June 27, 2017


















Article 2.24

FAST-GROWING, MASTER DISTRIBUTOR STORY:

AN INTERVIEW WITH JOHN TRACY, PRESIDENT OF DOT FOODS

INTRODUCTION:

Assuming mature channel players are thinking about supply chain efficiencies, I have written two articles on the subject that spotlight the expanding role of master wholesalers from both the distributor and manufacturerís perspectives.(1) Below is an interview of John Tracy by Dave DeWalt, a foodservice distribution channel consultant (www.franklin-foodservice.com). Dot Foods (www.dotfoods.com) is a master wholesaler founded in 1960 that has grown to be a $1.7 billion supplier to foodservice distributors that supply the eat-away-from-home "operators" (restaurants, company/school cafeterias, food-to-go c-stores and grocery retailers). Dot presently buys from over 500 suppliers to stock over 24,000 SKUs that are "dry, refrigerated and frozen" in 4 regional warehouses to serve over 3,300 distributor customers with over 400 multi-temp, tractor trailers.

Since their founding, Dot has grown at an 18% compounded annual growth rate even though both the manufacturers and distributors that deal with them have done so on "intuitive or instinctive" economics. Although Dot has worked hard at teaching manufacturers about their total cost to serve and teaching distributors about their total procurement cost, both sets of channel players are, on average, just starting to understand Dotís purpose intellectually due to economic necessity. John and I go way back. For the supply chain economics cause we did a videotape together in the early Ď90ís that was aimed at educating Dotís distributor customers on how to buy both the lowest total procurement cost and achieve the highest average fill rate economics.

In the following interview, I have added some under lining and inserted a few, additional comments that are preceded by my initials, "DBM".

THE INTERVIEW

DAVE (DeWalt): What new segments is Dot Foods pursuing in order to continue your growth, and do you ever see Dot serving major operators?

JOHN: Dot is not in the operator business and does not intend to serve operators. We have been responding to chain operator requests to understand our supply chain solution for manufacturers so the chain can embrace the manufacturer using our system to more effectively move product from the manufacturing plant to the serving distributor.

Our growth is currently being fueled by the overall growth in demand for redistribution services in all channels and the continued education on supply chain economics by distributors and manufacturers alike. Almost every distributor and manufacturer in foodservice, convenience store, retail and vending are spending time and money studying their supply chain and analyzing how to effectively utilize redistribution to improve their ability to serve each channel, reduce costs on LTL orders, and increase sales.

Our growth segments are across the board with:

  • more categories of products available to each channel
  • convenience store sales
  • equipment & supplies, and
  • continued expansion of our refrigerated and frozen offering

(Daveís comment) IMPLICATIONS FOR MANUFACTURERS:

Dot Foods is likely to become an important link in supply chains beyond the foodservice broadliner, serving distributors who specialize in C-Stores, vending, and the perimeter of the grocery store. The manufacturer people responsible for these channels should make it their business to understand Dotís role and Dotís potential to augment their marketing and logistics strategies.

DAVE: Most manufacturers are happy to have Dot serve less-than-minimum customers, and even those that buy in their smallest price bracket. Dot asks manufacturers to consider turning over all customers buying in less than Ĺ Truckload quantities. Should a manufacturer consider Dotís value to be the same across all of these customers and order sizes, or is it more accurate to say that Dotís value to the manufacturer is much higher on the smallest customers than on the 19,000 lb. customers?

JOHN: We feel each manufacturer is different depending on their product category, temperature and offering. In general, our feeling is that the issue is "does the manufacturer have a real understanding of their cost to serve?"

As redistribution becomes more accepted by manufacturers and distributors alike in all channels, the primary challenge for the manufacturer is to know exactly what their cost to serve is for all order types. It is easy to estimate that a minimum order should go through redistribution, but it gets harder to make that decision the higher the order size. The issue should not be how much volume per month, as much as it is what does it cost the manufacturer to serve each of the different order sizes, and compare that to the cost to serve through a re-di.

Most manufacturers do not know these economics because they have not needed to, and have used averages to estimate; the averages are distorted by the 80/20 rule (20% of the customers do 80% of the business).

IMPLICATIONS FOR MANUFACTURERS:

If you use average freight costs to compare to your Dot program cost, you risk drawing the wrong conclusions. Only by drilling into the details of logistics costs for various customer types and order sizes can you make informed decisions about who should and should not be served via redistribution.

DAVE: Do you envision development of a Dot Foods or other private label? If so, how might that work?

JOHN: At this point, we have no plans for a Dot label or other private label. The majority of our volume is with the manufacturer brands, which we support and embrace; we are happy to also offer the group and corporate labels on products that our manufacturers support and the volume warrants.

(DBM: In the foodservice channel, the great majority of distributors belong to buying groups and sell significant volumes of buying-group, private-label goods mostly made by the brand-name producers.)

