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Lowering distribution costs: Wholesalers zero-in on money-saving ideas by examining every expense

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Lowering distribution costs: Wholesalers zero-in on money-saving ideas by examining every expense

In the wholesale side of the business, some dealers say they have to get tough with their suppliers to get the best deal, while others say a conversation over dinner works better.

In either case, the cost of your inventory is going to be based upon a specific program developed by a manufacturer to enhance its business, not necessarily yours. Hopefully, it will focus upon mutual objectives and products that offer both parties the best margins.

The bottom line, according to dealers we interviewed, is that once your supplier programs are set, inventory becomes a fixed cost for the rest of the year. If inventory costs are fixed, where can you find savings that will help the bottom line?

Zero-base approach

The answer is lowering distribution costs -- something you can control. But to do that, you need to take a fresh look at all costs and take a "zero-base" approach to the business.

What is zero-base? It is the process of examining each cost and determining what would happen if no money was spent on it. (This strategy was credited to Jimmy Carter when he was governor of Georgia. It saved the state millions.)

A good example would be advertising. In a wholesale dealership, if nothing was spent on advertising, little business would be lost the first year. But, not advertising for more than a year might be detrimental to the business, especially if new competition showed up. Do you want to save one year's worth of advertising costs and begin advertising again next year? How much would this save? (Of course you probably have co-op funds available, but to spend them you also need to spend your own money in most cases.)

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Sponsoring local area sports teams is another example. If a company decided not to spend money on this, it might not hurt the business, but it could affect its image.

Is image that important to a wholesale business? Do you want to stop sponsoring local teams and save this money? Don't think of it as just a few dollars saved; it all adds up fast when you examine every expense under this harsh bright light.

If you analyze every cost, you may discover significant ways to save that will not hurt your business. It also may make you leaner and more agile, and able to adapt to any situation and still be profitable.

Words of experience

As we started developing this article, we found many dealers were willing to share solid business strategies and insightful information with us. However, they did not want their names used because they felt it could hurt their competitive positions in their respective marketplaces.

Three wholesale dealers did give us information we can attribute to them. One is a small dealer in Albany, N.Y. Another is a four-warehouse dealer operating in Virginia, Tennessee and North Carolina. The last is a single-warehouse dealer in Northern California.

Each has different ways of doing business, yet each pays close attention to these five areas, which they found to be most promising for lowering distribution costs:

1. warehouse.

2. staffing.

3. health insurance and benefits.

4. computer systems.

5. vehicles and routes.

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We asked each dealer interviewed these questions (their answers follow):

1. What brands do you carry?

2. How many people do you have working for you?

3. What are your annual sales?

4. What do you consider to be your key distribution costs?

5. What specific things do you do to cut distribution costs?

George Bohorquez, president of Pioneer Tire Supply Inc. in Benicia, Calif. The company recently moved to a larger, more convenient location with easier access to major routes and plenty of loading/unloading docks. Bohorquez says the move will result in significant cost savings and leaves Pioneer room to grow.

MTD: What brands do you carry?

Bohorquez: Our primary brands include Hankook, Cooper, Falken, Sumitomo, Mastercraft, Greenball and Nankang.

MTD: How many people do you have working for you?

Bohorquez: We currently employ between 30 and 35 people.

MTD: What are your annual sales?

Bohorquez: I would prefer to keep that confidential, but I can say our business has increased significantly over the past four years.

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MTD: What do you consider to be your key distribution costs?

Bohorquez: Our number one and most important expense is employees. It's so important that we really take care of our employees. Turnover is expensive, and if we treat our employees fairly (this includes competitive salary, benefits, flexibility, relationships, and respect), they will stay with us for a long time. Other primary costs include warehousing and delivery.

MTD: What specific things do you do to cut distribution costs?

Bohorquez: Logic says to work smarter -- not harder. There are many tools and resources available to help us work smarter while reducing our distribution costs.

We continue to find ways to streamline work. We've organized our new warehouse better to pull tires more easily. This includes adding equipment, organizing inventory for easy location, identifying clear roles and responsibilities.

"We continue to challenge ourselves to find easier, better ways to do our work," says Bohorquez. "As such, even though our business has grown, our expenses have not grown nearly as much."

Ron Brady, vice president of wholesale, Free Service Tire Co. Inc., Johnson City, Tenn. Brady manages all four wholesale warehouses. It is his responsibility to find ways to increase profitability -- while increasing service and customer satisfaction!

MTD: What brands do you carry?

Brady: Michelin, BFGoodrich, Uniroyal, Continental, General, Yokohama, Hankook, Nankang, Telstar, Doral, Cyclone, ProComp and Pirelli.

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MTD: How many people do you have working for you?

Brady: We have three different divisions of the company; we have retail, commercial and wholesale divisions. The wholesale division is the part that I manage. We have four warehouses: Roanoke, Va.; Johnson City, Tenn. -- this is our 100,000-square-foot mixing warehouse; Knoxville, Tenn.; and Swannanoa, N.C. We have 44 wholesale division associates in all branches. As a company, we have over 200 associates.

MTD: What are your annual sales?

Brady: That is not something I'll disclose, but we turn a lot of inventory every year and each associate is busy every day.

