Triggered by a discussion with a friend yesterday on the dynamics of wholesaling and how managing gross margin is key to its profitability I made a graph to further explain the fundamentals of wholesaling I was referring to. Today I took some time to polish the graph for your enjoyment (see above).

Per item much can be said and even more how these items work out in combination and in various circumstances and markets.

Some basic views:

  • Even though they are called suppliers the wholesaler has to see these parties as clients of their function as much as the parties called customers buying the products. Two sides of the same coin.
  • As so often the true added value is not easy to explain to either group of clients. e.g. Prices (and rebates) are visible but grouping deliveries of various supplier sources in one delivery is not. The wholesaler needs to understand though as they are key to strategically managing its value chain position. By understanding these aspects the wholesaler can build up what i have called “leashes”.
  • If I have to pinpoint the most important performance drivers (with a gun pointed to my head) it is managing the working capital employed. To do so basic processes in the company and a specific mindset towards clients has to be top notch anyway. “Rate of turnover of stock” and “outstanding debtors in days” are key performance indicators pur sang.
  • An other key performance indicator is the service level. If the customer starts to get reliant on speedy and complete delivery which is delivered again and again he will start adapting its procurement (short cycle), warehousing (dropping it!) and becomes much more reliant on its wholesaler.
  • Even though the physical/logistical role is a key part of the added value of a wholesaler in reality delivery does not per se follows the default route from supplier to Wholesalers Warehouses and then to the customer.
  • Size really matters as the economy of a wholesaler is based on it’s ability to create a sizable amount of parties on both sides. It is type of network effect working in favor of the middleman in a spoke and hub typology. e.g the one extreme is when all 1.000 suppliers reaching say 10.000 installers directly requires 10.000.000 connections, channeled via one wholesaler this could be reduced to 11.000 relations. It’s ability to invoke the network effect is proportional to its ability to economically serve both customers and suppliers while creating leashes – exit barriers – to both at the same time.
  • Do not underestimate how crucial a comprehensive management and internal fee model to balance the sales organisation’s interests with the central department’s interests is. Local situations and customer / project specific circumstances should be catered for while safeguarding the overall companies interest.

Creating a coherent strategy for your wholesale company should at least cover all items listed in the graph. For simplicity I left out some more which are not self explaining.