Whose Responsibility is it Anyway? (Part 1)
I recently attended the National Association of Electrical Distributors’ Executive Summit in Hollywood, Florida. Like all NAED conferences, this one contained more than enough educational content to make the trip worthwhile. One interesting panel discussion in particular that I attended was titled “Whose Responsibility is it Anyway?”. In this panel discussion, industry leaders were there to present both the manufacturers’ and the distributor’s points of view.
The relationship between manufacturers and distributors is always tenuous, and I think the more that the trading partners can sort out some of these key points up front, the more profitable and effective their relationship will be.
Let’s face it. The electrical industry goes to market through wholesale distributors. That’s not going to change any time soon – so it’s important to make the channel as profitable and efficient as possible. In this panel discussion, the following topics were presented: Order Size, Branding, and Electronic Communication. Each of these topics, if addressed correctly and appropriately can present an opportunity for a distributor and their supplier to excel and gain market share, or to get bogged down in the types of activities that result in an unprofitable relationship.
In this blog, let’s look at the first item on the list of topics – order size. It’s important for distributors to pay close attention to order size, because if a distributor makes frequent, small orders from his supplier he could watch all of his profits get eaten up in freight charges. On the other hand, if he makes infrequent, large orders which may be large enough to qualify for free shipping from his suppliers, the distributor will have more of his capital tied up in inventory and many of his key performance indicators such as inventory turns and gross margin return on investment are negatively impacted. At the same time, if the distributor chooses to pass the freight charges on to his customers, it could put him in a difficult situation against his competitors.
What’s a distributor to do? The panel did identify a few good ways to handle this issue. First, and perhaps most obvious, is to use your ERP system to calculate optimal order sizes such as EOQ (Economic Order Quantity) which takes into account inventory carrying costs, tiered pricing, and other factors to come up with the most profitable order size. The second idea is to make sure that non-stock orders are added to the standard orders. That way, the overall freight costs are reduced. What a shame to have a non-stock order shipped by small package courier arriving at the same time as a regularly scheduled delivery from the same supplier. A third point brought up by the panel is regarding freight costing. If you want to accurately measure profitability, actual freight rates need to be used – not just standard freight charges. And finally – by requesting the suppliers to include freight charges on each invoice, rather than a freight bill later, saves unnecessary and error-prone reconciliation work for the distributor.
By using these ideas as it relates to order size, not only can distributors and their suppliers improve their relationships, but they can do it in a way that makes both of them more profitable.