The Manufacturer versus The Wholesaler (and vice versa)

By JACK PFEIF;ER

In Part I of this article, (December lst issue of CLM,1, I pointed out a number of industry conditions that are adversely affecting the relationship between the manufacturer and the wholesaler. These conditions were:

1 End-users demand specialty products which often are difficult for independent wholesalers to prop- erly handle.

2 l,arger manufacturers are in a posi- tion to make specialties and provide the functions essential in spe- cialty products marketing. Smalier manufacturers are at a disadvantage in these respects without the proper wholesaler relationships.

3 Traditional distribution channels rvill continue to be by-passed unless wholesalers make their services sufficiently valuable to forstall the practice.

4 Manufacturers margins are being squeezed so that they require all possible efiorts by th6ir wholesale representatives to obtain higher prlces.

5 Manufacturers want more partici- pation with their wholesalers in the marketing decisions affecting their products.

Both manufacturers and wholesalers ga1- q9 many things to improve their individual situations as well as their relationships with one another-in spite of all the adverse industry conditi,ons facing them.

What Manufacturers Can Do

Manufacturers have varying oppor- tunities to improve their -compeiiiil e standings and profit positions. In large measure, these opportunities vaiv chiefly by virtue of differences in size. The very large manufacturers have a whole series of things to do. They can make specialty products, they ca-n set up their own physical distriSution facilities, they can rely on their own sales torces, and they usually can raise the n-ecessary capital to do any or all of the things that have to be done.

The opportunities for smaller manutacturers are less in number and more difficult to accomplish because they have fewer resources than their larger competitors. Yet there are three opportunities that occur to me-and there are undoubtedly many others. All of these opportunities are aimed at improving the smaller producers' posi- tion in the market place and should result in substantially better wholesaler relationships :

1 Offer as good a product as possible.

2 Choose wholesalers that command confidence.

3 Give the good wholesaler something extra.

Let's review these individually.

(a) Offer a Better Product

Most lumber manufacturers are not satisfied with the'prices they receive. However, if they are to .eceive higher prices they must provide something extra in return. The starting point should be something extra in the product. I'm not enough of a lumberman to offer any ne\,v recommendations on what to do to improve product quality. I do know. though, that some producers have sufficiently superior quality to be compensatid for^it.

Most of the obvious wavs of imoroving product quality have been ."pitalized on by some producers. These are such things as eased edges, double endtrimming, waxed ends, over grade mixes, and so on. Good packaging and handling also cause the lumber to arrive at its destination in good condition with a minimum of dirtv or damaged pieces. Even though tiere may be few new product improvements still available, which I doubt, many of the old ones can be adopted by manufacturers not now using them.

I have heard it said that "The onlv way to make money in the lumber business is to cut scant and cheat on gtade." This may be true if there is a shortage of lumber. I do not believe that a shortage now exists, by any means.

If you are in the lumber business for the long term, I believe that you must offer the best product you possibly can. I have never seen a truly successful enterprise that became that way-and stayed that way-without having high

Presenting Part ll of Mr, Pfeiffer's article uhich uas begun in our December 7 issue.

Mr. Pfeiffer, now partner in the firrn of Strong, Wishart 6 Holt, Management Consultants, uan preoiouslg associated uith the firrn of McKinseE b Compang, San Francisco, rwtional management consulting firrn u:hlch has done a greal anwunt of uork for the National Lumber Manufaciurers Assn, product quality as the underpinning.

(b) Pick a Partner for a Wholesaler

A second thing that manufacturers can do is seek out wholesalers who will serve them as marketing partners. There are a large number of highly effective wholesalers. If a manufacturer has something to offer them in the way of. a.better product, or a better commission arrangement, f have no doubt that a number of these suoerior wholesalers could be assernbled into a most effective marketing organization for any manutacturer.

- How does a manufacturer find the superior wholesaler that can do an outstanding job for him ? I would start by carefully evaluating which geographical markets I could serve best. This would depend on mill location and product capability versus the product iequirements demanded by any particular market. For example, some markets are basically green, others want dry lumber. Some markets prefer pine, others fir. Redwood is accepted for many uses where it is relatively inexpensive, but irr eastern markets -it is ;sed mostlv as a specialty item.

At any rate, I would pick my markets of greatest concentration and find out which wholesalers in those markets are doing a real selling job-not just offering lumber at a price. This can be done by interviewing retailers, traveling with wholesale representatives and talking to informed members of the business community who are in contact with lumber wholesalers. I would pick someone who I would be willing to have as a full-fledged partner. That is certainly what the wholesaler is to the manufacturer.

(c) Make a Better Deal

If the manufacturer is to expect superior performance from superior 'ivholesalers, he must offer s-uperior commission arrangements in the bargain. Any wholesaler can make 5 percent-and he wants to obtain 5 percent on the greatest total amount of business he can possibly do. This means_ that time spent selling one car of $100 lumber would be better spent selling two cars of $55 lumber. To the wholesaler, the second transaction would certainly be the best one.

Actually, the additional time spent by a wholesaler to gain an extra $2.00 I , a thousand is not usually warranted - , because he gets only 10 cents more for his efiorts. From the wholesaler's ' standpoint it is better to make the sale :, at any price rather than not make the ' sale at all. i

The manufacturer cannot take that , position because there is a point below which he does not cover costs. He also loses the opportunity for an alternative sale that might cover his costs, plus return a profit.

