Wholesale change

A growing number of manufacturers and distributors are turning to wholesalers — companies that sell products exclusively to distributors for resale — to help them through difficult times.

by Richard Vurva

Although recessions are never fun to live through, very often businesses discover that cost-cutting moves made when the economy heads south produce rewards when business picks up. Such is the case with distributors and manufacturers that recently either started doing business with wholesalers for the first time or have rediscovered the benefits of doing so.

There are several reasons why distributors benefit by buying wholesale rather than buying direct from a manufacturer.

No. 1, they can reduce their inventory levels, buying products on an as-needed basis rather than following a buy-and-hold strategy.

“We act as the distributor’s invisible warehouse, freeing up their capital to hire better people, cover more ground and keep their faces in front of the end-users,” says Howard Queller of David Queller & Company, a wholesaler in Kenilworth, N.J. “They can limit their inventory to what they know they sell well and sell every day, and let us handle the other items that they don’t get calls for very often.”

No. 2, they can buy a variety of products from a single source, avoiding multiple manufacturer minimum order requirements and reducing purchasing and receiving activity.

“We offer a large assortment of products,” says Kevin Hughes of Manufacturers Sales, a Texarkana, Ark., wholesaler. “Distributors can buy from a multitude of vendors and get one shipment, which means they have to put in less purchasing effort and cut fewer purchasing orders.”

A third way distributors benefit is that wholesalers typically have more generous prepaid freight terms than manufacturers.

“Our prepaid freight is $1,500, where most manufacturers require you to buy $2,000 to $3,000 before they’ll pick up the freight charge,” says Charles Thompson of Oklahoma Rig & Supply in Muskogee, Okla.

In other words, a distributor could order any mix of products from several manufacturers totaling $1,500 and Oklahoma Rig will pay the freight.

The message has apparently gotten through to industrial and contractor supply distributors. Despite the abysmal sales environment most distributors found themselves in last year, some wholesalers reported that business remained solid.

“In a recession, our business always excels due to the fact that a distributor will cut down on his stocking items and rely on us for just-in-time inventory,” says Hughes.

While some distributors saw sales fall 20 to 30 percent or more last year, Thompson says Oklahoma Rig & Supply realized an 11 percent sales gain in 2001.

“During a recession, we tend to be the last ones to slow down and the first to start back up,” he says.

Wholesalers also report increased interest from manufacturers.

“We’re having manufacturers seek us out now. Before, we had to make the case to the manufacturer,” says Mark Friefeld of Field Tool Supply, a Chicago-based wholesaler.

Why the sudden interest in doing business with wholesalers? For manufacturers, it’s the realization that doing business the old way has simply become too cumbersome.

“Manufacturers are changing their view toward wholesalers,” says Friefeld.

They’re beginning to understand that many of their distributors don’t generate much volume. They place a lot of small orders, which manufacturers are notoriously bad at filling. But they don’t want to lose that business. So, looking to transition it to someone other than a competitor, they turn to wholesalers.

Manufacturers take a second look
In the old days, when approached by a wholesaler that wanted to handle its products, manufacturers tended to ask one question. How much volume can you get me? The answer determined the size of the discount the manufacturer was willing to offer.

Today, manufacturers are more concerned about how its relationship with a wholesaler will impact its entire supply chain. They want to know what kind of marketing support the wholesaler can offer to distributors, its service levels, next-day delivery capability and other key performance criteria.

“One thing a manufacturer doesn’t want to do is tell a class of customers that it’s going to be served by XYZ Company and then have XYZ Company provide less service than the manufacturer expects,” says Friefeld.

In most cases, however, wholesalers perform at much higher levels than manufacturers. For example, most wholesalers have no minimum order quantities, will break case quantities and ship the same day. Some even offer blind drop-shipping to a distributor’s end-user customer. Many wholesalers also offer a variety of marketing support, such as customized catalogs, flyers and even Internet ordering that manufacturers are unable or unwilling to provide distributors. Because wholesalers take on inventory, logistics and marketing functions that manufacturers traditionally performed for themselves, manufacturers give them deeper discounts.

In some cases, wholesalers help manufacturers extend into new channels. For example, Joe Fitzenberger, national distribution manager for Georgia-Pacific Company’s Away-From-Home product segment, recognizes that most industrial distributors view paper products and dispensing systems as Tier 2 or Tier 3 items that they wouldn’t normally stock.

“For the majority of industrial distributors, these products are not a core competency. They don’t want to devote their warehouse space to high-cube, low-dollar items,” he says.

G-P’s solution is to sell to industrial distributors through paper/janitorial redistributors. He adds that wholesalers not only help manufacturers streamline their costs — primarily by eliminating the need to process and handle multiple low-volume orders — but manufacturers also benefit when wholesalers carry other strong brands. Why? Because, like end-users, distributors prefer to consolidate their orders when dealing with wholesalers, so they tend to migrate toward companies that carry more of the top name brands.

Over time, the distributor may generate enough sales to ultimately go direct, but until that happens, utilizing a wholesaler is an effective way for a distributor to establish a new line.

The price is right
Because of their purchasing power, wholesalers can sometimes sell at the same price a distributor would pay going direct. For example, wholesalers purchase hand cleaners, MRO specialty chemicals and paper products by the truckload and then resell it in smaller quantities at the manufacturer’s published direct price.

“In many cases, distributors can buy for less from us than what they’d pay direct from the manufacturer,” says Hughes. “In most cases, we buy at deeper discounts than the best distributor pricing. Even if a distributor has a direct relationship with a manufacturer, they might not buy at the deepest pricing level.”

It’s not just because they buy in large quantities that wholesalers earn generous discounts from manufacturers. Manufacturers reward wholesalers for taking over specific tasks, such as same-day shipping, training and other support activities.

“A wholesaler’s purchase price is not just based on volume today,” says Friefeld. “Wholesalers receive functional discounts for activities that shift from the manufacturer to the wholesaler."

Rick Bastian, a district manager in northeast Texas for Milwaukee Electric, says low-volume distributors can’t earn the best net pricing that a wholesaler like Manufacturers Sales gets from him. If he can’t encourage a distributor to increase his volume, he refers the order to Manufacturers Sales.

“If a distributor does $2,500 or less business a year with us, for example, we can’t give them the same net pricing that we give a wholesaler,” Bastian says.

Wholesalers also generally get product to distributors faster than manufacturers can. “A lot of people order from us because they can’t wait,” says Hughes.

Even distributors that deal direct occasionally choose to buy from a wholesaler, says Donna Pace, a Dallas-based district manager for power tool manufacturer Porter-Cable. It’s common for a distributor to send an order to a manufacturer for power tools, then take a call a day or two later from an end-user who wants a tool the distributor doesn’t stock. Rather than place a new order with the manufacturer, and be forced to meet another minimum order requirement, the distributor will order instead from a wholesaler.

“Even some of my local distributors will purchase something from Manufacturers Sales when they need it in a hurry because they can get it overnight,” she says.

As the economy begins to rebound, distributors and manufacturers may go back to their old ways. They’ll set up direct distributor/manufacturer relationships regardless of any overarching benefits that a two-step distribution channel might offer. Smart companies, however, will examine their channel strategies to determine if and when it makes more sense to buy wholesale. In some cases, they may discover that wholesale change makes good business sense.

This article originally appeared in the March/April '02 issue of Progressive Distributor. Copyright 2002.

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