually eliminate the risks of taking on a new product line. By bringing in only what is needed on a frequent basis, the distributor is able to fine-tune the product offering to match customer demand. He can focus his efforts on marketing and selling with confidence, knowing that the wholesaler will allow him to respond appropriately as the new line grows. And it is often the case that success in establishing a new line via a wholesaler can ultimately lead to sufficient volume to make direct sourcing from the manufacturer the best option.

What It’s Worth
Unfortunately, there simply are no hard-and-fast rules about which product lines to source direct from the manufacturer, vs. source from a wholesaler. Nor is there a simple formula that determines how much price premium a distributor should be willing to pay for the benefits of sourcing from a wholesaler.

That said, most distributors feel comfortable with a price premium of 5-15 percent over the “direct from manufacturer” price when buying from a wholesaler. Of course this generalization ignores differences in case weights, cubes, and values per pound. But it is indicative of the distributor’s intuitive understanding of the value of wholesaler sourcing.

More information on “Understanding Jan/San Redistribution” can be found at www.sswa.com.