Distributors site improved efficiency as a panacea for growing competitive pressures in a slowing economy, but often don’t know where to start.

In order to combat growing competitive pressures and handle market fluctuations, distributors often say they intend to become more efficient and streamline operations to keep business running smoothly. But Jon Schreibfeder, president of consulting firm Effective Inventory Management Inc., isn’t so sure it’s a priority. That’s what the appearance of the warehouse often tells him when he’s asked to find the leaks. 

“The physical condition of the warehouse tells us a lot,” he says, although his assessment always starts with the data and key measurements such as inventory turns and the cost of carrying inventory. Inside of the warehouse, telltale signs of inefficiency include excess dead stock, crowded aisles, overflowing garbage and products that are illogically stored, which contributes to increasing the cost to fill an order. “Many distributors have no idea what it costs them to maintain their inventory for a year, or what it costs them to fill an outgoing order,” Schreibfeder says.

Getting their arms around costs, which includes the impact of a disorganized warehouse, represents an opportunity for huge savings if distributors can break free from the urge to fight fires, or what the inventory management expert calls the day-to-day tasks that often consume them. Companies that commit to diverting the focus can save millions, he says. 

“Unfortunately, while this is a very important topic, it’s not a ringing phone or an email that needs to be answered,” Schreibfeder says, adding that those who do find the discipline have had impressive results. “We were able to help one of our clients reduce the cost of four line orders from $16.28 to $11.20. They’re filling about 550 orders a day and they’re open 250 days out of the year. That’s a lot of money. You just have to create a plan and stick to it.” 

Many distributors surveyed are at least thinking about a plan, according to a recent MDM survey. When asked about their strategy to brace for an economic downturn or contend with competitive pressures, they said they planned to work on rooting out inefficiencies by focusing on expense creep, streamlining operations, more effectively using data, and investing in an ERP system to improve efficiencies.    

MDM asked Schreibfeder and two other distribution specialists — Profit Isle founder Jonathan Byrnes and the host of the podcast Distribution Talk, Jason Bader — what steps distributors can take to cut costs and streamline operations. Their solutions are below. 

Manage the Order Cycle

When data software solutions firm Profit Isle works with a distributor to identify the processes that are crippling its profitability, the firm often devises a plan based on near-term, midterm, and long-term targets. While routinely overlooked and unmanaged, a customer’s order patterns can have a dramatic impact on profitability, says the founder of the firm, Jonathan Byrnes, and author of the book Islands of Profit in a Sea of Red Ink. 

“When we were working with a large beer distributor,” he says, “their new sales VP put in a program that required the salespeople to take a certain number of sales orders per day. That was causing them to call on a lot of small customers and they were losing a fortune.” 

The point is that all orders are not profitable orders. A better approach, says Byrnes, is to say to the sales team, “This is what a high-profit customer looks like. [We] would [like] you to get more of them. You can do that with your small customers but it’s going to take you at least three to six months to move them” into the profitable category.  

Separate the Stuff from the Stock 

Stock is active inventory. Customers expect it to be in the warehouse and distributors must have it on hand to meet or exceed expectations. Stuff is everything else, i.e., dead stock or products no longer on the approved stocking list. To determine the products that should be stocked, sort items based on their annual hits, which Schreibfeder defines as the number of times each product was ordered, transferred, or used in an assembly during the past 12 months, regardless of quantity.

Typically, distributors ignore the stuff, hoping to eventually sell it for what it’s worth — but high-performing distributors have a plan for liquidating unwanted inventory, says Schreibfeder, who suggests the following strategies: transferring the stock to another location that aligns with customer demand; reduce the price to move it; incentivize reps to sell it; and search the internet for sites that specialize in liquidating product.   

Clean the Warehouse

One of the most effective ways to organize a warehouse is to assign aisles of responsibility, says Schreibfeder, who recommends putting certain employees in charge of keeping specific areas clean and organized.

Go with the Flow

If you’re going to start looking at efficiency in your organization, be methodical, says The Distribution Team owner Jason Bader, who recently started a podcast that highlights the challenges and successes of distribution professionals. For him, the most logical place to start in the warehouse is receiving. “When you look at the process, search for redundancies or bad practices like receiving the product but not checking it into your software, or handing it off to a clerical person in the office to physically put it in the ERP,” he says. “For some companies, it could be a considerable amount of time before the product is checked in and available to sell. That’s a huge waste.”

Organize with Cost in Mind

Always organize product to minimize the cost to fill an order, meaning the products that are picked most often should be stored in the most accessible location, says Schreibfeder. “You don’t want to store product in a traditional way, having products lined up in size sequence or vendor-part-number sequence. As long as you have a good bin location system, your pickers should be able to find anything you pull,” he says. “If you can save two to three minutes picking orders, over the course of a year, that turns into a lot of money.”

Don’t Settle When Shipping

“Most people think it’s more efficient to use their own vehicles to get the product to the customer,” says Bader, “but there are many situations in which a common carrier can do it much cheaper than you can. I think there’s a failure there because some view shipping product by a common carrier as an inferior method. Distributors should ask themselves if they’re getting a return on the money they’re spending. In many cases, they’re not.”  

Another factor to consider when shipping is how profitable is the order, adds Byrnes of Profit Isle. “One distributor we were working with had $150 million to $200 million in UPS costs. So, with their permission, we went to UPS and got a file with every single shipment. Then we matched it to the orders by the waybill number and we found that 70% of the UPS cost was for unprofitable orders; it was overnight service. Once those orders were shifted to two-day service, they became profitable.” 

Commit

How do high-performing companies and low-performing companies differ in their mentalities toward efficiency? “High-performing companies have support from management and they are insistent in reviewing metrics every month to make sure they are making progress,” Schreibfeder says. “Low-performing companies don’t stick to an action plan.