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Why Buy Direct?


9/11/2007
By Gary Goms

Everyone wants to save a few points on parts purchases. But does cutting out the middleman really save anyone in the long run? Sometimes, the middleman brings more value than you think.
 

The phrase “buying direct” conjures up all sort of feelings in the aftermarket, both for repair shops and distributors.

For me, those words bring to mind a primal desire to “cut out the middleman” and participate in the world of “deep discounts.” Wow, wouldn’t it be great to bump profit margins from resale parts from an average of 30 percent to more than 50 percent? Or wouldn’t it be even better to increase car count by undercutting our competitors by 10 percent on parts-intensive repairs like undercar or air conditioning services?

The short answer is that if every small, independent automotive repair shop in the United States could “buy direct,” the playing field would be leveled and the service market would remain very much as it is now. But the question remains: Is there any advantage to buying direct?

EARLY EXAMPLES
The earliest example of distribution was our cavemen ancestors trading a rare commodity like flint, used for making sharp-edged tools for equally rare commodities like sea shells, used for making jewelry. Long before the Industrial Age arrived in the early 1800s, a worldwide distribution system for raw materials like iron and manufactured goods like silk and olive oil had developed between the nations that controlled those resources. When mass production of manufactured goods like machine tools, guns and clocks was achieved, a distribution system began to develop that moved products from the manufacturer to the end user. This early distribution system formed the basis for the more complex and efficient distribution system that we have today.

Of course, not all distribution systems succeed in moving manufactured goods to end users. The most remarkable failure of modern distribution occurred 50 years ago in Soviet Russia when a huge manufacturing capability developed during World War II fell flat on its face while attempting to distribute consumer goods to a civilian population. All too often, brand-new tractors were left rusting in factory parking lots while farmers tried to feed a starving population by using horses to cultivate crops. The lack of an enterprise-driven distribution system subsequently became one of the issues that split the Soviet Empire apart.

MODERN DISTRIBUTION SYSTEMS
How our modern, enterprise-driven distribution system works depends very much upon the type of product being manufactured and sold. Because an airliner, for example, is a very limited production item, very technology-intensive, very expensive and a highly customized product, it is usually ordered years in advance and sold directly from manufacturer to end user. One end user, such as an airline, might use the airframe for passenger transportation while another end user, like the United States Air Force, might use the same airframe as an aerial fuel tanker.

At the other extreme, a very common 10-32 machine screw serves only one purpose, which is to fasten one small component to another. Just about any manufacturer, from a small one-room shop in New Delhi, India to an acre-sized plant in Detroit can make a 10-32 screw. The Delhi manufacturer manufactures the screw for, let’s say, $.0008 per unit and the Detroit manufacturer makes the screw for $.008 per unit — or 10 times as much. But sourcing a 10-32 screw isn’t a question of price; it’s a question of logistics and distribution.

Is it, for example, cheaper to ship the screw all the way from a manufacturer in India or from a manufacturer in Detroit? Or, at the grass-roots level, from a jobber in Phoenix? Are transportation costs and quality-control issues worth the savings? If an auto manufacturer needs five tons of 10-32 machine screws to assemble wiper motors for next year’s production output, the savings offered by the Indian manufacturer might be an option if it buys at $.0008 per unit and has on-site inspectors to ensure that the product meets quality requirements and delivery dates.

For the wiper motor remanufacturer in Detroit, it might be cheaper to avoid the potential liabilities of buying metric tons of 10-32 screws from an overseas manufacturer and instead buy a few pounds of screws from a local manufacturer at a higher unit cost of $.008 per unit. If a one-man shop in Phoenix needs a single 10-32 screw to replace a missing screw on a customer’s wiper motor, it’s worth the relatively expensive $.08 per unit cost to buy a single unit on-demand at a local parts jobber, who keeps a dozen or so 10-32 screws in stock.

ADDING VALUE
The most overlooked aspect of modern product distribution is that each distribution point adds value to the product. Let’s begin with the imaginary “widget.” The manufacturing point adds value by assembling the raw materials, manufacturing capacity and engineering talent needed to produce a marketable widget. Unfortunately, developing and manufacturing the best widgets in the world doesn’t guarantee that the world will beat a path to the door of the widget manufacturer. Moving widgets to market requires the skills and talents of distribution people.

Let’s say that the widget is made in various sizes and colors. This means that Mom and Pop’s Hardware Store may only want to stock the most popular sizes and colors of widgets, but may also want the option of special-ordering sizes and colors for its more discriminating end-user customers.
To deal with the special order process, Mom and Pop’s parent company, Hardware Store Incorporated, must maintain a warehouse that can ship all sizes and colors of widgets to Mom and Pop within 24 hours. Since widgets aren’t expensive, low-volume items like airplanes, chances are that Hardware Store Inc. might buy from a regional distributor, who buys boxcar quantities of widgets directly from the manufacturer for distribution to franchised chains like Hardware Store Inc.
Each of these distribution points adds value. First, the manufacturer adds value by developing and manufacturing a marketable widget. The regional distributor adds value by allowing a multi-state warehouse distributor like Hardware Store Inc. to sell widgets without tying up precious operating capital in boxcar quantities of widgets. Hardware Store Inc. adds value by warehousing, distributing and perhaps marketing the widgets under its own brand name for Mom and Pop’s Hardware Store. Mom and Pop’s Hardware Store adds value by recommending and stocking the size and color of widget that best meets their customers’ needs. If the widget fails to meet the expectations of their customers, Mom and Pop will take care of the problem via the auspices of Hardware Store Inc.

WOULD I BUY DIRECT?
Like anybody, I like bargains and saving. Perhaps 10 percent on the cost of commodity parts could add thousands to the bottom line at the end of the year. Many years ago, for example, I bought spark plugs by the case simply because a half-dozen part numbers would cover 75 percent of the market and I could save about 15 percent under jobber unit price. But, as engine technology advanced from the 12,000-mile to the 100,000-mile tune up, spark-plug sales dropped and part numbers became very prolific and application-specific. The fact that the part numbers multiplied a hundredfold made it very expensive to keep spark plugs in a small shop’s commodity parts inventory.

Another example is when I used to increase profits through buying 10w-30 and 10w-40 motor oil by the truckload at 10 percent below jobber price. But now motor oil has become much more application-specific and most shops must now stock a half-dozen or more viscosities in both conventional and synthetic bases. Going from two to more than a dozen lubricant part numbers has made inventory costs sky-rocket without significantly increasing sales volume.

Facing current inventory realities, I now buy on an as-needed basis from my local jobber so I can dedicate my cold, hard cash to buying the new equipment and more sophisticated information systems needed for diagnosing and repairing modern vehicles. True, some large independents, perhaps with multiple locations, could benefit from buying direct from a warehouse distributor or even manufacturer. But, in the modern world, the math simply isn’t in favor of the single small shop profiting to any great degree from buying direct. It’s all about money and perhaps Mom and Pop have something going for them after all.















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