Wholesale Herb Articles & Resources

But retailers aren't the only competitors WDs need to be mindful of. Logistics companies are now prepared to go head-to-head with many wholesalers, which, according to Fein, "is a trend that the aftermarket should pay special attention to." He says it's happening in industries that have a large SKU base where the need for post-service delivery is low. "UPS supply chain has been investigating the automotive aftermarket." Fein recommends that if WDs haven't already, they need to benchmark their performance and find key differentiators. Though logistics companies are creating more competition in an already competitive arena by offering "pick-pack-ship" services, distributors still maintain an advantage when it comes to "post-sales service and support," according to Fein's work in the NAW report.

Industry consultant Dan Smith, president of Capstone Financial, suggests that some manufacturers may even try circumventing the WD by selling to expediters or by going direct to technicians. WDs sometimes make unreasonable demands on manufacturers, says Smith, which, in turn causes the manufacturer to look for ways to sell around them. He recommends that WDs continue to diversify products and help foster a "more balanced atmosphere."

"The WDs are no longer the major powers," Smith adds, while noting that we'll see more manufacturers trying to sell to smaller warehouses or jobbers because of the regional presence these companies have. Suppliers, though, are typically weak when it comes to distribution, claims Fein. "Services and manufacturers that try to cherry-pick to the best customers usually pay a price in the market."

The Internet has also affected business for distributors. Customers now have more access to product and parts information and availability. And Fein believes some are reaching around the channel to obtain key details like distributor cost structures. "The availability of this information is taking away a historical advantage that WDs used to have," contends Fein. "This is changing the power dynamic."

Many WDs, though, are using the Internet among other technologies as a tool to do more business and have established ways to use the accessibility it offers as an opportunity to grow market share.

The trek toward technology

Because of the already thin profit margins prevalent in the aftermarket, technology has become a vehicle for increasing profits. But whether it is being fully harnessed is still a debatable topic. It appears many WDs are still taking a "wait and see" approach when it comes to technological innovations. Basically at the mercy of manufacturers, distributors will most likely wait until their suppliers invest in the technology first before making a move. David Segal, vice president of Automotive Supply Associates, Inc. (Sanal Auto Parts), admits some are slow to change when it comes to distribution technology.

"It takes so long just to agree on something, by the time we are able to move, there is a new technology to look at," he says.

Another problem facing the aftermarket is the secrecy with which many companies guard their data, creating a potential roadblock to industrywide collaboration.

Radio frequency identification (RFID), a dynamic system of data exchange using radio frequencies, has been touted as revolutionary in supply chain management for quite some time, but many warehousing operations in the aftermarket are using bar code scanners with some others even relying on employees to manually check off orders. A majority of the smaller operations have not justified the return on investment to make the leap toward RFID, which some bigger players, like Uni-Select, are already doing. Those that have invested in RFID and have it in place say a company can increase its overhead more than it ever could without the system.

Segal says once RFID is adopted by his suppliers, he'll make the investment but that right now, "it's just too premature," though they have invested heavily in bar coding.

Considering the fact that RFID is being used by other industries like retail and pharmaceutical, it's something that's likely to stick around for a while. In the meantime, though, Fein of Pembroke Consulting suggests there are other technologies that can be used to improve productivity, including an online ordering interface, business management systems and customer relationship management tools.

"I think right now RFID is in the stage of over-hype," he says. "It has great potential to improve inventory management with some of the larger retailers, but most distributors do not sell directly to retailers using RFID."

He says WDs may not need to build this technology into their business plans for at least a couple of years. "Let's keep in mind bar code use isn't even widespread," he shares.

Other innovations such as voice recognition technology aren't likely to see general acceptance in the aftermarket, which remains behind the curve as it pertains to making these types of changes.

A good example of technology as a partner is the use of Internet parts ordering systems between service dealers and distributors. Herb Lohse, president of Midwest Auto Parts Distributors, says the use of Internet AutoParts, Inc. (IAP) enables technicians to access his store's inventory without even making a phone call. The order, in turn, generates a ticket at store locations so the company can make a delivery.

Paperless warehousing also has been an important topic among those in the know, but the fact remains that we will almost always need paper as long as we're doing business. Even if an entire chain of warehouses is automated, customers will still want receipts. And you'll want a "Plan B" for those unpopular moments when the power goes out and work must continue.

