SUPPORT NOTES FOR ARTICLE 2.22: "How Can Channel Players Re-deploy Master Wholesalers"
- The definition of "master wholesaler" (MW) is fuzzy. Perhaps the hardest boundary line would be that the MW does not sell to an end-user, but only to the suppliers of the end-user. There are two main types of MW’s, the ones that break bulk and re-assort goods from incoming suppliers to go out to customers, and the MW’s that can emergency ship odd items faster than the manufacture can or wants to. Examples of the former might be Wal-Mart and grocery retailers’ captive distribution centers (DCs) breaking inbound truckloads from producers into assorted case shipments to retail stores that then break cases to units for the consumer. Examples of the emergency ship MW’s occur commonly in parts, valves, wire and cable, and other channels in which the downtime costs for lack of a item is high. These emergency ship MWs tend to have very deep stock in a few manufacturing lines. They often do exist in their respective niches at the pleasure of the manufacturer that either can’t or doesn’t choose to be as efficient at the fill in business. It is not unusual for the manufacturer’s sales force to be the biggest source of referrals for business.
The break-bulk and assort MW’s can be captive facilities of manufacturers, distribution chains or co-ops. 3M and P&G, for example, have regional distribution centers that will receive truckloads of goods from different factories to then re-sort the products by skids and/or cases to ship typically to retailers. Big chains, like WW Grainger, will often have hub-and-spoke distribution that allows the hub to buy straight truckloads for best landed price of commodities to then do replenishment of small regional branches. In most chains, most locations may also be the designated "master stocking location" for odd items that typically reside in the one branch because a local customer once requested it as a special stock request. And, co-ops like Ace and DoItBest, in the hardware channel, have traditionally done break-bulk, re-sort and ship for only their members, but now they are starting to solicit business in other distribution channels.
One unique (to me) captive, shared master DC facility is CoLinx which was set up and still equally owned by four suppliers in the bearings/power-transmission/automation control channel. The story is at www.colinx.com. So far, only the products from the founding members have been routed through CoLinx facilities. I would expect to see more manufacturers in more channels take a serious look at this model.
There are a few, independent, break-bulk MW’s that have emerged in some channels like welding and janitorial supply. There used to be 5 MWs for the welding supply goods that have now consolidated to two players – ORS/Nasco and OKI Bearing. In the jan-san channel, LaGasse is the largest MW with probably Sweet being the #2 player followed by a number of more regional players.
- For the more complete story on the first phase of ABC Supply’s Profit Power Renewal Program" see exhibit 25 at www.merrifield.com at this specific URL:
For a complete walk-through outline of how to zero in on the most profitable customers and reinvent your total service value proposition check out the annotated slide show at this URL: ./articles/Identify_Customer_Niches.pdf.
For more on why selling more old items to more customers in a larger average order size has 50% flow through to the profit line for incremental gross margin dollars realized, check out pages 4 and 5 of the document at this URL: ./books/Chapter%202.pdf.
All of the measures taken in phase two are apt to be resisted by the sales force, more or less. They will insist that they have already tried to sell all "old-to-old" possibilities. They will be embarrassed by the easy oversight conversions that will be made. And, most will not follow through as far as re-tuning the customers’ reflexive buying systems to make sure that all future purchases of new, old items do come to the company on a larger average order sized basis. Best to assign a project/sales manager and buyer system overhaul team to the effort.
What are the criteria to use to decide whether incremental lines/items should be added? First, it is important that the extra items are bought by the same buyer that buys the bulk of the regular items. Bigger companies tend to split purchasing into specialty buyers who then are loyal to the specialty distributors that call on them. The specialty distributors will have better breadth-and-depth of specialty items and an extra special service or two. Second, it should be an item that 2 or ideally a lot of the niche customers will buy without any hesitation and without any big preference as far as brand. You don’t want to get into stocking 2 or more redundant labels on a new miscellaneous item. Third, you obviously have to be able to secure either a direct or MW supply source.
For more on "pushing the wheel of learning" and making good, fast, cheap mistakes see exhibit 24 at this URL: ./exhibits/Make_Lots_of_Good_Cheap_Mistakes.pdf. These concepts are also covered in modules #5.7 and 5.8 of our highly acclaimed video training product entitled: "High Performance Distribution Ideas for All". (Video info in the center of our home page at www.merrifield.com.
- Most distributors are not aware of the phenomenon that the length of time between re-ordering from a supplier and the degree that demand forecasts can vary for item usage is not linear, but instead parabolic. Consider two extreme scenarios: we can place and receive weekly orders from one supplier; or, we can buy from another supplier on a quarterly basis in order to make minimum order size, avoid punishing freight or handling charges per case and/or get the truckload, lowest price to maximize margin percent.
