Inventory: On the Shelf Vs. When You Need It
By Frank Hurtte
Over the years, I have heard some pretty amazingly misinformed things said about distributor inventories. Let me share a few:
- A peddler can’t sell from an empty wagon and a distributor can’t sell without a full warehouse.
- It’s the distributor’s main job to provide local inventory; no inventory, no value.
- If the distributor doesn’t stock your product and lots of it, you’ll never get the company’s full commitment.
- We want distributors to prove their commitment to our company by placing a large stock order up front.
- The distributor’s stock provides a margin of error for logistics problems at its suppliers.
While all of these probably made sense back in the day, those days are finito, over, dead and gone. Or at least they are for the knowledge-based distributor. Astonishingly, I still hear these words of wisdom bantered about, mostly by the sales teams of manufacturers serving as distributor supply partners. As we will demonstrate in the next few minutes, most of the folks tossing these nuggets around never took the time to think seriously about their comments.
Just for fun, let’s shoot a few holes in these antiquated theories. First, a peddler selling from an empty wagon story predated Sears & Roebuck setting the retail world on fire by selling from a catalog. It definitely came years ahead of Amazon Supply, where many of the items are shipped directly from somewhere other than from an Amazon warehouse.
The local inventory argument
The distributor role in local inventory is critical, but things have changed. Allow me to share a story. Back in the early days of my Iowa career (1978), I worked for a manufacturer with a plant 217 miles away. We had a warehouse in Iowa to serve emergency needs. Why? Because (and I know this will be hard for millennials to fathom) before FedEx and UPS arrived in Iowa, shipment time from Milwaukee to Davenport, Iowa, was four to five days.
The ideal local stock today would be items required for immediate use by the customer. Pulling an example from the automation industry, I can’t even imagine a customer decided during lunch that he needs to start and complete an automation project during the afternoon. The human time required to engineer and design the system requires days, sometimes weeks, to accomplish. This lag typically provides plenty of time to acquire and receive any parts and pieces needed to finish the job.
What might be an immediate need for the customer and thus justify inventory? Common spare parts for emergency breakdowns qualify. Consumables may be justified. Anything a customer requires on the spur of the moment are important. OEM customers often place blanket orders with monthly estimated usage quantities; typically these are easy to drop-ship, but things happen. Distributors need to be prepared to immediately replenish failed items and handle those instances where larger quantities are required with short notice.
Distributor commitment tied to inventory?
Somewhere, somehow, manufacturers came to the conclusion that distributors with a ton of inventory in the back warehouse were more committed to suppliers. Perhaps it appears this way on the outside looking in. Here’s an example. Friendly Frank Distributing has a great relationship with Acme Manufacturing. Over the years, Friendly Frank (FF) and his team have developed a number of mutual customers. Acme helps by providing leads, support, and a quality product. Customers make many purchases and, as described above, FF finds it necessary to carry more stock to service those sales. To the supplier on the outside, it might appear as though the inventory drives the selling activities. In reality, it is the other way around.
A few manufacturers (that are just launching their products) depend on distributors to assist in funding their launch. Often, they covet the “initial stock order” as a tool for driving their profitability. While a nice stock order provides them with instant cash, one can only wonder what happens if the distributor stocks the wrong mix of product or, worse yet, if the market doesn’t embrace the new products. The whole thing turns into a force fit situation. Distributors clamor for expensive stock rotations involving special care and extra freight. Product ages on the shelf, creating issues with revision levels and old, dusty boxes.
I have suggested this idea a couple of times without much acceptance, but wouldn’t it be easier for the distributor to pay something resembling a “franchise fee” that provides funding to the manufacturer without the hassles of inventory issues? Perhaps this fee would enable the distributor to get better margins in the future. Or, maybe, the manufacturer could provide some other benefit to the distributor.
If not inventory, how does the distributor show commitment?
For knowledge-based distributors, commitment comes by way of investment in (in order of importance): product knowledge, application skills, careful selection of target customers, and customer education. By definition, knowledge-based distributors don’t just ship boxes. They wrap every transaction in their unique blend of customer application and product knowledge. Creating an inventory of market-driving human capital is probably more expensive than just writing a purchase order.
