Post by: Jason Bader - Principal, The Distribution Team
I was recently asked to moderate a panel on master distribution in the plumbing, HVAC and PVF channels of distribution. For those not familiar with the acronyms, HVAC refers to heating ventilation air conditioning and PFV refers to pipe valve and fitting. My goal was to determine how master distributors provide value to the supply chain. Just to clarify, master distributors reside between manufacturers and wholesale distributors in the traditional supply chain. There are a lot of misconceptions about the role; but as I hope to articulate in the next 1000 words or so, they serve a very legitimate role in the chain.
The first misconception I want to clear up is that they sell directly to the end user. As one of my panelists so eloquently put, “It’s wholesale or no-sale.” This really defines the commitment of the master distributors to only sell to wholesalers and never put themselves into direct competition. Selling direct, as some manufacturers occasionally attempt, is the cardinal sin of the supply chain.
Some distributors have additional fears about supporting the master distributors. Years ago, I was coaching a purchasing team and we were doing a review of their top suppliers by annual purchase dollars. One of the interesting things we discovered was that a large master distributor landed in their top 5. While this was no surprise to the team members, it was a bit of a shock to the owner of the company. He was less than pleased and directed the team to minimize their reliance on this supplier. I asked him about his rationale and why he didn’t like working with the master. His belief was that by supporting this master distributor, he was allowing smaller non-stocking distributors access to brands that he had made big investments in. Fair concern. What he failed to realize is that buying from this master distributor gave him access to non-stocking lines that his customers asked him to source. In the world of construction supply, sourcing nonstocking products amounts to a huge portion of the sales revenue. You can’t have it both ways.
The second misconception that I want to address is the notion that master distributors are higher priced than going direct with a manufacturer. If you only look at the net invoice pricing from both options, the master distributor will appear to be more expensive. But we are smarter businesspeople than that, aren’t we? Just like we ask our customers to look at the total cost of procurement when we are pitching our slightly higher priced wares, we must look at the value of the total package from the master distributor to determine our best option.
One of the strongest value propositions for the master distributor is that they act as an inventory buffer between manufacturing and distribution. As my panelists shared, they are not looking to achieve high inventory turns on their shelves. They tend to carry a wide breadth of branded product and support those SKUs that no distributor should be heavily invested in. When these requests do arise, our ability to source these products in small quantities will allow us to provide superior customer service without having to overburden our limited shelf space.
This ability to sell wholesalers in bitesized pieces is how master distributors came into existence in one of the channels I researched. I had the good fortune of spending some phone time with a purchasing manager in the PVF channel about how they use master distributors. He shared some of the back story on how they came to be a part of the chain. Many years ago, the steel mills got the bright idea to weed out some of the smaller wholesalers in the pipe market. They increased their prices and raised the minimum order quantities to a point where it became too expensive for smaller wholesalers to buy direct. One of the big mistakes the mills made was giving this really preferential pricing to these remaining large distributors. These large distributors realized that they could still make a healthy profit by selling smaller orders to wholesalers without charging a premium. Not only could the distributor buy in a more reasonable quantity, but they also bought at the same price they would have been getting direct from the mill. A new market was born to service these forgotten distributors.
As illustrated by the business owner I worked with, master distributors give wholesalers access to products that they are not primary in. Let’s face it, wholesalers love to push the boundaries of their core market. They love to peek over the fence and see what others are doing. In the contractor supply market I grew up in, we would love to take a shot at the industrial or rental markets. Usually, we wound up back in our lane with our tail between our legs, but it wasn’t for a lack of trying. Our relationship with master distributors allowed us access to some of the products necessary to explore these markets without having to go all in with a new supplier. This was a tremendous relief when we came to our senses and backed away from a market. This is not meant to dissuade you from trying to enter new markets. I am merely pointing out a more cost-effective way to experiment.
The second major value proposition for a master distribution is providing a logistics buffer between manufacturer and wholesaler. This is especially true today. Manufacturers are struggling to find trucking carriers for anything smaller than full truck shipments. In fact, many have suggested that they are unable to provide LTL (less than truckload) shipments. Master distributors have been working in the LTL and small package arena for decades. This is what they do. Where it might take 2-3 weeks to get a shipment from your direct supplier relationship, a master distributor might be able to get it out in 2-3 days. This can mean the difference between making and missing a sale. Contractors might be aware of the supply chain crisis, but that doesn’t mean that they have adopted a Zenlike patience.
The wholesaler that I spoke with shared another circumstance that I hadn’t considered. The ability to ship smaller quantities has allowed him to better service his branch locations. As wholesalers add locations, the struggle to keep them resupplied puts a strain on the internal company logistics. A majority of these locations don’t have the volume to take factory direct shipments and must rely on transfers from a hub or distribution center. By working with master distributors, this wholesaler is able to resupply his locations with appropriate quantities. This results in a reduction of overall inventory carrying cost and minimizes the expense of transfer logistics.
The final value proposition, as articulated by my panelists, is technical expertise. Now this may not be the case with all master distributors, but it could be very apparent in certain verticals. As these master distributors become more focused on the markets they serve, their ability to solve problems increases. In many cases, the master distributor can help translate the challenge from the end user to the original manufacturer of a product. The repetitive nature of the challenges helps strengthen the problem-solving expertise of the master.
As all of you are aware, we are living in the days of scarcity. The supply chain is broken. No longer can we just send an order to a manufacturer and expect to have it hit our dock in a reasonable period of time. These challenges are great, and demand is even greater. Now, more than ever, we need to break from our traditional lines of supply and find alternatives. If a master distributor is not in your top 10 list of suppliers, you might want to take a look at how to add one to your stable. Good luck and know that I am always here to help.
About the Author:
Jason Bader is the principal of The Distribution Team. He is a holistic distribution advisor who is passionate about helping business owners solve challenges, generate wealth and achieve personal goals. He can be found speaking at several industry events throughout the year, providing executive coaching services to private clients and letting his thoughts be known in an industry publication or two. He recently launched his first podcast, Distribution Talk. Episodes can be found at www. distributiontalk.com. He can be reached at (503) 282-2333 or via email at firstname.lastname@example.org. You can find additional resources on his website: www.thedistributionteam.com