How Companies Lose When Buying Direct
I cringe when I hear customers talking about what about great deal they made on x project by buying materials directly from the manufacturer.
After 20 years in the industry, rarely do I ever see a deal where that customer actually saves money. Sometimes they lose on price, sometimes it’s service, and usually it’s both. In almost every case they are convinced they are getting the best deal.
There’s about a dozen other things that aren’t as easily quantified into dollars that eventually costs them money. The one constant is that it eventually negatively impacts their bottom line.
Issues with handling & storage, accounting, leadtime, quality control, warranty claims, and other complications add up to lost dollars.
Why?
Taking over
Well, why can be a number of things. The number one question that comes to mind is “do you go to a chiropractor to fix your teeth?” No, I go to someone who fixes teeth every day, because they are good at it. They are called dentists. So why are companies that succeeded in development, construction, or property management suddenly trying to become distributors of building products?
Inevitably, they see the opportunity to cut out the middle man — distributors, wholesalers, and retailers — to “save money”. They set out to become their own supply chain, instead of focusing on managing it.
Trade shows are littered with companies from across the globe that show up trying to sell direct to large customers with deep pockets. Usually the low prices promised are exchanged for 16 week lead times, customer managed inventory, up front payment and lots of other pitfalls.
Having worked with retailers and wholesalers for my entire career, I know the challenges that plague the distribution supply chain. Dealing with supply, production and lead time issues while meeting the demands of buyers and project managers can be daunting. Some items take three to four months from order date till they are available, and then they still have to ship to where they will be stored or used.
Handling product costs money, so does storage and transportation. These add costs in both labor and overhead that few companies truly understand and that fewer still are equipped to manage. Inventory management and controlling loss from damage, theft or negligence increase risk and rarely equate to an increase in profit.
So why do companies make the move in this direction? Generally speaking, it’s because they’re really good at what they do and make a lot of money at it. Maybe they spend so much money on product that they think they will pay for all that overhead with their savings from buying direct…it just never seems to actually work out.
Why not? Looking at it logically, shouldn’t removing a step and taking out the middle man improve profit? They buy it, mark it up to cover commission, overhead and profit and pass it on, right?
Yes…and no. Sure, cutting out the middleman sounds good. Does it actually produce the intended results?
What you’re taking on
Adding complexity to your business rarely works out long term. With more things to coordinate and balance, there are more opportunities for things to go wrong. Also, with “more hands in the cookie jar” there are more mouths to feed and more crumbs that wind up on the floor.
I know what you’re thinking — “But Andy, we’re doing what we’ve always done — we’re buying product to use in our projects”. While that’s true, you’re not doing it in the same way. On the surface, the process looks similar and the end result seems to be identical…but is it really?
First, by cutting out the middleman you take on the responsibility of choosing the product and making sure it shows up on time.
How is that different than what you do now? Well, the distributor probably keeps some inventory on hand and already has a supply chain system set up. Goods arrive regularly and get turned a few times a year so product isn’t collecting dust (along with the money you paid that could be working for you). You don’t have to wait 13–16 weeks and order 20% extra for potential damaged product, the distributor does it for you, and can usually service issues in a few days that would take months to correct.
When you get it directly, you’re taking an entire team of people whose careers have been based in supplying product and eliminating them, and the tools they bring to the table.
How is that bad? Well, not all building materials are created equal, and when Chinese imports are involved, counterfeit product, zero warranty coverage, and hidden risks like radon, formaldehyde and asbestos can appear out of nowhere and bankrupt you.
Distribution companies make it their business to ensure callbacks are close to zero and that the products they sell are reputable. Can buyers, being paid based on the bottom line purchase price, be trusted to do the same?
Complications
When you eliminate dealers, you also dilute your buying power. Everyone in building materials sales has heard the line “I have relationships and like to spread the wealth around”. While relationships are the lifeblood of our industry, the reality is this approach can get expensive fast.
- It adds complexity — More vendors means more bills to pay, more shipments to keep track of, more sales reps on jobsites, and more opportunities for something to go sideways.
- It increases overhead — Outside of just diluted buying power, more vendors mean more deliveries, more deliveries mean more labor. Labor to meet each delivery separately (or worse, driving to multiple locations to get product!), Labor to check the product in, and labor to pay the bills all increase.
- It increases workload — In addition to the above, you also have to spend time communicating to more people. Managing more vendors will always increase the time invested in planning and scheduling.
- It increases exposure — More visitors means more risk of injury on the jobsite, as well as more potential delays. Additionally, it creates opportunities for things to slip through the cracks, costing money on the project. Product has a way of disappearing on chaotic jobsites, and the costs of other, smaller issues can pile up quickly and crush your budget.
Unfortunately, procurement tends to take a back seat to sales, operations, and production. In most cases, building materials costs are passed to the end user without much concern over getting the best delta between cost, leadtime, and quality.
Create Vendor Partnerships
Contrary to that trend, the building materials industry has recognized the advantages of expanding their footprint and product categories. There has never been a better time to delve into your procurement process to re-evaluate how it’s done than now.
Many dealers are moving towards being a one stop shop for building materials. Box store home centers and companies like ABC Supply are buying businesses that fill gaps in their offerings and improve their service model.
Can you actually do a one stop shop for everything you need? It’s unlikely, and it could be painful. Companies, like people, have different strengths and weaknesses, and just because they can sell something doesn’t mean that you should buy it there.
If the service model puts undue hardship on your team, budget or timeline, it’s probably a good idea to pass. Using a supplier that has the ability to provide the necessary service and timeline is just as important as getting the right price.
Does that mean you need 15+ vendors in one market all supplying different things? Nationwide is it practical to manage 300–500 vendors across 15 states and 50 cities? Probably not.
If that doesn’t make sense, where is the logic in adding even more vendors by buying direct from the manufacturer?
Leverage Your Strengths
The final, determining factor should be “how much buying power and leverage can we get if we spend $500k annually at one supplier, instead of spending $50k each at 10 different ones?”
If you add $50k in flooring to $20k in appliances, $75k in kitchen and bath product and then throw in $5k in hardware and paint, that might take you whole new level at a dealer that can provide it all.
Maybe that leverage lets you push for better pricing or service on a key item for upcoming projects. If the dealer is large enough to have a national footprint, chances are good that they buy more product from every category than your business does alone. If they are any good, they have already leveraged their power with all those manufacturers who can’t afford to walk away from $150 million a year in sales. That same company will drop a $5k per year direct customer in a heartbeat.
So, instead of trying to become a dealer, companies should focus on managing their purchasing. If they can figure out how to leverage their buying power, they can reduce the number of suppliers they work with, streamlining the procurement process while reducing labor costs, product costs, and after sale service issues.
A targeted approach to vendor management can reduce head count to something reasonable, without impacting service levels (and hopefully decreasing costs at the same time!)
Where to Start?
If you or your team is overwhelmed by the options on the market and flood of information available, I can help. Contact Me and let me know what issues you’re seeing.