Covering breakdowns in manufacturing systems and logistics
Covering breakdowns in manufacturing systems does justify inventory. However, we should set some parameters. First, we’re not referring to breakdowns with regularly moving “A” products. In today’s manufacturing environment, these come quite rarely. Instead, the issue often falls with items which fall further down the line, which are sometimes referred to as “pre-engineered.” The design work is finished, but the build is still done on an as-needed basis. The factory doesn’t necessarily stock all of the parts and pieces of the product, so lead times can be lengthy.
For most distributors, keeping a spare of this type of item is dependent on customer mix and customer usage. To provide an example, a distributor in Gary, Indiana, may have enough steel plants on its account list to justify a part specifically developed for a steel mill, but the guy in south Texas, with only a single, small steel facility, may not. Referring to the recent massive rainfalls in Texas, what happens when that single plant is flooded by 15 inches of rain in a two-hour period? Factory delivery times hamper restarting the plant.
Most times, this type of emergency requires plenty of scrambling: Calls to the manufacturer, expediting of component parts, and, occasionally, mad scrambles by distributor and factory people alike to find a replacement somewhere.
But there is an option.
What if distributors could share the right inventory?
Distributors have looked for easy ways to share inventory for eons. Some of the more progressive manufacturers have created plans for distributors to report inventory back to a central point for better sharing. In spite of great enthusiasm along the way, the plans have mostly fizzled out with time. For the most part, the reason is simple; the work and money required didn’t justify the results.
Over the years, I have watched first hand as groups of distributors networked with the idea of sharing inventory. Typically, these are established from the top down: owner to owner or president to president. These guys decide to attack the inventory issue bypromising to help one another.
They work, but often the cost of interaction is high because nearly every call involves some kind of touch by high-level folks who are often hard to reach on a moment’s notice. Good idea, but way too much human interface.
To be effective, an inventory sharing system needs to be automated, easy to use and affordable. Over the years, several organizations have attempted to create something meeting these criteria. For the most part, they faded away.
Last summer I became aware of a fresh approach to the issue, WarehouseTWO.com. This company applies internet technology to an age old issue and takes things a few steps further. Here’s a short list of the things I like:
- Distributors can get started for free. It’s the “freemium” model applied to distribution. It costs nothing for a distributor to purchase from other distributors. Plus, the costs to sell products are low, certainly lower than building your own software platform. For instance, a distributor can list up to 1,000 items online for less than $70 per month (10,000 for $99 per month). Plus, there are no transaction fees; the cost is the cost. The low monthly subscription fee is the only cost to use this service.
- The selling distributor sets the price. Got overstocks? You can sell them for distributor cost, less 10%, 20%, or any other price that makes sense. Generally, the cost is something lower than the cost of restocking fees from the manufacturer. Other distributors can quickly shop for bargains and help you balance your inventory. If you normally stock a “D” item and want to improve your turns, you can sell the product for cost plus 10%, 20%, or “whatever.” You set the margin.
- This is a distributor-only program. There are no concerns with your local end-customers “trolling” for bargains or checking out their local distributor’s price on products just purchased.
- The site automatically limits interaction to only other authorized distributors. Many distributor contracts prohibit the sale of products to non-authorized distributors. This is not a source for bootleg materials. Instead, authorized distributors share inventory within the authorized channel only.
- The site allows manufacturers to sponsor distributor interaction. This allows the manufacturer to see what’s in stock throughout its distribution channel without massive IT outlays and constant maintenance tied to creating such a site.
Importantly, the company provides the subscribing distributor the option of automating the system. You can easily send broadcast messages out to other distributors, simultaneously search for multiple items, or establish a “bargain hunting” list.
Finally, I have spoken with a half-dozen distributors already using this service. They report great results and are quick to report the value is getting better every month. Why? More distributors are joining the program. One distributor was quick to point out that nearly every new distributor that joins the network adds a few more new items to the inventory. One distributor was so enthusiastic, he asked me to get the word out to everyone. Consider it done. Check out WarehouseTWO at www.WarehouseTWO.com.
Straight talk, common sense, and powerful interactions all describe Frank Hurtte. Frank speaks and consults on the new reality facing distribution. He blogs on “The Distributor Channel” at http://thedistributorchannel.blogspot.com. Contact River Heights Consulting at firstname.lastname@example.org or via phone at (563) 514-1104.
This article originally appeared in the July/August 2016 issue of Industrial Supply magazine. Copyright 2016, Direct Business Media.