Understanding the ‘Simple Strategy of Wholesaling’

BY RICH SCHMITT

Management specialist

Over the years, we have been privileged to work with and observe some really top-notch wholesalers. We call them high-performance wholesalers. In studying these top performers, we have noted that many operate using a very similar strategy. Some have professional-looking bound books that describe this strategy; for others, it’s just the way they have always operated. Whether it is an explicit strategy or not, its simplicity often causes some to wonder whether it can really work. We call it the “Simple Strategy of Wholesaling.” (We call it simple not because it is easy to do but because is it easy to understand and explain.) 

In short, the Simple Strategy of Wholesaling means: Become the primary supplier to a group of selected customers.

I have discussed some facets of this in previous columns but I wanted to devote a column to it since some of its ingredients are even more critical as the economy continues to soften. In describing the simple strategy, I like to divide it into two components:  Primary Supplier and Selected Customers.

Primary Supplier

What is a Primary Supplier? The Primary Supplier gets the best chance at any piece of business.

This happens in a variety of ways:

• First call -- The Primary Supplier normally gets the first call when a contractor needs material for a job. The contractor picks up the phone and, normally, calls his “go-to wholesaler,” his Primary Supplier. 
• First stop -- If the contractor is in his truck running for the parts required to complete a job, he will often stop at his Primary Supplier’s location. Of course, he won’t drive 100 miles out of his way, but whenever the distance is close to being equal, the Primary Supplier gets the nod.  In some cases, the contractor might even drive out of his way to visit his Primary Supplier. 
• Last look -- In a bidding situation, the Primary Supplier will probably get a “last look” that is like a right of first refusal for the job. At its best, the Primary Supplier is not even required to meet the lowest prices in the market because the Primary Supplier offers value that justifies a somewhat higher price. 
• Forgiveness -- Finally, the Primary Supplier bond between a contractor and his wholesaler tends to weather problems at both ends of the relationship. 

I like to say that gaining this “best chance” at a piece of business allows a wholesaler to be more dominant than any other strategy we have observed over the years. (The most dominant strategy we have heard about was in another industry and involved compromising photographs taken during a “no-spouse” customer trip to Bangkok, but I cannot confirm nor do I recommend this approach.)

When the contractor calls you first, stops at your store first or gives you a last look, it is essentially your business to lose. Sure, you can somehow mess it up so badly that the customer will go elsewhere, but in a lot of instances, if you get the basics right you get the order. I like to say that the other team (the second- and third-level suppliers) might not even get an at-bat. While in baseball it wouldn’t be considered proper to create a game where the other team doesn’t have a fair and equal opportunity to score, in wholesaling I believe it is a key part of your mission.

Thus far it might seem pretty simple, but the wholesaler must earn the role of Primary Supplier with each customer -- and that is not easy. We have observed that the role is earned in four areas:

• Getting the product to the customer --  If I was going to give you the three most important factors in this area, it would be Reliable, Reliable and Reliable. Customers will buy product from you if you are not reliable, but only when their Primary Supplier is stocked-out. Contractors want a wholesaler that can get the product to them or to the job site as-promised without numerous unpleasant phone calls. They hate delays caused by unreliable suppliers. While they can mess things up in a truly mind-boggling number of ways, they expect much more from any of their suppliers and superior reliability from their Primary Supplier.  So your operation must, first and foremost, be able to get product to the customer as promised. Your deliveries must be on-time and accurate. Your counter must be efficient and accurate. Some of you might be thinking, “We have that one covered.”  I would encourage you to look at your execution through the contractor’s eyes because they are very tough graders.
• You must have the products that they use and want -- That means the types of products that they use, but it also means the brands they use, the quality level that they want and the quantities that they normally buy in.  If a customer likes a specific brand, your choices are clear -- stock his preferred brand or convince him to use the brand that you stock. If your customer wants the economy version of a product and you stock the heavy-duty version, again you choices are clear -- stock what he wants or convince him to use your product. If the customer wants to buy cases of a product then your choices are again clear. Unfortunately, many contractors can get set in their ways so convincing them to change is often a losing game. In the end, if you don’t stock what the customer wants and you are unable to convince the customer to buy what you have, the customer will probably be looking for another supplier to be his first love.  Ideally you provide all the products that the contractors need and use so you can be their reliable “one-stop shop.”  Operating as their one-stop supplier means you seldom, if ever, send them off to a competitor to purchase “the rest of the material for the job.” Whenever you force them to visit a competitor, you are giving them an at-bat and tossing them a big, fat meatball. 
• One part of this process that spans the first two qualifications for the primary supplier, is identifying and managing a small number of NBOO (Never-Be-Out-Of) items. These are the items that you must never stock out of -- ever. The products that are embarrassing to stock out of. The stock-outs that the contractors remember for a long time and forgive you slowly. The ones they count on you to have every day without fail.
• Last but far from least, the customer must know that you have the products that they need and use.  If they don’t know you have it, you will not be their primary supplier for the product. This involves sales, catalogs and promotions so the customer knows with confidence all the products that they can depend upon you to provide.
• The customers must like you --Contractors want to buy from wholesalers that they like. So a group of activities in the company must be designed to create an ongoing relationship with your target customers. Contractors will buy from you if they don’t like you, but you will not be their primary supplier.
• The customers must believe that you are offering all of the above at a fair and competitive price -- This doesn’t always mean the lowest price, but a fair price. As above, contractors will buy from you if they think your pricing is high, but you will not be their Primary Supplier. Most of us don’t like to think that our day-in, day-out supplier is taking advantage of us.

