HOW CAN CHANNEL PLAYERS RE-DEPLOY MASTER WHOLESALERS
Economic necessity is forcing both manufacturers and distributors to look for supply chain solutions that lower total costs and improve service levels through the channel to the end users. Based on my work and interviews with both suppliers and distributors, there are a number of opportunities for how one or both parties could re-think how they use existing "master wholesalers"(MW) or invent a new co-opetive capability that would benefit all channel players.(1)
(1 -- A "master distributor" is a channel player that sells only to other "distributors/dealers" and not end-users. They exist in many stripes: 3 types of captive, independent, co-op x break-bulk and emergency items. For their taxonomy see topic #1 in the "support notes/article #2.22" at www.merrifield.com. "Co-opetition" is a pop business term describing when competitors agree to cooperate in one area, but remain competitive in others.)
To illustrate the problem/opportunities for all channel players, lets focus first on the new needs of channel end-users and their chosen distributors for consolidating "total procurement cost"(TPC). To do this, let’s track the journey of a disguised case study starring "ABC Supply" that is now in the third phase of an 18-month old "Profit Power Renewal Program".(2)
(2 -- For more on TPC, see merrifield.com articles #4.1-4.2. The ABC Supply case study has been repackaged into "exhibit 25" at www.merrifield.com. All other footnotes that follow in this article can be found in the "support notes" referenced in footnote #1 (3 to 11).
As a quick summary of what ABC now refers to as "Phase One", here are the steps that management took in the fall of ’02 to "sell a lot more to their core". They:
- Did a customer profitability ranking report to zero in on the 5 most profitable accounts within a common segment of customers. (3)
- Did a common-item history analysis for the 5 accounts to determine that less than 5% of their current stocked items were bought by 2 or more of the 5 accounts.
- Beefed up those strategic items significantly to see if average sales and order size would grow for the 5 as well as the rest of the active customers within the target niche.
- In the first month after strategic fill-rate stocking was completed, both sales and order size for the entire niche was up 7%.
- Management guesstimated that the extra efforts normally done by order fulfillment people to take care of order "shorts" dropped by an inverse amount.
- Within three months sales and margin dollars to the customer niche had grown 15% without adding any people.
- Management estimated that 50% of the incremental margin dollar growth flowed through to the bottom line, because it involved only incremental carrying costs for incremental old inventory. All selling and transactional costs stayed flat due to larger average order size. (4)
PHASE TWO OF THE PROFIT POWER JOURNEY
ABC was now on a new discovery path with new confidence and momentum. For their next phase, they decided to proactively sell supplier consolidation TPC benefits to their best niche customers with these measures:
- ABC printed out customized lists of all of the common-items that each niche customer was not buying, and then reviewed the list with each customer to see if they might want to consolidate away some minor suppliers by buying more items. The number of items that the customers were surprised to discover that ABC stocked and were glad to switch to ABC was embarrassing to the sales force who were promptly let off the hook. (5)
- They also asked the 5 best niche customers if there were any other minor or miscellaneous suppliers/items that they might like ABC to stock. A spreadsheet revealed lines/items that 2 or more requested. (6)
- ABC then added 12 suppliers, which included three new master wholesalers, to stock another 100 standardized items that 2 or more of the 5 customers promised to buy forthwith.
- Sales reps made sure that code numbers, etc., for both the new old items and the newly stocked items were changed within the customers "buying process", so that they would systematically be re-ordered from ABC along with regular items on ideally a larger average order size basis. This would consolidate transaction costs for both parties.
- Sales volume to the entire niche eventually increased by another 20% on top of the 15% growth that had come from better fill-rates on the original common-needs item list. Because of the high-flow through incremental margin effect, profits for the entire company exploded.
PHASE THREE OF PROFIT RENEWAL
ABC had gotten the idea for selling more new items to their core customers’ and replacing minor suppliers to lower TPC from two large, industrial accounts. Both of these accounts were a niche by themselves and had coerced ABC into stocking a number of special items that consolidated away some minor suppliers. These new stock items were, however, only bought by the one customer, so ABC did not get any shared cost of stocking or common value creation benefits from selling it to two or more customers. The new-for-stock items put in for the core niche customers were, by contrast, all bought by at least 2 or more customers.