IMPLICATIONS FOR MANUFACTURERS:

"Whew!"

DAVE: Because Dot carries multiple manufacturers in most categories, you would seem to be "neutral" regarding which products you promote. At the same time, Dot has a large sales force and offers marketing program opportunities to the manufacturer.

Is Dot simply in the business of expertly fulfilling demand that is generated by the manufacturer, or is Dot in the business of influencing distributor demand for various manufacturers and brands?

JOHN: We are neutral in the sense that we make the products available to the appropriate distributors in multiple channels, and we do not try to provide an operator selling function or be the product experts technically. However, by selling the distributor on the value of our concept, and creating demand for products through our system, we are breaking down barriers for our manufacturers to sell product. These barriers typically include manufacturerís shipment minimums, long lead times, custom items with limited volume, and the distributorís lack of space to add product lines.

That said, our sales people are like others. If a manufacturer has created numerous barriers for the target volume (LTL orders) to move through our system, they are going to focus more on manufacturers that have less barriers in place for them to sell and influence our distributors.

The final point is that we have a variety of sales and marketing resources to help manufacturers access the market in a way they canít match on a direct basis. Our marketing activity including the most widely used web access to distributors in the industry (Dot Expressway), does a lot to influence demand. Most distributors have a good idea what they want; if not, our sales people will focus on the lowest-barrier manufacturer. Dot provides a manufacturer the opportunity to grow their sales through more customers in more channels, as opposed to just a logistics solution.

IMPLICATIONS FOR MANUFACTURERS:

This is a great clarification of a sticky topic. In our follow-up conversation, John said "it wouldnít matter even if I told our salespeople not to favor one supplier over another Ė it only makes sense that theyíll sell whatís easiest for them." When manufacturers place too many limits on who and what Dot can sell, they reduce the potential to take advantage of Dotís "marketing value" and new business potential.

Ideally, your redistribution program should be structured in such a way that you are comfortable "taking off the reins" and letting your redistributor sell all of the customers who fit your defined target criteria.

DAVE: If a manufacturerís price bracket structure is sufficient to cover the cost of shipping minimum orders, why does Dot need to earn this margin PLUS a redistribution allowance, when Dotís system is more efficient than the manufacturerís?

JOHN: We have never seen a manufacturer who has all of the cost to serve LTL orders (including Order Entry, Accounts Receivable, warehousing, transportation, and invoicing) in their price brackets. Almost all do not know the exact cost to serve each bracket, and most look only at transportation costs as a driver of their bracket structure. Price brackets primarily address the transportation cost difference, and even if it is more than that, we are providing sales and marketing support to grow a manufactures top line, which is much more than just cost to serve.

Ultimately, the marketplace determines what price an operator will pay, and thus what a distributor will pay. It is unlikely the marketplace will allow a manufacturer to arbitrarily set up prices within brackets without regard to the competition or create bracket pricing that has all the total cost to serve. This is one reason so many manufacturers have to deviate from their price list to get the business and why it is so critical for the manufacturer to understand cost to serve based on the size of the order and customer, regardless of what bracket or price they charge.

IMPLICATIONS FOR MANUFACTURERS:

As weíve written before, there is a very strong relationship between price bracket structure and redistributor programs. But itís all meaningless without price discipline. If a manufacturer routinely provides truckload price exceptions on small orders, he cannot expect his redistributors to adhere to the price list, as they will lose volume.

Establishing bracket prices is further hampered by the lack of sophisticated accounting systems to capture all of the costs outlined by John. Manufacturers who make the effort to understand these costs, and have the discipline to enforce the resulting prices, stand the best chance of establishing a redistributor strategy and program with clear financial benefits.

DAVE: If a distributor who buys 10,000 lb. orders from a manufacturer switches his business to Dot, he gains the benefits of faster turns, shorter lead times, responsiveness, etc., probably with no price increase. If the manufacturer makes lower revenue and incurs higher cost to put this business through Dot, how can he justify that decision?

JOHN: The issue you are raising above gets back to the challenge for everyone in the supply chain (including manufacturers, distributors, and Dot Foods) to understand their cost to serve. It is easy for Dot, or the manufacturer to pick out one customer or one instance that is less than perfect for either party. Far too much emphasis at times is spent on that one instance as opposed to looking at the entire program.

We donít deny that occasionally the distributors we serve elect to source a line from Dot Foods, even if they are above the target order size for that manufacturer. In most cases, we are able to show the manufacturer that these are aberrations, and are more than offset by the hundreds of distributors we serve that are buying far below the manufacturerís minimums.

We know, however, that in the long run no manufacturer (or no business for that matter) will sell anyone that lowers their revenue and raises cost. So if a serious case does occur, it will be corrected because if it isnít, the relationship will not survive for either party. The key is to have good communication as to what the target customer is and then review any exceptions to understand why and look at the cost to serve in that case.

