Wholesale Sector
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Industry Overview
The wholesale distribution industry in the US includes about 300,000 companies with combined annual sales of nearly $5 trillion. Large distributors include SYSCO (foods); McKesson (drugs); and Avnet (electronics). Distributors specialize by product. In many product segments, the 50 largest distributors generate between 40 and 60 percent of revenue.
Competitive Landscape
For most distributors, demand is closely linked to local economic activity. The profitability of individual companies depends on efficient inventory management and order fulfillment operations. Large companies can supply customers with a wider range of goods and in more markets, but smaller distributors can compete successfully by carrying specialty products or providing add-on services. The industry is capital-intensive: average annual revenue per worker is over $1 million for large distributors, about $500,000 for smaller ones.
Computer and communications technology have had a major effect on the industry by improving the efficiency of warehouse and distribution operations. Because of automation, industry labor productivity improved more than 40 percent in the past 10 years.
Supply chain efficiencies allow some manufacturers and retailers to bypass independent distributors. Manufacturers account for 32 percent of wholesale trade in the US, up from 22 percent 10 years ago. And large retailers like Wal-Mart operate their own distribution systems, taking products directly from producers.
Products, Operations & Technology
The major segments of the wholesale sector are wholesale merchants of durable goods (42 percent of revenues); wholesale merchants of nondurable goods (46 percent); and business to business electronic markets, agents, and brokers (12 percent). The largest durable goods segments are professional and commercial equipment, motor vehicles and parts, machinery, and electrical goods. The largest nondurable goods segments are groceries, petroleum products, and drugs. Electronic market agents and brokers arrange sales for a commission and generally don't handle or take possession of goods.
Operations typically consist of merchandising decisions, purchasing from manufacturers and other suppliers, warehouse inventory management, product transportation and distribution, and providing various types of customer services. Operations vary widely according to the type of product. For example, food distributors not only deliver products to individual customer stores, but also arrange them on store shelves; steel distributors often have fabrication operations to make semi-finished goods for their customers; some auto parts distributors also operate retail stores.
Deciding what merchandise to carry determines the types of customers a distributor can sell to. Many distributors carry a broad range of goods to satisfy all of their customers' needs. A distributor of fasteners may stock some 100,000 items (stock-keeping units, or SKUs) bought from 1,000 manufacturers. Customers often ask distributors to carry new products. Trade shows are a major source of new products.
Distributors may have contractual arrangements with manufacturers or may order products as needed. Large distributors frequently have annual supply contracts with manufacturers, under which they commit to taking a certain volume of product in exchange for a discounted price. In some segments - especially those with a few large manufacturers, such as beer - distributors may hold exclusive sales territories as long as they meet volume requirements. Distributors may also have "authorized distributor" agreements with manufacturers, which typically require that they maintain a certain level of service to customers. Some distributors receive some or all of their product as imports, and may have exclusive distribution rights.
Big distributors may operate a network of warehouses, but the majority operate a single warehouse. For many products, warehouse operations consist of receiving products at a loading dock, storing them on shelving systems, and assembling loads to be delivered to customers. Warehouses may cover hundreds of thousands of square feet. Managing inventory is a major activity. Incoming product is typically moved on pallets by forklift trucks.
The complexity of warehouse and order fulfillment operations depends greatly on the type of product. In general, the smaller and more numerous the product, the more complicated the operations. Distributors of farming machinery, for example, can park an inventory of tractors in a lot, see each item from the office window, and drive one off on a trailer when an order comes in. Distributors of electrical supplies, on the other hand, may stock tens of thousands of different items, of which a customer may need only a dozen; quickly finding those items requires a sophisticated location and retrieval system.
Another general rule about warehouse operations is that the faster the inventory must move, the fewer the items that can be stocked. Distributors of fresh foods, for example, typically specialize in just a limited line of goods, whereas distributors of canned or frozen foods carry a wider selection.
Distributors may own or lease a fleet of delivery trucks. In many cases, special trucks are required - such as for gas, beverages, or refrigerated foods. Some distributors contract with transportation companies to deliver their products. The operation and maintenance of a delivery fleet can be costly. Depending on the product, distributors may make deliveries to customers several times per day. Fuel costs are a major concern. Many distributors have a sales territory that extends several hundred miles from their warehouse.
The additional services that distributors most often provide are spare parts, repairs, maintenance, and training. Some distributors provide logistics to customers, including inventory management and just-in-time delivery. In many cases, customers rely heavily on distributors to advise them on how to use existing products and information about new products.
Most distributors operate transaction-oriented systems that maintain an inventory database as goods are received from suppliers and dispatched to customers. Small distributors may maintain an inventory database on a stand-alone PC and update it overnight using receiving and shipping data. Large distributors have fully automated supply chain systems tying together suppliers, shippers, warehouse management systems (WMS), and customers. The goals of both types of systems are to minimize inventory of slow-moving items, increase inventory turns, reduce warehouse staff, and reduce inventory shrinkage.
A WMS tracks the physical location of inventory throughout the warehouse, typically by scanning bar codes on the merchandise. These systems may include automated materials handling systems used to convey the inventory and place it automatically in bins for later retrieval. The WMS also tracks inventory by age and, for certain perishables, by environmental conditions. WMS systems schedule dock personnel for loading and unloading according to anticipated traffic volumes. For distributors operating multiple warehouses, inventory systems are linked, allowing materials to be shipped between warehouses as demand requires.
Radio frequency identification (RFID) devices are coming into widespread use, replacing the bar codes on merchandise and pallets. Wal-Mart, Home Depot, the Department of Defense, the FDA, and others have implemented programs requiring RFIDs. These devices allow tracking of the location and movement of merchandise automatically. As the prices for these devices drop, and more vendors have experience with them, they'll eventually become the dominant method of merchandise tagging.
Some distributors have online interfaces with customers and suppliers. Customers may be able to place orders online, receive confirmations and shipping information, and track shipments. As orders are received and fulfilled, distributor systems automatically generate orders to suppliers to replenish inventory. Financial systems capture order information and automatically generate accounts receivable and payable entries. The customer systems include online catalogs, product configurators, order entry, and order tracking, all of which are available 24/7. Systems also allow customers to schedule delivery and access help desks to get support for orders.
Distributors that operate their own delivery fleets have logistics applications that optimize loading and delivery routes. Many distributors have GPS in their vehicles that allow them to track the vehicles and reroute them as required.
