Your Products Have Changed, But You Haven't
Does one segment of your product mix dominate the way you handle inventory?
by Jason Bader
I recently had the opportunity to spend some time with a nursery wholesaler. These folks cater to the commercial landscaping trades. Like all distributors, they found themselves having difficulty communicating with suppliers and choosing the most appropriate vendors. We talked about line consolidation, freight issues and general buying best practices.
Over the course of the visit, I noticed they kept referring to how they buy plants and trees. They talked in terms of yard layout and how to get the green products off the trucks or on the trucks. In fact, every issue we discussed was framed in how they handled the “green” side of their business. This seems logical because I was working with a company focused on the distribution of plant material. The only problem was that two-thirds of their revenue came from hard goods. Their products had shifted over time, but their perspective remained in the past.
As I continued to work with this distributor on how to manage a less perishable inventory, I kept wondering if this was something all distributors face. Does one segment of the overall product mix dictate how we make decisions affecting the entire range of items we stock? In this example, the company was clearly trying to treat every supply challenge as if they were buying perishable plant stock. The words free freight, or freight minimum, were foreign concepts to them. You mean we don’t have to pay freight on our pumps and irrigation materials? If you buy them right, probably not.
Take a look at your own organization. Are your purchasing habits based on a specific category? Do you set up the primary stocking locations based on an outdated business model? Have there been changes in the source of revenue? Does the management team reflect the longevity of the organization? Old habits die hard.
Industry Type
There are some industries that may be more susceptible to a dominant inventory segment. Industries that rely on early buy programs, like the heating and air conditioning market, will probably be heavily influenced by the dominant category. When asked about the seasonal nature of their product, these distributors generally say everything fits that category. When they actually go back to look at the selling patterns, the distributor will find a large portion of their overall inventory does not behave in a seasonal manner.
Industries that rely on a calendar selling cycle, such as residential construction, will often identify a majority of their business as seasonal. This influences the way they move inventory levels and can result in stock outs during the traditional non-seasonal months. The intuitive selling perceptions force the distributor to make uninformed stocking decisions.
In the fastener industry, the dominance of bulk products and importing practices can pull the distributor away from a more prudent domestic source.
I recall a visit to a fastener distributor where the CFO and I mathematically proved that it was more expensive to use an off-shore supplier. The salespeople, and the president, were convinced the company should make these large container buys for a 6% lower unit cost. In this case, the carrying cost would have made the purchase less profitable. Again, the majority of the business focused on buying containers, so the perception was rooted in the mind of the buyers.
In the beauty supply business, anything with color tends to be very volatile. I worked with a distributor that was heavily focused on the nail salon industry. One of the biggest challenges comes from the media. When someone appears on Oprah with a new shade of polish, your sales patterns can change overnight. Try stocking for that demand. This forced this supplier to be very hands-on with his buying. This method infiltrated his entire stock purchasing. Only 25% of his sales actually came from polish, but this inefficient method washed all the way through the inventory.
I am sure there are several other industry examples out there. I encourage you to look at your own to see if these perceptions exist.
Product Mix
Has your product mix changed over time? Many distributors started out catering to a specific trade or customer type. Over time, perhaps generations, that customer base has evolved. In the electrical supply business, low-voltage contractors were not part of the traditional customer base. This is an example of how changes in technology can create an entire category for a supplier. How do we alter the way we buy for a new customer base? Is it always compatible with our existing replenishment methods?
I recall when my former company acquired a distributorship focused on concrete accessories business. We were a commercial contractor supply company.
How different could the two be? Let me tell you, the headaches were immense. The concrete world tends to work in bulk and full truckload shipments. We had never been forced to deal with these buying parameters. We were trying to shoehorn these new product demands into our existing buying parameters. Ultimately, the fit was so uncomfortable the unit was sold off.
In the landscaping example, the customer had not changed. The breadth of product the distributor was supplying had changed. It had changed to a point where the hard product became the majority revenue stream. This is an example where the purchasing methods had to be split between the green and hard products. By separating the two functions, hard products could be purchased more efficiently using traditional indicators like lead time, review cycles and safety stock.
At your next management team meeting, pose this question to your group: “Does one segment of our product mix dominate the way we handle all the products in our offering?” Cite some of the examples in this article and look for similarities. You may not distribute plants or nail polish, but distributors tend to be more alike than you think. Good luck.
Jason Bader is the managing partner of The Distribution Team. He spent the first 20 years of his career working in distributor operations. His firm specializes in helping distributors become more profitable through operating efficiencies. He is a regular speaker at industry events and spends much of his time working with individual distribution companies. He can be reached at (503) 282-2333 or Jason@Distributionteam.com. Additional resources can be found on his Web site at www.thedistributionteam.com.
This article originally appeared in the Jan./Feb. 2010 edition of Industrial Supply magazine. Copyright 2010, Direct Business Media, LLC.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
