What should we buy from a wholesaler, and what should we buy direct from manufacturers?

Building an Effective Redistribution Program — Distributors

This is the key question for distributors to consider as they seek to optimize their supply chains. If price were the only consideration, virtually all products would move directly from manufacturers to distributors, as wholesalers generally have to charge more than their manufacturer suppliers.

But savvy distributors know that wholesalers charge more because of the value they add to the JanSan supply chain. And distributors benefit from this value in three important ways: cost avoidance, fill rate economics, and accelerated growth.

In this section, we will describe the specific ways in which sourcing from wholesalers can improve a distributor’s business results, and propose a method for analyzing the distributor’s sourcing options.

Cost Avoidance

“The wholesaler’s role is to act as our other warehouse.” This statement by a distributor captures the essence of the cost-avoidance potential of sourcing through wholesalers. Certainly, distributors who bring in a significant share of their volume via wholesalers would need to build and operate much more warehouse space to maintain their business if the wholesaler did not exist. Avoiding this cost frees up the distributor’s capital for higher-return investment.

In the same way, the use of a wholesaler can significantly increase a distributor’s inventory turns. Because wholesalers do not require a minimum order “per manufacturer,” the distributor is free to bring in exactly what he needs on a much more frequent order cycle than he could if buying everything directly. With a sourcing strategy that approaches “just in time” inventory, a distributor can greatly reduce the amount of capital not tied up in slow-moving inventory.

Some wholesalers and distributors have worked out supply arrangements whereby the distributor essentially transmits his customer orders to the wholesaler. Given sufficient lead time, the wholesaler can sort and label the entire shipment based on the distributor’s orders, enabling what is essentially a “cross-dock” system. The distributor receives the wholesaler shipment first thing in the morning and loads his outbound customer shipments on the same day.

What’s more, wholesalers can greatly reduce a distributor’s operational and administrative costs because they consolidate a lot of activity. Dock space and receiving time are reduced when multiple manufacturers are sourced through a single wholesaler. The administrative “paperwork” associated with credit applications, generating PO’s, reconciling pricing, and paying invoices is simplified and streamlined when many suppliers are bundled together by a wholesaler.

While it can be challenging to quantify these costs (and the cost avoidance provided by wholesalers), most distributors have a good sense of how sourcing through a wholesaler can reduce a lot of activity and improve ROI.

Service Improvement

The second benefit provided by wholesalers is their ability to support improved service from the distributor to his customers. The most obvious example is the significant reduction in order lead time, vs. sourcing from the manufacturer. Two factors drive this benefit: “no minimum per manufacturer” and “geographic proximity.” Because the wholesaler is making frequent deliveries to the distributor, it is a simple matter to add exactly what is needed to an outstanding order and receive it within 24 to 48 hours. When dealing directly with a manufacturer, the distributor usually must wait until he can put together a minimum order, then wait for the manufacturer’s delivery lead time until the product is received. The geographic proximity of the wholesaler also contributes to short lead time from order to receipt, compared to longer transit times from most manufacturers.

The shorter, more frequent order cycles offered by wholesalers allow manufacturers to respond quickly to their customer’s needs.

The wholesaler also supports accelerated sampling response when a customer wants to try a new item. Rather than putting the sample on the next manufacturer order, then waiting for it to come in, the distributor can often find the product at a wholesaler, order it, and provide it to his customer quickly. The result is improved customer satisfaction and a higher likelihood of new volume for the distributor and manufacturer alike.

Of course, smaller, more frequent orders with no minimums and short lead times will mean fewer out-of-stocks for the distributor. In a direct-buying situation, the mix of inventory for a given manufacturer rarely matches the customer demand. As a result, when the distributor runs out of 3 of his 20 SKU’s from a given manufacturer, he must wait until his next order cycle to correct the stockout and balance his inventory. With a wholesaler, recovery from stockouts is simplified and accelerated, providing a higher level of service from the distributor to his customers.

Finally, wholesalers allow a distributor to market and sell a much wider variety of products than he could profitably warehouse in his own location. For product lines with a vast range of sizes, colors, and labels, the wholesaler is often the only logical source for a small-to-medium volume distributor. The distributor is able to offer a broad product portfolio “as if” it were in stock at his own facility, knowing that the product is within easy reach at his wholesaler whenever he needs it.

Accelerated Growth

Wholesalers also support distributor growth. While taking on new product lines is often a key growth strategy, it comes with risk. If buying directly from a new manufacturer supplier, a distributor must invest considerable time in establishing credit, providing data, and updating internal systems before going to market. Then he must be willing to invest in inventory while accepting uncertainty about product mix and volumes. And all of the problems associated with manufacturer order minimums and lead times are compounded by the small initial sales volume typical of a new product line.

By turning instead to a wholesaler, the distributor can virtually eliminate the risks of taking on a new product line. By bringing in only what is needed on a frequent basis, the distributor is able to fine-tune the product offering to match customer demand. He can focus his efforts on marketing and selling with confidence, knowing that the wholesaler will allow him to respond appropriately as the new line grows. And it is often the case that success in establishing a new line via a wholesaler can ultimately lead to sufficient volume to make direct sourcing from the manufacturer the best option.

What It’s Worth

Unfortunately, there simply are no hard-and-fast rules about which product lines to source direct from the manufacturer, vs. source from a wholesaler. Nor is there a simple formula that determines how much price premium a distributor should be willing to pay for the benefits of sourcing from a wholesaler.

That said, most distributors feel comfortable with a price premium of 5-15 percent over the “direct from manufacturer” price when buying from a wholesaler. Of course this generalization ignores differences in case weights, cubes, and values per pound. But it is indicative of the distributor’s intuitive understanding of the value of wholesaler sourcing.

“Understanding JanSan Distribution” is a guide written for JanSan manufacturers and distributors — specifically those distributors who are considering using wholesalers as a source for certain lines, particular product types, or at various times throughout the year. This is an excerpt from Chapter 4 of the guide

More information on “Understanding JanSan Redistribution” can be found at www.sswa.com.


Source: CleanLink, The Sanitary Supply Wholesaling Association