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Chapter 3: Building an Effective Redistribution Program —

Distributors

“What should we buy from a wholesaler, and what should we buy direct from
manufacturers?”
This is the key question for distributors to consider as they seek to optimize their supply chains. If
price were the only consideration, virtually all products would move directly from manufacturers to
distributors, as wholesalers generally have to charge more than their manufacturer suppliers.

But savvy distributors know that wholesalers charge more because of the value they add to the Jan-
San supply chain. And distributors benefit from this value in three important ways:

■ Cost Avoidance

■ Fill Rate Economics
■ Accelerated Growth

In this section, we will describe the specific ways in which sourcing from wholesalers can improve a
distributor’s business results, and propose a method for analyzing the distributor’s sourcing options.

Cost Avoidance

“The wholesaler’s role is to act as our other warehouse.” This statement by a distributor captures the
essence of the cost-avoidance potential of sourcing through wholesalers. Certainly, distributors who
bring in a significant share of their volume via wholesalers would need to build and operate much more
warehouse space to maintain their business if the wholesaler did not exist. Avoiding this cost frees up the
distributor’s capital for higher-return investment.

In the same way, use of a wholesaler can significantly increase a distributor’s inventory turns. Because
wholesalers do not require a minimum order “per manufacturer,” the distributor is free to bring in exactly
what he needs on a much more frequent order cycle than he could if buying everything directly. With a
sourcing strategy that approaches “just in time” inventory, a distributor can greatly reduce the amount of
capital tied up in slow-moving inventory.

Some wholesalers and distributors have worked out supply arrangements whereby the distributor
essentially transmits his customer orders to the wholesaler. Given sufficient lead time, the wholesaler can
sort and label the entire shipment based on the distributor’s orders, enabling what is essentially a “cross-
dock” system. The distributor receives the wholesaler shipment first thing in the morning, and loads his
outbound customer shipments on the same day.

What’s more, wholesalers can greatly reduce a distributor’s operational and administrative costs
because they consolidate a lot of activity. Dock space and receiving time are reduced when multiple
manufacturers are sourced through a single wholesaler. The administrative “paperwork” associated with
credit applications, generating PO’s, reconciling pricing, and paying invoices is simplified and streamlined
when many suppliers are bundled together by a wholesaler.

While it can be challenging to quantify these costs (and the cost avoidance provided by wholesalers),
most distributors have a good sense of how sourcing through a wholesaler can reduce a lot of activity and
improve ROI.

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