Our forecast for each item’s "demand during lead time" for the one week cycle period will be very accurate, and slight overage or underages can be quickly re-tuned or compensated for in the following week’s order. But, our accuracy for the three-month order cycles will deviate geometrically. Deviations will average plus or minus 40% at the item demand level. (Master distribution centers that replenishment many small locations can do better, because lumpy local demands can be averaged out to some degree.) The over stocked items will quietly increase our average inventory investment and holding costs. But, what should we do about the items that are stocked out for 40% of the order cycle? We can scramble to save a lot of the potentially lost sales by:
- Substituting other competitive brands or more expensive items from the same line at the less expensive item price. (Does inside sales switch the demand for the substituted item to the economy one? Otherwise, we will continue to buy more expensive items to keep substituting in for the less expensive one that our customer base actually wants.)
- Buying the stocked-out item as needed from a competitor, another location or a master distributor.
- Persuade the customer to go with a backorder and put up with our weak service until they quietly switch their business to someone else with superior fill-rates; etc.
Because the hidden costs for all of these scramble moves will more than wipe out the price savings we thought we were achieving by buying big on an infrequent basis, what can distributors do about supplier line buys that arrive every 2 to 3 months? They can switch the volume to consolidated orders that arrive weekly from MW’s, IF THE MW IS ORIENTED TOWARDS SUCH WIN-WIN REPLENISHMENT SYSTEMS.
./articles/4_9.asp and the article’s support notes at this URL: ./articles/SupportNotes4-9packet.pdf.
- For more on how you might start to comfort zone a veteran, product-push-centric sales force into thinking about selling win-win replenishment systems read our article #4.9 at this URL:
I have received anecdotal evidence/stories from a number of channels about the "resurgence of the independent distributors" in contrast to the big roll-up, consolidating chains that grabbed so much attention in the latter half of the ‘90s. My theory is that most of these roll-ups were: run by financial promoter types; they grew too fast; and paid too much for their deals. For awhile they could buy earnings growth and persuade concerned manufacturers to pay them growth rebates for volume that they bought, but it is all over. Many of these roll-ups have become frozen, eroding if not imploding or bankrupt stories. The rest of the channel players (including long-term, steady-growing chains) have then picked up the market share by just being there more than doing anything differently than they always have. Many suppliers, nevertheless, perceive that the little guys are where the growth is so they are showing more interest in reaching the small guys through their buying groups and/or MWs that serve them.
Two closing thoughts: maybe the best thing that can happen for a distributor is to have his best head-to-head competitor bought out by a growing too-fast, by-the-numbers chain. And, how many independents will take advantage of the supplier interest pendulum swinging their way by taking their value creation capability up a few levels like ABC Supply?
Here’s a case story that touches on a number of the new trends that manufacturers are responding too:
A large manufacturer with several divisions that all sell through a common distribution channel discovered that:
- They had too many small customers for which the total cost of selling, maintaining and servicing, on an annual basis, caused these small distributors to be losers.
- None of their factories were doing warehousing and outbound logistics well, let alone at some world-class level.
- There were many more small, niche distributors that could buy their products, but weren’t.
- The independent, customer-niche focused distributors were now growing organically faster than the big consolidated roll-up distribution chains, and they are still selling new products instead of being low-cost fulfillment, private-label sourcing and substitution players.
So, they approached a master distributor and asked if they could:
- Create rationalization, cost-plus pricing program based on activity based costing or what traditionally we might have called "functional discounts" for doing specific activities. This pricing program would allow (and encourage) three different groups of small, customers to buy at the old price as long as they combined their needs with the rest of the volume that they were already buying from the master distributor. The two parties have to work on separate plans for all the permutations of what distributors had or had not already been buying from one or both of the parties in the past.
- Consider being a third-party logistics (3PL) solution for all of their outbound goods. The divisional factories would ship (on a one at a time, experimental basis) all of their volume to the master distributors warehouses. The "3PL subsidiary" of the master distributor would then ship to all of the factories "direct end-users" as well as to and through all channel distributors. In this 3PL model, the MW would not buy the inventory, but warehouse it on consignment.
- The first "factory" to ship to the master distribution center is actually in China, so containers will arrive directly to the master distributor’s warehouse (which is in the process of getting ‘free trade zone" status) for superior reassortment economics with all other already stocked products. The MW would be replacing another 3PL company that has no other same-channel product synergies.
So, producers of goods are starting to realize that master distribution centers can:
Link back to Article 2.22./articles/22_2.asp
- Lower their annual, total sales and service costs (TSSC), especially for small-location distributors, which includes big chains with direct buying branches, and convert profit losers into winners.
- Increase the number of distributors/dealers that can buy their products more easily.
- Take over 3PL needs for imported containers of goods and do a better total economic job for all parties involved than a 3PL provider that has no specific channel customer focus.
- Potentially take over 100% of the outbound production for domestic factories, especially if most of it is going to and through the distributors that the master distributor serves.
- Increase the comparative fill-rate performance of their products off of the distributor/dealer’s shelf in comparison to the me-too competitors’ stocked items. Because distributors can get weekly shipments that include a given manufacturer’s products, fill-rates can be managed to much higher levels with less average inventory investment. Then, the supplier’s items will be substituted more often for the competition’s items that aren’t bought in a similar way and therefore have lower average fill-rates.
Merrifield Consulting Group, Inc. Support Notes for Article 2.22