Team up, profit up

by Tim Underhill

By finding out what customers and suppliers want, distributors can show their value to channel partners.

The National Association of Wholesaler-Distributors’ Distribution Research and Education Foundation (DREF) released a new book that takes a unique look at ways that wholesaler-distributors can cut cost and increase customer loyalty. “Team Up, Profit Up: Partners in Channel Cost Reduction” by Tim Underhill stresses the need for teamwork between distributors and their suppliers.

Underhill is president of consulting firm Underhill & Associates, Tulsa, Okla. In conducting research for the book, he developed a survey for each of the three channel partners: customers, distributors and suppliers.  He sent 10,000 surveys to each link. Then he contacted more than 100 responding companies for follow-up information, focusing on the specifics of what they were doing, why and how. In this excerpt, he discusses why distributor-supplier partnerships are so important and how to get started forming them.

Today, most supply chain management strategies focus on customers and their first-tier distributors only. Very few wholesaler-distributors have implemented significant ongoing supply chain initiatives with their suppliers; yet the opportunities for reducing channel costs between distributors and suppliers offer real competitive advantages.

This point is not new. In the 1995 DREF book “Facing the Forces of Change,” one of the key tenets was the need for distributors to work more closely with their suppliers. This was brought to light again in DREF’s 1998 edition of Facing the Forces of Change, where supply chain integration was identified as one of the key trends impacting wholesale distribution.

Distributors are in a unique position within the supply chain.  Their role is to provide value both up the channel to suppliers and downstream to customers. While many distributors add value for their customers, many suppliers say they see a decrease in the value wholesaler-distributors provide them. Some distributors no longer “sell the brand.” Instead, suppliers say people who used to sell are being replaced with mere order takers. As alternative channels and new technologies make it easier, and in some cases more profitable, to bypass distribution, why wouldn’t suppliers do this?

The survival of wholesale distribution hinges on the distributor’s need to show value to both supply chain partners. By working together, the partners can actually thrive in tomorrow’s marketplace.

Today, a company’s competitive position is based on the strengths of that company. Tomorrow’s competitive advantage will not be defined by a single company, but rather by the supply chain within which it operates. Imagine the competitive advantage you could achieve if you could eliminate much of the waste in the channel. The opportunities to achieve this are real, but you cannot accomplish it without the participation and support of your supply partner.

If you don’t choose to make improvements today, a customer or competitor may force you into a position you would rather not be in. But if you seize the initiative, you can determine your own course of action. What should it entail?

By asking a wide range of customers dealing with a broad array of products which categories of initiatives had the greatest impact on their company, we identified seven: expenditures, performance, inventory, administrative, technical/engineering, information and quality/safety. The list shows where distributors will need the most support from their suppliers, and potentially will have the greatest impact on costs throughout the channel.

Expenditures
Every wholesaler-distributor is faced with pricing pressure. In response, distributors turn to their suppliers and ask for price breaks. While this works for a while, eventually the well runs dry, and customers either disintermediate the distributor or take the contract somewhere else.

Alternatively, the distributor can cut prices unilaterally. However, a reduction in one cost for the customer often increases another.  For example, if a distributor agrees to a lower price, it could hurt that distributor’s profitability. The distributor might reduce his service level to compensate, perhaps by providing less technical support than before.

To overcome this, customers recently started focusing on ways to ensure they achieve savings in all areas. They usually accomplish this by rewarding the distributor based on total cost reductions. This requires distributors know their costs well enough to ensure adequate compensation for reducing the customer’s costs.

Performance
Our survey found that performance was the customers’ next biggest issue. Distributors are being asked to make improvements in delivery and quality. Customers are also putting greater pressure today on shortened lead times, on-time deliveries and the accuracy of orders shipped.

Often, the wholesaler-distributor is dependent on the supplier’s lead times and ability to perform as promised. But the supplier is dependent on the distributor to provide market intelligence on what to produce, how much of it and when. This is a service that the distributor can offer as added value.

Inventory
Consignment programs, inventory buy-backs and support in surplus reductions have all helped the customer save significantly and are increasingly part of a customer’s supply chain management initiatives. But it is not ending there. Customers look to their distributors to take over management of part or all of their warehousing operations with programs such as vendor-managed inventory, storeroom management, point-of-use stocking programs and outsourcing.

As these initiatives increase in popularity with customers, the obvious reaction for wholesaler-distributors is to once again turn to their suppliers. After all, the lowest cost of inventory ownership in the supply chain is the supplier.  But as distributors ask suppliers to incur more costs, costs that typically were part of the value that distributors brought to the supplier, some suppliers question how much value distribution actually provides. If you can provide additional areas of value to your suppliers, it is possible that they will be more willing to support your efforts.

Administrative
Administrative costs are also on customers’ agendas. These generally revolve around the ordering/invoicing processes. The most common formats uncovered by our study were electronic data interchange, electronic funds transfer and summary billing. E-commerce is already showing significant gains and is likely to continue to grow in the next few years.

The ability to reduce the steps and time required to perform a task or process can allow a customer to reduce operating costs or free up time for more strategic tasks such as planning or working the supply chain for additional savings.

As pressure mounts on wholesaler-distributors to do more with less, these same initiatives can be used on the supply side to free up personnel. E-commerce is one area where this is starting to happen. Instead of each distributor incurring the cost of producing an online catalog for each supplier, some distributors are letting their suppliers provide direct online access for customers.

Engineering/technical support
Perhaps one of the most beneficial and often overlooked areas where distributors can reduce a customer’s total cost is engineering and technical support. This refers to any distributor that provides input on the choice of product or application specifications that might better suit the customer’s needs.

According to our findings, support in installation, design, operational analysis and even utility usage analysis are gaining in focus as the loss of this support has created higher costs for customers. It’s another area where distributors can work closely with suppliers to improve the situation.

Information
The old adage “information is power” applies now more than ever.  In an age where information is just a mouse click away, it is surprising how little of it channel partners share. Control of information allows one partner or the other control over the channel. If members of supply chains are to truly work together to reduce costs and improve channel performance, they must learn to not only share control but to share information.

Point-of-sale/use information can be very advantageous in improving performance by decreasing inventory and achieving improved customer satisfaction. Such information needs to be shared from the start to the finish of the entire supply chain. This includes wholesaler-distributor to manufacturer-supplier (and not just point-of-sale information). Marketing intelligence can help suppliers better plan production.

Quality control/safety
The last area where customers are working to reduce costs is quality control and safety. Any ability to decrease workplace injuries and thus insurance premiums can have a significant impact on a company’s costs. For example, a manufacturer of products including hoist connections (called shackles) found a way to make its shackles particularly safe to use. The company shows customers how they can decrease their safety risks by using its shackles, based on the manufacturing process and materials used. Additionally, the company provides safety training support to its distributors and customers.

There are many other examples of teamwork between suppliers and their distributors. What’s key is finding out what your customers want and what your suppliers want. Then it’s a matter of working with your supplier to keep him — and the customer — happy.