Categories: Inventory Management
By Mark Tomalonis
Principal, WarehouseTWO, LLC
If your company is a regional wholesaler-distributor of branded products, you are an essential consolidator in your suppliers’ sales channels. You handle a large number of small transactions from a customer base in a finite geography, and then you consolidate that demand into fewer, larger purchases to your suppliers/manufacturers. Like-branded wholesaler-distributors (“peer distributors”), in other geographies, are doing the same thing. And they want to buy from you. Why? Because you have something in stock that they do not, that their primary supplier (the manufacturer) cannot provide quickly, but that their end-customer wants NOW. By offering your available inventory for sale to peer distributors, you are effectively expanding your sales territory. Here are 5 reasons why offering your inventory for sale to peer wholesaler-distributors is good business.
You sell to hundreds, perhaps thousands, of local end-customers. So do the dozens (hundreds?) of peer distributors located in other geographies. By making your inventory available to peer distributors, you are essentially making it available to tens of thousands of potential end-customers. (See Figure 1.) How can this exposure not result in more sales?
The lower the transaction cost of a sale, the higher the net profit on that sale. A sale to a peer distributor incurs a lower cost of transaction than that for a sale to a local end-customer because of these two factors:
Hard cost savings: no sales commission
Treat all peer distributors as “house accounts”. They do not need to be “called on”, and no traditional “account maintenance” is needed. Thus, no one on your sales team should receive any “commission” for a sale to a peer distributor. For a typical industrial wholesaler-distributor, that is a savings of 6% or more, which contributes directly to net profit. Even if you sell an item to a peer distributor for 5% less than for what you would sell it to a local end-customer, your net profit still will be higher on the sale to the peer distributor. (See Figure 2.)
Don't worry about having to discount deeply to sell to a peer wholesaler-distributor. If the peer distributor needs what you have badly enough, it will pay your price (typically cost plus 20%) and mark it up to its end-customer.
Soft cost savings: less time and effort completing the transaction
The only reason you got an order from a peer distributor is because you had the item in stock. That distributor knew exactly what it wanted. Processing this kind of order is easy and fast. Compare the activities associated with a typical order from a local end-customer with those associated with an order from a peer distributor. (See Figure 3.) Less effort processing the order means less time spent on the order, resulting in cost savings.
Got a transactional "e-commerce" website? Direct peer distributors to place their orders with you on-line, and reduce soft transactions costs even more. (An effective way of getting peer distributors to place their orders on-line is with price: lower price if placed on-line, higher price if placed via phone, email or fax.)
Selling to a peer distributor has lower finanical risk than selling to an unknown end-customer, such as an on-line buyer. Peer distributors buy from the same suppliers as you do. These suppliers/manufacturers have already vetted the members of their distributor networks to ensure credit-worthiness.
Furthermore, your company’s senior executives may know personally the senior executives at peer distributor companies. They may have met at conferences, sales meetings or distributor council meetings. They may be “friends”, at least on a professional level. Friends rarely defraud friends.
Do you own any “dead” inventory, items that you have not sold to anyone in the last twelve months? Chances are, you own these items because a local end-customer used to buy them but no longer wants them, or because the end-customer for these items went away. (Or perhaps someone in your company made a costly mistake. But let's not go there today.) Just because none of your local end-customers want these items anymore does not mean that no one in the rest of the world wants them. By offering your inventory to peer distributors, you increase the chances of matching a remote end-customer’s needs to your “dead” inventory. And because that other distributor has a real, immediate demand, it will likely be willing to purchase your item near, at, or above current distributor cost.
Today, a peer distributor might buy from you an item that you have in stock, to fulfill a critical back order for one of its end-customers. By helping peers at a time of desperate need, you are building a community of resources who will be there for you when you have a critical back order for one of your own end-customers.
In summary, offering your available inventory for sale to peer wholesaler-distributors is good business for these reasons:
What is not to like about selling to other like-branded wholesaler-distributors?
It is 2017. Are you not yet collaborating with peer distributors to share each other’s inventories? Contact me for suggestions on how to get started.
About the Author
After a successful career in sales and operations management in the wholesale-distribution industry, Mark Tomalonis is now principal of WarehouseTWO, LLC. He amuses himself by writing articles, such as this one, to help wholesaler-distributors execute their operations better. Mark’s articles and tips are published in WarehouseTWO’s monthly e-newsletters. Click here to subscribe.
WarehouseTWO, LLC is an independent “inventory-sharing” service created exclusively for durable goods manufacturers and their authorized distributors, and for any group of durable goods “peer” wholesaler-distributors, such as members of a buying/marketing group or cooperative. To learn how inventory-sharing with WarehouseTWO can help your business, visit the WarehouseTWO website, or email email@example.com.