The parts and data dilemma

There are plenty of industry hot buttons up for discussion, maybe even a heated debate, but the majority of us can reach a consensus about parts and data: warehousing and cataloging wouldn't be such a ferocious beast if parts weren't entering the system at such rapidity. "It's taking more and more parts and SKUs to get market coverage," comments President & CEO of Tier Parts Warehouse, Ron Levene. "And figuring out how to get the right parts where they should be in the supply chain is a major challenge." The number of parts in the aftermarket has become monumental and trends show there is no slowing.

Bob McKenna, past president at NAPA and current president of the Motor & Equipment Manufacturers Association (MEMA), says he can recall when 50,000 SKUs offered complete industry coverage. When he left the company this year, there were over 350,000 and he is sure the day is rapidly approaching when we'll see 1 million. New products are hitting shelves daily. In fact, according to one WD, some manufacturers release anywhere from 300 to 500 new part numbers in a month's time.

Jacques Landreville, president and CEO of Uni-Select, says, "Data warehouse software is becoming a prerequisite given the number of SKUs that have exploded in the last decade." Because of this, Landreville has about 70 percent of the Uni-Select network linked electronically, but confides that just 10 years ago, "it wasn't even 5 percent." He predicts they'll have 95 percent of their network linked within the next five years.

Taking the step toward a data warehousing system--in which such items as catalogs and purchase orders are shared digitally along with reports that closely monitor trends and help to better manage inventories--is known to be costly. A number of distributors, however, are implementing data warehousing under the auspices of their respective program groups, emphasizing that there is indeed power in numbers.

Reports suggest that the Aftermarket Auto Parts Alliance, Inc. and the National Pronto Association are making strides, while many others, like Federated, are waiting in the wings to see their results. Tim Sturdevant, vice president of SAE Warehouse, a National Pronto member, is a big proponent of information technology and open systems. He believes that too many closed systems are giving retailers an advantage to develop newer, fresher systems. He says that the Pronto database "helps us move product among other members. If we have excess product in our town, another WD might see our dead inventory and decide to purchase it."

One benefit cited to a data warehousing system is the ability to manage the massive amounts of data collected, molding it into customized reports based on a company's needs.

As for the Alliance, a collective of 56 independent distributors serving 4,000 parts stores and 2,000 service centers, only time will tell if its members are reaping all the right benefits. Lohse, of Midwest Auto, says it helps his company manage inventory and profitability, adding that "it makes it easy to extract information like price overriding and exceptions." Replacement Parts' Lord, another Alliance member, says the data warehousing system is a "fundamental part of being able to run our business." He contends that it is far more valuable due to the participation of all the members. "We tend to group our activities into sales, margins and movement by product line. When you've got a data warehouse, you can break that down into much smaller pieces, which are more manageable."

The Alliance recently announced its participation in a pilot study of Activant Catalyst, a stand-alone Web-based catalog provided by Activant Solutions, Inc., the group's data warehouse provider. The new technology claims it offers true "cover to cover" content with details like product images, specifications, warranty information, technical service bulletins and more.

Levene thinks data warehousing is a superb tool, though he has been unable to invest in it as a mid-size WD. He cites that the economic cost is just too steep. "It's harder for a smaller WD," he explains. "Whereas some of the larger WDs are probably maximizing the benefits of it because they can afford it in the sense of time and money." Segal says with any system, it can get to the point where "you have so much data, you get into an analysis paralysis mode." You have to ask yourself what you need to do with it. He asks, "Do you want to get a better return on investment; or improve inventory returns?"

A system developed by O'Reilly Auto Parts called the PartnerShip Network is yet another platform that enables trading partners to share information over the Internet at a much lower cost than building a data warehouse.

Data warehousing and synchronization will ultimately help address the overflow of inventory but we are a long way from being error free. But, those with "clean" data are cutting down on supply chain mishaps, which accumulatively cost the industry an immensely large arm and leg.