MTD: What do you consider to be your key distribution costs?

Brady: Since we only sell tires, (no wheels, parts, or equipment), every cost is a direct cost to our distribution system. I consider the cost of over-age inventory. I consider the cost of money to pay for inventory. I consider the cost of our accounts receivable.

I consider the cost of staff, as well as the high cost of finding new ones. I look at everything and I have a great team to help me.

MTD: What specific things do you do to cut distribution costs?

Brady: We have scaled back our long routes, anything more than 100 miles from a distribution point. We have found we can service local areas better and more efficiently than trying to travel great distances to deliver product. We deliver more often, and in most cases we out-service our competition.

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We also track fuel consumption, vehicle costs from birth to death, and come up with a total cost per mile. We then take the route driver's salary and benefits cost and add them to the vehicle costs and then look at the profitability of the route to see if we can sustain the current deliveries at a profit.

We also are bringing in all our containers to Johnson City for redistribution to our branches. We can then become more efficient in managing our inventory and try to achieve a higher inventory turns ratio.

"We are still in a growth mode and continue to look at new markets that make sense for us," says Brady. "We have really only been doing route truck distribution for about five years.

"We have tried a lot of things that worked and a lot of things that didn't. We keep trying to improve customer service and our relationships with our customers.

"We are not the biggest," says Brady, "and we really do not want to be. But we do want to be the best at what we do!"

Tony German, Tony's Tires and Wheels Inc., Albany, N.Y. German, a Russian immigrant, operates a small operation in terms of employees and costs, but it does big volume compared to size.

German's warehouse is sized to his scale of business, with room to grow in a location that is reasonable in cost and close to his customer base. There is nothing pretentious about German, his family, staff or business posture. They are just a hard working group of people who believe in their business, and that keeping it simple will allow them to compete for a long time to come. (See the accompanying sidebar on German's path to success.)

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MTD: What brands do you carry?

German: We carry the entire Hankook line, the only full line here. This company was started with this line and we remain loyal to it today. We also locate any OE tires customers need. By meeting customer needs this way, they stay loyal and have made our company grow each year since we started 12 years ago. Of my original 28 customers, 95% are still buying here.

MTD: How many people do you have working for you?

German: We have seven people total, including me, my daughter (Galina, a member of the New York Bar) and son (Alexander, who will graduate with an IT degree this June from The University at Albany). One of my people, Leon Pasikov, I've known (from the old country) for 40 years and trust him with my life.

Michael Kolak, my manager, has been with us for five years and he is like a member of the family. Add Butch Driver and Doug Spenser and you see we have a great team. The team is why we are successful.

MTD: Will you share your annual sales with us?

German: No, but we turn close to 20,000 square feet of inventory many times each year. We have grown by almost 20% every year since we opened.

MTD: What do you consider to be your key distribution costs?

German: Everything besides inventory is a distribution cost. Period.

MTD: What specific things do you do to cut distribution costs?

German: We are using smaller vehicles including small pickups and even small passenger type vans, with the seats removed of course. Our business is based upon fast delivery to small repair shops and dealers in the city and nearby suburbs. We do not need large vehicles and downsizing the fleet has saved us a lot of money.

We run regular routes but we also deliver one tire to a customer when needed and that doesn't require much of a vehicle. We even use our cars to make that kind of delivery.

"Every business is different," says German, "but profitability always comes from lower costs, smarter business and hard work from a determined team."

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Other things we learned

Not one wholesaler we talked with has outside salespeople who are paid commissions. Each considers performance and fast service the best sales tool. They all focus upon on-time deliveries, in-stock inventory and a friendly voice on the phone. Additionally, each told us that their upper management was always willing to take customer calls.

Warehouse buildings are a fixed cost, not counting the potential rise in property taxes. If you are leasing the building, you still can achieve savings by working with your landlord. It all depends upon how much the landlord wants to keep you happy and in place.

Negotiate leases with options, not long-term leases that don't allow you to respond to business opportunities. You might even consider buying the building yourself and leasing it back to your tire dealership.

New, more durable trucks are being designed with higher payload capacities. They also may offer better economy and performance because of more technologically advanced engines (diesel as well as gas) and better automatic transmissions.

Every dealer interviewed says his most expensive cost item is a well-trained staff member who leaves the company. They all say it is far less costly to pay top wages, give the best benefits and develop teams than it is allowing one to go away.

Some of the other cost-saving advice they recommend include the use of the following:

* Leasing agencies. Some of them also can handle your existing employees. By adding them to their larger employee base, they can improve benefits and help cut your costs.

* Computer systems. According to Pioneer Tire Supply, its on-line customer ordering process pays big dividends in added sales opportunities and helps eliminate mistakes in the ordering process.

* Telephone systems. Dealers say they are either great or terrible. Each told us that the choice of a carrier that can handle it all (phones and Internet/broadband) is one of the most important business decisions facing a dealer today.

* Accountant. Another critical player in saving dealers money is selecting the right accountant or CPA. You don't want the most creative, just the best trained and most respected.

* Office supplies dealer. Get the best quality you can afford, but never better than you need.

About the author

John Newman is a freelance writer based in New York.

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