You might be in red ink...

 

(Editor’s Note: At this year’s Pacific Southwestern Distributors Association Convention, industry veteran Robert Vick was again invited to be part of the program. The following are highlights of Vick’s presentation.)

 

As a refresher, my subject matter last year revolved around how much our industry had changed in my lifetime, for both the better and for the worst.

 

But the main take-a-way was mostly how wholesalers and manufacturers were concentrating more on their own immediate needs rather than trying to improve the overall effectiveness of our supply chain channel.

 

I concluded my presentation by pointing out how manufacturers should take the lead and start thinking in terms of providing more value to the wholesalers in an effort to jump start the partnership.

 

Needless to say, it was that last statement that fueled most of the comments during the panel discussion. I wish that I could stand here today and say that what I said last year was just for last year. That time has helped us work through the manufacturer-wholesaler disconnects and the robust economy has given us clear sailing ahead. 

 

Unfortunately nothing could be further from the truth. The old saying of what a difference a day makes, or a month or a year could not be more appropriate in describing the downward spiral we find ourselves in today. I am more convinced than ever that our supply chain is in trouble and business as usual is not going to help turn it around. 

 

We as manufacturers and wholesalers need to look at the big picture and start addressing our shortfalls. Shortfalls like our inefficiencies, waste and redundancies. And the most important shortfall of all — the one of not working together.

Survival for both the manufacturers and wholesalers depends on the changes we are willing to make for the other. But before we can make the changes we need to have a better understanding of the role each of us play in the supply chain and which direction we must take to make us the best at what we do. ...

 

Last year my presentation generated a lot of conversation about who we are but very little action about were we need to be going. So this year I thought that I would try a different approach. I have put together a list of manufacturer and wholesaler perceptions or beliefs that may in reality be misconceptions hindering both sides from getting where they need to be going.

 

In an effort to make the presentation of these lists more interesting, I have put them in a format that combines David Letterman’s “Top Ten” along with Jeff Foxworthy’s “You Might Be a Redneck.” With a little modification, they form my “Top Ten” of why “You Might Be in Red Ink.” ...

 

Manufacturers’ list

 

• Manufacturer Misconception No. 10 — If you think that the wholesaler is your only customer...You might be in red ink. Your selling should not stop with the wholesaler. The wholesaler is primarily going to offer either what the engineer specifies or what the contractor asks for. The days of the wholesaler promoting specifically your brand alone is gone. The wholesaler’s sales pitch is more like, “Mr. Contractor, tell me what you want and at what price and I will get it for you” Today, you must do the downstream selling yourself.

 

• Manufacturer Misconception No. 9 — If you think that you can save a lot of money by selling direct...You might be in red ink. Manufacturers should understand all the functions and cost that a wholesalers absorbs before trying to bypass him — such as the time spent handling inquires, having local inventories, making deliveries, working weekends, invoicing, collections, etc. Don’t assume that the money saved by selling direct will all drop to your bottom line.

 

• Manufacturer Misconception No. 8 — If you think that a 90% fill rate is good...You might be in red ink. If your competitor’s initial fill rate is at 98% and you are at 90%, the 98% supplier can cut the wholesaler’s inventory level in half and still have him providing the same level of service to his customers. A profit driven wholesaler will choose the 98% supplier every time.

 

• Manufacturer Misconception No. 7 — If you think you know what’s best for your wholesaler...You might be in red ink. Many policies made by manufacturers are made to keep the wholesaler from abusing the system. But from the wholesaler’s viewpoint it appears that the rules are being made without any concern for their needs. Wholesalers constantly ask me “why do  manufacturers make it so difficult to do business with them.” Policies should make sense to the customer, not leave them shaking their heads in disbelief.

 

• Manufacturer Misconception No. 6 — If you think that the contractor will favor you over the wholesaler...You might be in red ink. There are manufacturers who like to think that they have the contractor in their back pocket. But who do you think a contractor most likely favors, someone he talks to or sees everyday, who stocks locally all the material that he needs, makes daily deliveries to his job site, plus gives him a line of credit or you? Don’t be fooled about who has the upper hand with the contractor.

 

• Manufacturer Misconception No. 5 — If you see private labeling as just a fad...You might be in red ink. Adam Fein, author of Facing the Forces of Change, says that by 2012 over 50% of all wholesalers will be selling a private labeled product. If you are not careful your biggest customers could become your biggest competitors. For many of you, you have already seen this happen.