With a blinding flash of the obvious, ABC then reasoned that if outsourcing the procurement of minor suppliers to one supplier could lower their customers’ TPC why wouldn’t outsourcing minor suppliers to a master wholesaler lower ABC’s TPC? They decided to "push the wheel of learning", do some analysis and perhaps try some "cheap, fast experiments" by taking the following steps (7). They:
- Ranked all of their suppliers by total volume of purchases for a year in the first column of a spreadsheet. Then, calculated/guessed the following stats for more columns to the right:
- The number of purchase orders placed over the same time
- The average dollars per P.O.
- Estimated # of stocked items from the supplier
- Estimated average $ in inventory for the line
- Estimated annual turns for the line
- Estimated sales per item for the line
- (fill in) which master wholesalers might stock the line or equivalent
- (fill in) other comments
The big theory behind this analysis was to find two types of suppliers that might be outsourced to master wholesalers:
- A big volume supplier or two that had a broad line of items that included both big volume commodities and lots of little service items for which the entire line was not turning as well as it should. The poor turn result was due to ABC choking on full truckload buys to get good land prices on the commodity items. But, while they waited 2 to 3 months to buy the next truckload some items would stock out while others would turn slower than forecasted. If they could buy and constantly re-tune such lines on a weekly delivery basis, total economics and fill-rates could improve. (8)
- Lots of little suppliers for which there were lots of little PO’s and inbound shipments that might all be consolidated into a weekly or bi-weekly delivery from a master wholesaler.
ABC found both types of suppliers in their analysis including lots of the bottom 80% of the suppliers that accounted for less than 20% of the total sales volume for the year.
But, guess what happen when they approached the three MW’s about doing an "integrated sole supply" type of deal? They didn’t "get it" at the sales or sales-management level. All three wholesalers were fixed on selling only their existing line of products, especially the ones for which they were receiving the best rebates. The idea of "let’s co-create a win-win replenishment program that might serve as a testimonial to other distributors, especially on the same shared-cost, shipping route" was met with a glazed looked. (Honcho-to-honcho summit talks are in the works.)
WHAT MUST CHANGE ABOUT MASTER WHOLESALE THINKING?
The three MWs in this case were each different due to how they had grown up, so none had a natural, perfect overlap fit with ABC’s request. And, none of them had really thought about being as flexible and expansive as ABC had been with becoming one-stop-shop for their core customers to the point of adding new lines/items.
Should MWs do some more thinking about simulation analysis and educating of their sales force on:
- Win-win, lowest TPC replenishment programs?(9)
- For the right, best, most profitable customers within one niche at a time?
- Along a shared "pool lane" delivery route?
Can MW’s convince distributors that they shouldn’t buy as much direct from manufacturers as they do, because the incremental margin dollars made on the buy are overwhelmed by the negative costs of:
- Having lower average fill-rates on a narrower one-stop-shop offering for customers causing customer defections and smaller order size diseconomies.
- Having a lower, average, turn-earn return for on their inventory investment, and
- Dramatically increasing the purchasing department’s activity costs due to a big increase in small-sized PO’s cut for lots of minor and miscellaneous suppliers.
The three MWs in this case may have also been distracted by lots of compelling new requests from manufacturers responding to some new trends including:
- Asian outsourcing
- The seemingly solid rebound of independents versus the consolidation chains (10)
- CRM and customer profitability software conclusions
- Rationalizing, while also expanding distribution channel reach to meet end-user needs
- Consideration of outsourcing the non core competency of distribution and logistics (11)
These are big opportunities for MW’s. But how should the manufacturers’ requests mesh with and be strategically shaped by the needs of channel end-users and the distributors like ABC that are meeting those end-user needs? More on this will follow in another article that will be published soon.
For now though, what do you think? Should more distributors, MWs and even manufacturers do some supply chain simulation thinking and analysis to better understand and pursue the economic benefits of: higher fill-rates on a more customer centric one-stop-shop offering with better order size and/or shared delivery route economics?
Selling what you make or stock on a price, rebate and/or terms basis isn’t meeting the channel end-users TPC replenishment needs for 90% of their purchases that happen to be on mature commodities for which there is no product edge. Could ABC’s value creation path work for you?
Link to Support Notes for this article:2_22SupportNotes.asp
Merrifield Consulting Group, Inc., Article 2.22