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Chapter 3: Building an Effective Redistribution Program —


                   “What should we buy from a wholesaler, and what should we buy direct from
                   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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