Last year, the University of the Aftermarket report thoroughly discussed inventory problems and some possible solutions. Duke Young of Pat Young Service Company, Inc., says he read the report with interest but doesn't think it took the topic to a level that most folks didn't already know about. On a positive note, he says, "At least it reinforced the need to get paid for the inventory that you warehouse and keep mindful of your margins." As a result, he is looking at the pricing structure at Pat Young Service to determine how to address the slower moving items. Fletcher Lord thought the report was a pretty academically driven piece of work, but agreed that it didn't provide any new insight; rather the findings were "broad brush opinions," he says.

Due to the insurmountable number of catalog changes, some products are still being left "dead in the water," says Sturdevant. "It takes a talented counterperson to find a catalog and get something sold...but we can't sell something if we can't look it up." He believes that about 10 percent of product in the aftermarket accounts for about 80 percent of the volume. He contends the other 90 percent is spread out and slow moving, creating mass amounts of excess inventory. With so much inventory occupying valuable shelf space, it doesn't help that the life cycle of some products can sometimes be years. Without expiration dates, some items prove to be a true burden. Levene adds to that, pointing out that another major challenge is getting consistent supply from manufacturers. "In the past year, we've seen sporadic fill rates, hiccups and bumps from a number of our leading manufacturers and that has hampered our ability to supply to our customers," he says.

Lohse has spun parts proliferation into a pot of gold with a centralized inventory control system, which enables his team to have the right part at the right time. They can maintain adequate inventory and protect themselves from obsolescence. "I think as long as you manage your inventory well and offer a wide variety, it sets you apart and allows you the opportunity to grow market share," comments Lohse. "That is how we differentiate ourselves."

The larger WDs seem more capable of coping with the onslaught of parts entering their warehouses. Like Lohse, many are using it as a key distinction--being able to boast, "we have almost everything you could possibly need." But for the smaller distributors, parts proliferation is a much meaner beast, leaving them facing financial and space constraints. "It's the ability to strike that balance and afford the investment," says Levene. "For a small to mid-size WD, it's a much bigger challenge," but he continues that the reality is that it's a challenge for everyone. Other smaller warehouses like Rock Valley and Hovis Auto Supply say it's an issue that tops their list. "It's become paramount that you have the right product at the right time," says Beasley. Cliff Hovis, president of Hovis, adds that some manufacturers make it more difficult since they don't always have up-to-date information or technology, forcing them to do a lot of unnecessary digging. These types of problems leave many grappling with how to find a solution to their supply chain management woes.

A return that's not always welcome

As if parts proliferation isn't enough of a challenge, today's WDs also face dwindling profit margins, as well as the industrywide dilemma of warranties and returns, which can further erode the bottom line for everyone involved.

Distributors are free to depart from the manufacturer's price sheet and create their own structures, but raise the prices too much and the customer will look for their items elsewhere; drive prices down to gain market share and shrink margins even more.

To help combat the profit margin issue, Segal suggests working with brands that aren't typically well known but high quality nonetheless. "We're in a marketplace where almost everyone has the same brands, so you have to create your own differentiation," he says. While most vendors are trying to add new distribution to increase margins, Segal suggests keeping the current distribution, but with an alternative product line.

Duke Young maintains his company has kept margins reasonable, and the key is to let customers know what they are getting for their dollars. "You've got to sell your selling price," he says and continues "we see the value of keeping our repair shops educated and from that standpoint, we have a strong relationship with them. That's another reason we need to demand a greater margin, because we are supplying more than a part."

"We sell with training and added services and others sell bare bones," says Hovis. Many agree that emphasizing the service that comes with the parts is crucial but Fein of Pembroke declares the competitive pricing problem has been resolved for the most part, and that WDs really should be dedicating more time to solving their customers' problems. But retailers offering discounted product lines also place added pressure on margins, concedes SAE Warehouse's Sturdevant, who adds manufacturers may not be keeping a "level playing field" among distributors. Some manufacturers have separate divisions to work with retailers than with distributors. "There needs to be parity," he says, including that he may not be able to purchase the same amount of product as a large retailer in order to get a bigger discount, but would at least like to know what that order requirement is so he can decide for himself.

For the most part, distributors admit warranties and returns are a fact of life and the nature of this business, but sometimes being a member of a program group can help distributors reduce this returned inventory and share overstock and returns. Other times, returned items can't be reused because of damage to the products or packaging.