 

• Manufacturer Misconception No. 4 — If you expect that by joining a buying group all your problems will be solved...You might be in red ink. Buying groups have their advantages but they don’t come cheap. The same can be said for being awarded a shelf at a retail chain.  Make sure your projected sales  growth will offset what you have to give up in margin before you jump in.

 

• Manufacturer Misconception No. 3 — If you don’t know the net cost of each of your skus...You might be in red ink.  Your cheapest competitor is usually the dumbest. A policy of matching a competitor’s low price without knowing your cost is a recipe for disaster. Don’t assume that your competitor knows what he is doing.

 

• Manufacturer Misconception No. 2 — If you think that problems with customers will just go away with time...You might be in red ink. Large problems usually start as small problems. Like the tip of the iceberg, if ignored they can sink the largest of relationships. A complaint has a way of being brought to a conclusion one way or another. It usually ends either with you having a satisfied customer or you having no customer at all..

 

• Manufacturer Misconception No. 1 — If you think that your brand is so strong that it can’t be substituted...You might be in red ink. Your brand is being substituted by a generic everyday, you just don’t know it. Don’t let your company’s brand identity become obsolete because you take it for granted. Next to your employees, your brand name identity is your company’s most valuable asset. You should treat it with equal respect.

 

Wholesaler’s list

 

• Wholesaler Misconception No. 10 — If you think that your delivery costs are free....You might be in red ink. You can insert any number of activities for delivery cost that are performed in the name of “customer goodwill” and the bottom line is that none of them are free. Whether it is a salesman making a delivery on the way home, accepting a late payment check, taking back returns, waiting at a jobsite to unload, they all are expenses that should be understood and controlled.

 

• Wholesaler Misconception No. 9 — If you don’t know your profit margin on each customer...You might be in red ink.  Usually the answer as to which accounts are profitable will surprise you, and not in a good way. Don’t assume that all dollars are profitable dollars or that more volume will offset the cost of servicing a specific account. There may be reason why your largest customer keeps coming back to you.

 

• Wholesaler Misconception No. 8 — If you think that technology is for someone else...You might be in red ink. Technology is a fabulous tool that reduces your cost of doing business. It is not free but it is cheap enough for your competitor to be using it. The next generation of leaders at your company will not know how to operate without it. Don’t put off investing in technology. It is a pay me now or pay me more later scenario.   

 

• Wholesaler Misconception No. 7 — If you’re business plan is to wait for the economy to turn around...You might be in red ink. Years of a brisk economy will cover up a lot of bad business habits. Re-evaluating your business’ profit model is probably long over due. Don’t put off making the hard decisions that should have been made even in the good times. Take advantage of the downturn to break the “business as usual” mentality. 

 

• Wholesaler Misconception No. 6 — If you think that it is ok to inventory more than two brands for the same product...You might be in red ink. Contractors generally will buy what their wholesaler recommends, i.e. the success of  private labeling. Instead of trying to be everything to everybody promote the two  brands that can do the most for you and drop the rest. This is redundancy at its worst.

 

• Wholesaler Misconception No. 5 —If you think that you can source from Asia better than your vendor...You might be in red ink. Direct sourcing to the wholesaler is as risky as direct selling is to the manufacturer. Deflation, product liability, shortages, design changes, lead times, supplier uncertainty may not be worth it. Concentrate on what it is that you do best.

 

• Wholesaler Misconception No. 4 — If you learned all your business acumen from an older generation...You might be in red ink. Old business rules like “you can’t sell from an empty wagon,” or “If enough money goes through your pocket, some will stick” may not be the most efficient guide in today’s environment.  It is best to temper these words of wisdom with modern day sensibility.

 

• Wholesaler Misconception No. 3 — If you don’t see value in the business concept of “Earns and Turns”...You might be in red ink. Before “back end rebates” dominated the selection of a vendor, wholesalers used “earns and turns” as one of their key performance measurement. The optimum goal should be to sell the product before the invoice is due. With the industry averaging just four turns a year, the opportunity for profit improvement abounds.

 

• Wholesaler Misconception No. 2 —If you think training is a waste of time... You might be in red ink. Do your employees understand how your company makes money, keeps customers satisfied, picks suppliers, how the products you carry differ from your competitors? What they don’t know can hurt you.

 

• Wholesaler Misconception No.1 — If you are not measuring your supplier’s performance...You might be in red ink. Wholesalers will measure their own downstream performance religiously but not the performance of their upstream suppliers. To give superior service wholesaler’s either have to invest lots of money in inventory or have consistent high fill rates from their suppliers. But you can’t improve on what you don’t measure. Hold your suppliers to a initial fill rate of 98% and then watch your profits grow.