What's the true cost of buying from a wholesale distributor?

T HE FIRST of two position

I papers commissioned by the North American Wholesale Lumber Association, "The Cost of Distribution and Value Added ServicesReasons for.the Wholesale Distributor," emphasizes the importance in understanding the true cost of distributing forest products.

Prepared by Wayne Quasha of the Merrifield Consulting Group, the NAWLA papers aim to identify opportunities for improving the economic value and performance of wholesale-distributors, and to persuade wholesaler suppliers and customers to calculate the true cost of distributionthe value added services a lumber wholesaler-distributor provides to manufacturers and retailers.

Today's economy is characterized by severe pressures on market demand and distribution. These are tempting mills and retailers alike to believe that the wholesale function in lumber distribution can be bypassed to save money and gain additional market shares. However, the costs of distribution cannot be avoided, and the NAWLA "white papers" ask suppliers and customers to measure channel economics to determine the direct selling and direct buying boundary line. Channel bypassing can be inefficient and more costly, according to NAWLA.

For example, manufacturers with many small order accounts for which selling, service, and transactional costs exceed incremental contribution may be losing some "market liquidity" and long-term production stability. Retailers or industrial users sometimes get a better price, but lose on total procurement cost and/ or turn/earn economics. The swing between excess-stock and stock-out problems can resutlt in inferior fillrates for their customers. More importantly, channel by-passing frequently spawns intermittent selling and intermittent buying, neither contributing to a company's growth.

The report shows that lumber wholesale-distributors provide an important accounts receivable financing role involving risks that mills may be reluctant to assume. Wholesalers generally have more knowledge of their customers than mills do, and the wholesaler's credit manager performs one set of activities for the retailer on behalf of the potential mill suppliers. Direct selling mills must do the same set of

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October 1987 activities for a fractional piece of the retailer's business.

In addition, many lumber whglesaler-distributors invest in marketplace inventory and serve as a shock absorber between mill production and retailer demand. The wholesaler-distributor is the low-cost warehouser-of-goods. The movement of

Story at a Glance

Losses often offset gains for retai lers bypassing wholesaler distribution in buying chain direct selling and buying can be inefficient and costly less market liquidity, fewer financial and inventory services cited in NAWLA "white paper."

NAWLA says, that the expense of handling small claims is larger for them and the procedure is much slower than at the lumber wholesaler level. Retailers usually receive faster settlements and personal service to their claims from wholesale-distributors.

North American Wholesale Lumber Association's first position paper is being distributed to lumber wholesalers and their suppliers. Shortly, a similar, but different, position paper will be introduced to retailer customers,

L-P To Spln Off Fibreboard

Louisiana-Pacific Corp. and its Fibreboard Corp. subsidiary are developing plans to spin off Fibreboard from L-P ownership early in 1988.

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Lumber large quantities to the wholesaler usually results in the mill receiving quicker payment, thus permitting better cash flow. Likewise. the slightly higher prices paid to a "bestservice" wholesaler by retailers are offset by the turns and fill-rates available from quick delivery.

Many wholesalers provide a buying price and a selling price in the cash market, making a market in the forest products they purchase. Neither the mills nor retailers provide this function. During the frequent times of excessive mill inventory of certain items, the lumber wholesaler. not the retailer, is in an ideal position to help the mill liquidate the inventory using "win/win/win economics. " The mill wins by virtue of its quick inventory turn and bringing remaining inventory into balance. The wholesaler wins by handling the business and by buying inventory at a cheaper price which can be a "special" to his customers, resulting in a win for the retailer, according to NAWLA.

Additionally, retailers often file claims for shortages and damages on their shipments. Most of these claims are handled and absorbed by the wholesaler-distributor and never need to be dealt with by the mill. Producers should recognize,

Under the plan, all of Fibreboard's outstanding shares will be distributed to Louisiana-Pacific stockholders on a pro rata basis. Further details of the spin-off will be announced later. Fibreboard Corp. has been a wholly-owned subsidiary since L-P acquired it in 1978.

The potential liability of "asbestos lawsuits is the underlying reason" for the move, according to a spokesman.

Harry A. Merlo, Louisiana-Pacific's chairman and president, said that the spin-offwill allow L-P to focus its energies on its core forest products business.

"Although we've both benefitted from our association over the past nine years, we're at the stage now where we believe separating the two companies is in the best long-term interests of our stockholders," Merlo said.

Fibreboard Corp. - headquartered in Concord, Californiamanufactures linerboard, corrugated containers, insulation products, hardwood and softwood plywood and lumber. lts 16 plants are located in California, Oregon, Colorado, Louisiana, Texas, Washington and Arizona. Its Trimont Land Co. subsidiary owns Northstar-at-Tahoe, a ski resort and year-round vacation and conference center in California. Fibreboard had sales in 1986 of $231.8 million. lt was incorporated in 1917.

"We're looking forward to the (Please turn to page 75)

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