From the October 2010 Issue
Every distribution company that’s enjoyed success will tell you their
fortune is based on the balance of the three points of the distributor triangle:
- Inventory – Know what you need to manage the cost
of carrying inventory in the warehouse while staying responsive to customer
- Customers – Build loyalty by having the products
your customers need, when they need them and for a fair price.
- Suppliers – Know their strengths and weaknesses
and manage the relationship with suppliers for timeliness, reliability and
Fran Distributing Company, a regional leader in the medical and electronics
parts business, saw positive changes by adopting “Best Practices”
for managing inventory and building customer loyalty, as we saw in my last two
columns on distributors in July and August (www.CPATechAdvisor.com/go/2916;
The last leg for Fran (not the real name) was to take the same proactive initiative
in their focus on suppliers. So what was it that would benefit them while enhancing
the relationship with their suppliers?
- Comprehensive information on items they buy from each supplier.
- Improve accuracy and delivery time: what they need, when they need it.
- Improve purchasing processes to take advantage of volume discounts and
- Easy visibility to all this information so Fran’s team had accurate
and up-to-date knowledge when talking to customers to set expectations and
strengthen the bond with the customer.
WHAT DO WE KNOW?
The first step in the process was to improve their intelligence on suppliers
for each of their product groups. It was helpful how some team members just
knew from experience who was best on delivery or who was best on price, but
information in their heads didn’t help the customer service reps when
these people were away from the office or not available. The answer was to gather
and centralize information in their Business Management system so any team members
could access key information, such as the following:
Who Carries What? Now stored in each Inventory Item Record
is the list of all suppliers that carry that item. Fran can now easily get
a comprehensive list of who carries what, and that makes it easier to choose
the right supplier based on the need or situation.
How Long? The expected lead time — how long it takes
from order to delivery — is now documented for the suppliers of each
item. This was important because some of their overseas suppliers had better
pricing, but delivery time was longer. For customers who needed something
quick, price could be secondary. With better information, Fran Distributing
is now able to customize purchases to best serve each client’s unique
Price breaks? The Fran team is now tracking suppliers’
quantity price break information in their Business Management system, which
allows customer service reps to better meet client needs. A recent winning
example was the customer who got a great price on a large order of electrical
connectors because the Fran rep could see the information in the system and
was able to suggest the right quantity for the circumstance.
Multiple Units of Measure? By setting up multiple units
of measure for each item in their system, there’s no longer any need
for Fran reps to do conversions in their head between the buying, stocking
and selling units of measure. Now the rep can easily sell in the unit the
customer wants (each, by dozen or by box) while at the same time the system
is accurately relieving inventory for the quantity sold regardless of the
unit of measure.
Re-Order Points? It used to take lots of man hours to determine
quantities to purchase for stock and orders. Not anymore! Fran has identified
a primary supplier for each item and has added to their Inventory Item Record
information such as EOQ (Economic Order Quantity), reorder point, minimum
order quantity and maximum on-hand number. Now the system quickly and easily
generates suggested purchase orders to fill inventory needs based on the information
in the system.
Whose ID are we using? Fran often had multiple item IDs
for the same product — their internal ID, the supplier ID and customer-specific
IDs. Reps often got confused and sometimes lost business by telling a customer
they didn’t have stock on an item that was in the warehouse with a different
item number. In one case, they ordered the wrong product for a client. Fran
used their internal product number for an order instead of the supplier’s
number, and then had to pay shipping to send it back to get the right product.
Adding insult, the customer was less than happy with the delay in delivery.
Now they’ve taken advantage of functionality in their system to relate
all the different item numbers. It is basically a translation table between
the IDs, and it has definitely made it easier on everyone.
In addition to the big changes, Fran has also benefitted from some
fine tuning to their processes:
Fran now tracks historical purchase information on their suppliers,
including items purchased and total money spent. They have used this information
to negotiate a better rate with a supplier who was getting a lot of their
They have a historic view of the last cost and lead time
for each purchase of an item from each of their suppliers. This information
helps them decide who to buy from the next time.
Fran now has the ability to distribute landed costs —
freight, duty and more — to the cost of an item. The system can allocate
these costs to the items received. Fran’s team chose to do this by quantity,
although the system was flexible enough that they could have used dollars
or even weight for the allocation. The win is that it lets them see the true
cost of product. In the past, the sales team may have underpriced a product
to a customer because there was no clear view into what additional costs were
associated with the product. They learned that lesson when a rep stocked up
on some inventory from an international supplier who quoted a great rate that
turned out to be very expensive when they added in shipping and duty.
Like the three-legged chair that wobbles or can fall if everything is not
in balance, the wholesale distributor needs balance in its dealings with customers
and suppliers as it manages all the costs tied up in inventory. Strengthening
their position in only one or two areas will leave them weak and at risk. They
need to follow the example of Fran Distributing and be sure they are taking
advantage of best practices in all their dealings related to inventory, customers
and suppliers. And if they do that, their three-legged chair will be the foundation
that puts them in the best seat in the house.