Wholesaling 2006: The Wholesaler Link

Dizzy spells, sweaty palms, racing pulse … If you’ve experienced any of these symptoms in the past 12 months, you may be suffering from a severe case of sticker shock. Product prices are soaring with no end in sight, and distributors are anxious for some sign of relief. But elevated product prices are just the tip of the iceberg, according to industry wholesalers. Other less-visible supply chain costs are just as likely to chip away at company profits.

Sanitary Maintenance’s March 2006 cover story took an in-depth look at how distributors are dealing with some of the costs trickling down the supply chain. Manufacturers are raising prices and passing on product increases to wholesalers, who in turn are forced to raise their prices. Still, more and more distributors are realizing that wholesalers are a valuable link in the supply chain that can offer respite by defraying some of the hidden costs of doing business.

“The value of a wholesaler is not necessarily price,” says James Carlson, director of marketing, LaGasse Inc., Deerfield, Ill. “In addition to looking at, say, the cost of a case of two-ply toilet paper, distributors need to consider the total supply-chain cost to get that toilet paper. As prices increase, the value of wholesalers will increase because they help to streamline operational processes.”

“Every time distributors write a purchase order, there are costs associated with it,” adds Frank Lacombe, national director for jan/san products, Bunzl Distribution, St. Louis. “Distributors are starting to realize that these are real costs, such as inventory investment, cash flow and finance costs.” Writing one purchase order to a wholesaler, as opposed to 25 separate orders to 25 different manufacturers, can result in huge savings, he says.

Wholesalers can help distributors see the big picture and realize savings in several areas they might have overlooked. For example, “when distributors receive inbound freight, they have to make sure receivers are present,” says Lacombe.

For each shipment, the distributor must tie up one person, he explains. But if the distributor receives one truckload from the wholesaler, that shipment is the equivalent of receiving supplies from five or six manufacturers. Similarly, distributors can save on labor costs associated with unpacking and storing product as well as on expenses associated with invoicing for that product.

“These are all the hidden cost-saving opportunities distributors are finally taking into consideration,” says Lacombe.

ROI ASAP
In the face of rising fuel and business costs, manufacturers are also increasingly recognizing the value of wholesalers. Today, more manufacturers are turning to wholesalers because they want customers that buy large volumes on a regular basis, says Philip Sullivan, director for Huff United, Boothwyn, Pa.

“The cost of servicing a customer is high,” Sullivan says. “If a customer is a periodic buyer, he’s not satisfying the manufacturer.”

Alan Gangl, president of OmniSource Inc., Auburn, Wash., also sees wholesalers becoming a more integral partner with suppliers in the future in an effort to lower overall supply-channel costs.

“With higher fuel charges, I think factories are going to be forced to raise their minimum orders,” Gangl says. “They’re going to want to use wholesalers because they can ship larger orders to [distributors] and deal with only one invoice.”

Smaller distributors that cannot meet suppliers’ minimums will have two choices: buy larger quantities from manufacturers or rely more on wholesalers for products that they might not otherwise have access to.

“Buying large quantities from the factory with theoretical higher margins that sit in your warehouse for prolonged periods of time is not the way to run your business,” says Dan Merkel, executive director of Advantage Marketing Associates, a Ripon, Calif.-based alliance of U.S. jan/san wholesalers. “One of the reasons the age of the wholesaler has arrived is that distributors have finally become aware that their business is all about turnover and return on investment.”

And in this industry, ROI also stands for “return on inventory,” says Sullivan. He says distributors buying direct from manufacturers need to ask themselves the following questions: How much cash do I tie up in buying that product? If I have to buy six to eight weeks’ worth of inventory, is it worth tying up cash for that long? Is it worth tying up space in my warehouse to store that product?

A warehouse full of inventory that isn’t going anywhere can translate into lost profits for distributors. “If you buy product that sits in inventory for six to 12 months, it doesn’t matter if you save 5 or 10 percent buying it from a manufacturer,” says Mitchell Mark, president of Snee Chemical Co., Harahan, La. “You’ve lost that, and more.”

Inventory is the most non-liquid of your assets, adds Carlson. Simply stated: “You’re stuck with inventory.” Using a wholesaler can shrink your inventory — and, as a result, some of the less visible costs associated with it. Less inventory equals less warehouse space needed, which requires lower insurance, utility and labor costs. This can also free up cash to invest in other areas of your business, says Carlson, such as sales or marketing opportunities.

Customer Retention
As rising supply chain costs are brought to the forefront of business concerns, distributors face another intangible business cost: Keeping their customers happy. And that means having supplies available and ready for delivery on short notice.

“Distributors are concerned that they’ll pay more if they buy from a wholesaler versus a manufacturer,” says Sullivan. “But if the customer says they need ‘X,’ and you tell them you don’t have it, that customer will go to another supply source. Even if you do pay a slight up-charge, that premium is well worth it if you can retain your customer.”

Another danger, says Sullivan, is that customers who approach competitive distributors for items that their regular distributor is unable to supply may be encouraged to purchase additional items, in which case, the regular distributor may end up losing that customer permanently.

Most wholesalers deliver within 24 to 48 hours, whereas manufacturers can take up to two weeks. Distributors that “need items yesterday” often turn to wholesalers for fill-in orders between shipments. One of Sheppard Enterprises’ customers relies on the Oaks, Pa.-based wholesaler for last-minute orders during snowstorms.

“They’ll call at 3 p.m. or 4 p.m. and order a truckload of product to be delivered at 7 a.m. the following morning,” says Bill Sheppard, president and owner.

In addition to “just-in-time delivery,” customers are demanding a wider range of products from distributors. This trend makes it more difficult for distributors to purchase directly from manufacturers, says Merkel, because they can’t comply with truckload quantities. By turning to wholesalers, distributors have access to a wider variety of products from one source.

Wholesalers can also tailor products and literature to distributors’ needs. Snee Chemical, for example, is both a manufacturer and a wholesaler that offers contract packaging services and custom-blended items. And Sheppard Enterprises’ in-house graphic designer creates custom flyers and brochures for distributors to help them sell product.

Sharing Knowledge
Wholesalers are not just selling products to distributors; they’re educating them. Distributors, in turn, are passing that product knowledge on to their customer base.

Many of the wholesalers interviewed for this article indicate that they have salespeople on the street committed to educating distributors about the products they sell — some even accompanying them on end user sales calls.

“Our sales force calls on distributors at least once a month so that they have frequent access to a human being,” says Sullivan. The salesman will bring to the distributor’s attention any new products or promotions the manufacturer has in effect and will help them become better informed about the product lines.

Last year, Bunzl started providing ongoing training for its sales staff. Approximately 90 percent of the company’s salespeople are ServSafe-certified by the National Restaurant Association Educational Foundation, which allows them to educate distributors about food safety.

Snee Chemical is even educating distributors to discern whether they’re getting their money’s worth when they deal with end users. “End users just look at price,” says Mark, “but that’s deceiving.”

Distributors should know — and be able to explain — what makes one product better than another. Research comes in handy.

Naturally, distributors want the highest quality product for the best price, but they should be equally concerned about some of the other issues that drive their businesses, such as how to manage supply chain efficiencies and maintain customer loyalty.

Rising costs are affecting all segments of the industry, but wholesalers are optimistic about their role and the service they provide to both distributors and manufacturers to help them meet their goals. “With rising transportation costs, the importance and reliance on the wholesaler has increased,” says Carlson. “Distributors and manufacturers are looking at the wholesaler as a value-added service to grow the whole channel. This has had a positive impact on the industry.”

Kassandra Kania is a freelance writer based in Charlotte, N.C.