A number of WDs we interviewed cite education and tracking as a remedy for excessive warranties and returns.

"A lot of warranties are usually controlled at the counter and from our people giving out the right part the first time," says Sturdevant. "Many things were never installed and have nothing wrong with them but get returned."

Segal agrees that educating customers, whether they're technicians or jobbers, helps combat the problem, combined with testing units prior to selling to ensure they meet quality standards. "We are below the industry average (on returns), but it's still too high," he adds.

Having a reliable catalog system is more likely to ensure the proper parts will be ordered, says Beasley, from Rock Valley. "We have our installers hook up to our cataloging system so they can look up what parts they need," he offers. "We continue to educate the customer to order the right parts the first time."

Educating the customer also balances the legitimate returns against abuses of warranties, points out Levene. "Continuing education will be of benefit here in selectively drawing the line with your customers where it is abusive." He says his company requires every warranty request to be tagged with specific information to identify these abuse issues throughout the supply channel and track warranty rates by vendor.

Lord sees the warranty predicament as a two-sided issue: it's both a problem and an opportunity. "We don't like the fact that we have a high percentage of volume returned each day, (but) if you're able to get your job done in that environment, you're able to separate yourself from those who can't."

If you restrict returns, all it does is degrade the quality of inventory you distribute, continues Lord.

All dried up

Following suit with other avenues in the aftermarket, the quality employee pool is running dry for WDs. Even with competitive wages and good working environments, many WDs are having a hard time finding the right personnel when growth is upon them--either for the warehouse, behind the counter or in store management. Segal says, "It's hard to find good people because we don't put out a very good image as a whole." His conclusion is that the industry may give employees the perception that this is a job not a career. Lohse, of Midwest Auto Parts Distributors, agrees that good people are hard to come by. "We are growing our store count dramatically and it's difficult to fill the pipeline with adequate store personnel/management." Because of this issue, some WDs have a very low turnover rate. When they find good employees, they hold on to them.

Many of the executives we spoke with listed the commitment and effort from their employees and staff as something they take extreme pride in. Levene of Tier Parts Warehouse can't say enough good things about personnel. "If I had to tap one thing in my company, it's the commitment of my management team to focus on the business, focus on satisfying customers and supporting all of our employees. My senior and middle management team has just done an outstanding job and I can't give them enough credit."

An eye for the future

As distributors work against inventory, pricing and competition issues in the here and now, an eye must also be cast toward the future, which promises to hold a number of changes and opportunities for distributors.

For one, there is a fragmented supplier base and changes in business strategies. The NAW report on wholesale distribution speculates that manufacturers will begin to move away from "open distribution policies" toward more selective strategies that include fee-based services to deliver products directly to end consumers. Many in the industry, though, say that the WD is here to stay. Young contends, "We will remain a viable entity for two reasons," citing parts proliferation and delivery demand.

The NAW report suggests that distributors become suppliers of customized relationships by offering products with services attached. Distributors could add fee-based services or encourage "self-service" by customers, the report suggests. Attaching fees to services that may now be performed for free can be risky and should be implemented slowly, but fees will, in the long term, add value to service and predictably increase profits.

"For distributors to remain relevant, they need to improve productivity fast enough to remain viable," says Fein.

Another trend to look out for, which follows other businesses, is continued consolidation among wholesale distributors. Contrary to popular belief, it may not be just the big dogs who stick around. Smaller WDs will continue to proliferate if they can focus on specialized or niche items and offer something the larger ones can't. Larger WDs also must change with the times to stay alive and continue to use technology as a productivity tool, according to industry sources.

WDs also will have to look out for ways to positively counteract the many secondary costs of doing business, like rising health care and fuel charges. Sturdevant, from SAE Warehouse, says his company has contracted a third party for deliveries to remove fuel surcharges. As an example of diversification, SAE created a division strictly focused on paint and body suppliers.

Automotive Supply Associates, which also supplies paint for body shops, offers shop and business management seminars. Others offer service dealer programs and social events, participate in councils or simply focus on customer service.

Whatever the case, Fein says distributors who continue to think strategically have a promising future. "Wholesale distribution is one of the most dynamic industries in the .," he says. But, he cautions, the future only holds opportunities for the forward thinkers.