Getting these four checkmarks does not guarantee that you will be a contractor’s primary supplier. If all your competitors offer these four things, the game is tough and you must do even more to earn the Primary Supplier role. Fortunately, these four basics are difficult to master, so doing so puts your company in an elite group or maybe a group of one in your market. 

Selected Customers

The second component in the strategy involves “Selecting Customers.” You cannot be all things to all customers. You can try, but the odds are greatly against you. It is far better to determine the types of customers that are in alignment with your company and then focus on those types of customers. 

I am talking about alignment in terms of products and services that customers use. I feel that alignment is critical in earning the role of Primary Supplier and in a successful long-term relationship. When there is alignment, you sell the products that customers use to do their jobs and you provide the services and support that the customer needs. Their transactions flow through your company without a lot of special hand-holding or stress. This is because your company is equipped to provide quality service to that type of customer.

Conversely, attempting to do business with unaligned customers normally creates a mess in one or more ways:

• The customer needs products that you don’t normally stock. The sales and purchasing people jump through hoops to provide the products that the unaligned customer uses. There are lots of special orders, special handling and extra costs associated with the customer’s everyday transactions. The wholesaler is, in effect, trying to hide the fact that they aren’t organized to serve the customer. I have seen plumbing wholesalers pretend to be in the HVAC business because HVAC contractors use some plumbing product in their work (pipe, fittings, etc.). When an HVAC contractor arrives expecting to pick up a 2-pole 30A contactor (product a plumbing wholesaler wouldn’t normally stock) the pretending is over. For that contactor, the product is one of their unforgivable NBOOs. It is unlikely that the plumbing wholesaler will ever be the Primary or Secondary Supplier to that contractor.
• The customer needs services and support that you don’t normally offer. Using the hvac pretender as an example, let’s say that the salesperson found the contactor and got it to the customer.  Whew -- problem solved. The customer then gets out to the job, finds that the equipment has unusual wiring and calls the plumbing wholesaler with a question. Busted!
• The customer is always upset. The customer feels that your company promised to take care of him but you are fundamentally not configured to reliably take care of that type of customer.
• When there is a fit, there is an opportunity for a Primary Supplier relationship. When there is a fit, there is a greater chance of a profitable relationship. It is difficult to become the Primary Supplier to unaligned customers. Of course you can always explicitly decide that you are going to expand your offering and target other types of customers, but this is not a casual, situational decision. It is a strategic decision that should include a budgetary workup that looks at the costs of all the products and people required to move into an additional line of business.

Looking for just the right fit

After you have identified your target customers, their characteristics become the specification for all new customers. Over time, you try to focus your efforts on these target customers and become highly skilled at serving them. As part of that focus, you may decide to move away from some of your existing customers.  (I would never -- but especially in this business environment -- “fire” a customer simply because he/she does not fit the profile, but you must always be sure that you are making a fair profit selling to non-target customers.) 

The next level of selection is to choose the individual customers within your target groups that are a precise fit for your company. Some customers might be aligned well with your company’s products and services but might not be a fit for other reasons. The main reason I would de-select specific companies would relate to whether they allow a profitable relationship with their wholesaler. When they try to cheat you and don’t pay as agreed, you try to find other customers who seek a win-win relationship with their wholesaler.

Mastering this simple strategy helps get your team focused on the important products and activities in your business. It helps focus your inventory dollars on the right products. Our Price Analyzer® software helps wholesalers understand the balance of inventory to sales. A recent customer saw that 80% of his business was supported by 35% of his inventory value. That means that 65% of his inventory value was there to support 20% of his sales volume.  In looking into the details, much of that 65% was product that had been purchased to support unaligned types of occasional customers. The company’s inventory turns really stunk since their core customers were buying products from the 35%.

As I said before, the “Simple Strategy” is simple to say and understand, but difficult to implement and maintain. The great part is that if you do master it, you will improve your profits, your standing with your customers and your competitiveness.