IMPLICATIONS FOR MANUFACTURERS:

Many of the companies I work with express concern about this issue, whether it involves one large distributor, or several dozen. There is no doubt that a distributor will "be happier" if he can get your line from Dot with all of the benefits and no price increase, and it may feel like a win/lose situation.

(DBM: Ideally, distributors should be sophisticated enough to know that a higher price from a re-di might still provide: a) a lower total procurement cost; b) the best turn-earn inventory ratio; c) lower average inventory investment; d) higher everyday fill rates that in turn improve e) customer satisfaction and retention as well as f) average order size economics while g) reducing stock-out activity costs of back-orders, more expensive substitutions and inter-branch, order-balance shipments. If both distributors and manufacturers donít completely understand these total buying economics, then they need to know to help them make better supply-chain, strategic decisions.)

(DAVE continued) If you are not comfortable accepting this situation as part of your overall re-di program, perhaps there is an opportunity to convert the distributorís "happiness" to volume and profit growth for your line. Working with your Dot representative, the crux of the message could be "weíre supporting you via our Dot program; letís talk about the new products, replacement of marginal competitors, and other growth opportunities enabled by our barrier-free re-di strategy."

DAVE: Most accounting systems seem to lack the capability to truly reflect the cost avoidance associated with putting business through Dot. Does signing up for a Dot program require an "act of faith," or have you seen processes and systems that help a manufacturer "see" the cost offsets as well as the Dot allowance?

JOHN: We can help, and we have some tools to support that analysis, but the first key is for the manufacturer to commit internal resources to truly try and get to the true costs. Signing up for our program is hopefully a strategic decision with specific objectives, based on good business instincts and an understanding of costs. If the complete understanding of costs is not there, which it normally is not, there are usually excellent instincts on what is probably happening, as well as a plan to extend their reach by making the product more available and increase sales.

(DBM: Isnít it amazing that Dotís incredible growth, so far, has been supported more by the "instincts" of both manufacturers and distributors than actual economic facts? Most firms are swimming in financially-oriented data instead of supply chain economic/service measurements. To improve growth rates based on better customer service economics and profits based on total procurement costs, we need to measure new factors and rethink our incentive plans for both buyers and sales reps.)

IMPLICATIONS FOR MANUFACTURERS:

Perhaps manufacturers were more willing to make the "leap of faith" in the past, but I see many working hard to quantify the impact of serving customers through redistribution vs. direct. The internal accounting issues will continue to be a stumbling block, until someone develops a way to capture the cost avoidance associated with redistribution, and reflect it in the regular financial statements.

When this happens (and I believe it will), a lot of the issues weíve been debating will be obliterated and manufacturers will be able to focus more on maximizing the value of their redistribution programs.

(THE END OF THE INTERVIEW)

DBM CONCLUSIONS:

While Dot has grown from zero to $1.7B over the past 45 years by filling "instinctive" economic needs, what have the majority of channel players been economically focused on?

  1. One of the biggest info tech goals within distribution channels for the past 30 years has been to automate the internal purchasing and management of inventory to improve turns which, in most channels, has not changed significantly.
  2. Over the past few years, many channel players have been trying to lower inter-company transaction, paperwork and error costs through electronic commerce applications. Others have been experimenting with getting lower prices, not total procurement costs, through reverse auctions. These initiatives have not touched the essence of what Dot does for the foodservice channel. Billions of dollars of inventory are still collecting dust in too many profit-center warehouses in most channels.
  3. Since the mid-Ď90s, a growing number of large, channel end-users have been co-creating integrated supply relationships. At first, many of these deals were they-win-supplier-loses "price" weighted. Now, more are focusing on win-win, lowest total selling/buying cost replenishment deals. When will distributors realize that they, like their big end-user customers, should be looking for a consolidated supplier capability, like Dotís, that will lower total inventory investment and procurement cost while improving fill rate service value? Even if the "price" is sometimes higher, the rest of the economic positives are a greater offset.
  4. When will manufacturers do less commodity product promotions and rewarding their employees on cases sold this quarter or year resulting in channel load up deals? What if they focused, instead, on measuring total cost to serve customers, customer (location) profitability and highest everyday fill rates for their products off their distributorsí shelves?

If and when manufacturers and distributors start to focus on total supply chain costs and one-stop-shop, in-stock fill rate service economics, then channel inventory piles will start to reconfigure. Master distribution capacity will start to grow much faster than Dot has been doing on instinctive economics.

 

  1. The supply chain redesign articles are posted at www.merrifield.com and numbered 2.22 and 2.23.

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(2) For more on total procurement cost see articles 4.2 and 4.3../articles/4_2.asp and ./articles/4_3.asp.

Ó Merrifield Consulting Group, Inc., D. Bruce Merrifield, Jr., Article 2.24