Industrial Distributors Can Learn From Consumer Goods Retailers

Two of my clients, both small distributors, sell to consumer goods retailers, some large (Wal-Mart, Target, Sears) and some mid-size (Meijer, Giant Eagle). For the most part, these retailers are tough, but fair customers. Their quality standards are high and their tolerance for supply channel errors is non-existent. The industrial distributor and manufacturer can learn a great deal about efficiency, cost savings and error reduction by observing this industry. The gases and welding industry is far too lenient in accepting shipping errors, late deliveries and non-automated processes, which add a significant “fix it” premium to a vendor’s product. Industrial distributors need to learn to set high and measurable supply chain standards of their manufacturers and enforce these standards.

The Retailer’s Way
Whenever a sales contract is negotiated between a retailer and distributor/manufacturer, the contract will outline the deliverables of the supply channel. For example, in order to ensure 100 percent identification accuracy, the manufacturer must provide UPC bar codes on all products. Thereafter, the UPC number becomes the common product identifier on all information flow (POs, invoices) and product flow (bar code scanning at the warehouse and point of sale). This ensures there is no misinterpretation of the retailer’s order. Nor are there pricing mistakes as the product is scanned through the cash register. In addition, all retail orders are sent EDI or through Web forms to the manufacturer. The manufacturer receives accurate orders that should not have to be re-keyed into their ordering systems.

Contrast this process to the industrial world. Many (about 20 percent) of the products in our industry are not bar coded, negating the common identification factor. The lack of universal bar codes prevents distributors from scanning part, or in many cases, all of their receiving, picking and point of sale orders. The distributor must insist on universal bar codes on all products sold through its warehouse.

In addition, most of the industry’s orders are faxed to the vendors, requiring manual re-keying and often subjective product number interpretation. About 50 percent of shipping errors are caused by data entry errors or misinterpretation of the faxed order. Once again, sending orders electronically can eliminate these errors.

Furthermore, at the warehouse level, product that is picked and packed is seldom scanned for accuracy. As a result, between 0.5 percent and 2 percent of industrial shipments are in error. This costs millions of dollars in credits, lost productivity and customer loyalty.

The Retail Contract
Before starting business with a consumer goods retailer, a vendor must sign a contract stating the terms of the arrangement. In addition to payment terms, pricing and a product quality guarantee, the contract stipulates how the vendor must service the customer, including information flow, shipping, returns and allowances. This is where the retailer sets expectations. For example, the contract will state that all POs will be sent EDI with a 24-hour acknowledgement required; all invoices must be sent EDI; all products must be bar coded; all products must ship within an acceptable window or will be canceled; and all products will have a defective allowance (usually 0.5 percent).

Enforcement of the contract is fairly simple: any deviation from a contract provision is a monetary fine that is debited from the vendor’s account. For example, if an EDI transmission is wrong, it is a $100 fine. If a bar code can’t be scanned, the product is returned, along with a labor fee and a wrong shipment fine. Ship the wrong product? That’s a fine and the retailer may not return (or pay for) the wrong product. As you can see, the retailer sets high service expectations and penalizes the vendor for any behavior that requires them to manually deviate from their procedures. Fines and debits for my clients can run from two percent to three percent of sales. As a result, both are installing systems to ensure greater accuracy and fewer fines.

Fines in the Industrial World?
So is this draconian system of supply chain contracts and fines going to arrive in industrial distribution anytime soon? Not as long as industrial distributors continue to accept the current level of errors and supply chain inefficiencies. Only when they understand the cost of wrong product shipments, stock outs due to late shipments, loss of customer loyalty, and the labor cost associated with fixing these errors, will distributors understand the need to “raise the supply channel bar” for their vendors and themselves.

Gases and Welding Distributors Association
Scott Ehrnschwender Meet the Author
GAWDA Technology Consultant Scott Ehrnschwender is president of Efficiency Associates Inc. in Terrace Park, Ohio. Members can reach him at 513-831-0181 and at