It seems to me that a reasonable solution for reconciling the different price incentives between manufacturers and wholesalers is to have variable commission arrangements. The particular one that would work best for a given manufacturer would depend on his product line, the markets he sells in, and the opportunity to sell to alternative wholesalers. Let- me explore the possibilities in general without any attempt to classify the alternatives as to which are the more desirable.

The first different possibility I would like to ofier is the complete abandonment of the pure functional trade discount. Why not sell the lumber to the wholesaler and let him resell it at whatever price he can obtain ? It is my un- derstanding that some manufacturers and wholesalers now do this.

As a second possibility, the manufacturer could set variable functional discounts depending on the type of item to be sold. Kiln-dried clears could have a 6 percent discount while green hemlock dimension might have only a 3 percent discount.

Another approach to developing a different, more effective discount structure might be to ofier a 5 and a 2 percent discount. When the wholesaler calls the mill with his sale, and the price is not acceptable to the mill, the mill would simply refuse it on the prospect that a competitive wholesaler will put the order away at an acceptable price. The principle here would be that by ofiering a better than average discount, wholesalers would compete to sell for the mill having that arrangement. Presumably the mill would gain more in higher prices than it would give away with the higher discount.

The above possibilities for lumber manufacturers to improve their profitability through a more positive approach to the market are obviously only illustrative of what any particular manufacturer should do. I have known of manufacturers who have followed these practices very successfully. I also know of wholesalers who are following different and sometimes new practices aimed at improving their marketing skills and relations with the mills. 'fhese are covered next.

What The Wholesaler Can Do

There are three possibilities that I would like to point out for wholesalers' consideration in helping build their positions as the manufacturers' marketing departments. They are:

1 Serve the manufacturer.

2 Work with the manufacturer to improve his products and services.

3 Adopt a greater willingness to assume more marketing risk along with the manufacturer.

(a) Serve The Manufacturer

Certainly the wholesaler should be concentrating on serving his customers. But shouldn't he work as hard to serve the needs of the mills he represents ? If a mill adds a specialty line, the wholesaler should be prepared to promote it, do missionary work and stock it. The wholesaler should be iust as pliable as a manufacturer's salei force is expected to be. At the same time, the wholesaler would have the right to expect tenure and remuneration comparable to a manufacturer's captive sales grouP.

The wholesaler cannot be expected to spend promotional time without adequate compensation, or to make financial commitments without assur- ance of future employment as the manufacturer's matketing representative. If a manufacturer is willing to provide the necessary compensation and commitments, however, the wholesaler should be willing to provide the appropriate kinds of marketing services. I don't believe, for example, that it should be necessary lor a smaller lumber manufacturer to add his own sales force because wholesalers are not servicing his current and potential accounts. Yet this is happening.

I doubt that few but the largest lumber producers can build, train, supervise. and continue to motivate thiir own sales forces. This is one of the most difficult management challenges I know of when it would have to be done in a well established, highly competitive industry by management mostly familiar with production functions. When this does happen, it represents a severe indictment of the wholesalers who represented that manufacturer. They undoubtedly failed to offer the kind of service demanded and required by the producer.

(b) Improve The Manufacturers Products And Services

If the wholesaler is truly serving the manufacturer, he will no doubt have the kind of relationship that permits him to make recommendations for improving proclucts and services that will be heeded. A major function of the sales or marketing departments of most businesses is to keep the product line and level of service up to and surpassing that of the competition's.

In many respects, I believe the lumber industry has lagged behind its nonwood products competitors so badly in developing end-user tailored products and services because of the divorcement between the wholesaler and manufacturer. The mill makes lumber based on what it can best cut out of the 1og. The wholesaler tries to move this lumber at the lowest possible cost. Never mind whether the end-user would pay more for a slightly different product or for somewhat better service. No one has really been responsible for determining what end-users want and need and carrying through with the right kind of program to meet these demands. Only in the largest lumber companies do you find this.

The wholesaler is in touch with the market's demands and he should be willing and able to interpret them into specific recommendations to the manufacturer. This requires the wholesaler to put his recommendations together into a meaningful form, including estimates of volume and price potential. It requires that he know enough about his mi11's capabilities to recommend changes that are reasonable to make. There is no use in recommending that a small stud mill start to make hardwood plywood paneling. On the other hand, it could be very reasonable to recommend that a small stud mill start making fabricated components for roof trusses, for example, if a sufficiently large market existed and if projected prices were attractive.

(c) Assume More Marketing Risk

A third way for wholesalers to become a more favorably regarded marketing department for the lumber manufacturer is to assume more marketing risk. As long as a wholesaler merely takes 5 percent off the top of sales, he is assuming little marketing risk. I am convinced that a major reason for some of the current strife between lumber wholesalers and manufacturers is a result of the manufacturers feeling that he carries all the risk, except for credit. And the manufacturer has a good point.

As a broker, in effect, the office wholesaler has authority without responsibility. lle, in effect, sets selling orices without need for concern about what this does to his profits, except in a minor way. It will be an advancement for the industry when lumber wholesalers buy from the producer for resale at a price that does not necessarily bear any relation to the old 5 percent functional discount. This might be ac(Conti.nued, on Page 27)