Amazon’s (AMZ) efficient web site and warehouses are chewing up traditional channel sales. Why is it buying the warehouse-robot manufacturer, Kiva Systems, for $775MM in cash? AMZ already has Kiva, warehouse-robot economics through buying Zappos and Diapers.com 1 (The robots cost $20K and deliver $2MM in lifetime equivalent human labor.) Will these robots be in your future for better or worse? Start exploring this question by determining the net-profitability of every item you currently stock and special order.
WHAT’S YOUR COST-PER-PICK IN THE WAREHOUSE?
Most distributors are shocked when they find out how high the cost of a line-item-pick is in their warehouse(s). The true cost typically makes very popular, high markup, great turn-earn, but small-dollar-per-pick items big losers. Once, this sub-group of items is identified, however, solutions exist for transforming them into winners without using robots (yet!).
For picking cost references: retail/catalog warehouses (without robots) have pick/line costs down to $1.50. This level is consistent with AMZ’s “fulfillment by Amazon” (FBA) charge, but AMZ unbundles extra charges for “weight” and “monthly storage”. 2 In the Waypoint Analytics universe of distribution clients, there is a wide range of picking environments (over 50 different channels) from specialty-retail goods to steel processing with a median pick cost of $11.44.
SMALL PICKS, ORDERS AND CUSTOMERS AT THE “WILL CALL” COUNTER ARE LOSERS TOO! (?)
When an electrical distribution chain (using Waypoint) discovered many, will-call-counter customers were unprofitable; a branch manager did his own benchmarking trip to Home Depot. At HD, it took him 5 minutes elapsed time to go in and out for two electrical items which he self-scanned and paid the $7.15 charge with his credit card. No human service needed. At his counter, customers wait (time is money) to be helped by employees who then pick most of the requested items. “Bill me” (with trade credit) resulted in $40 of out-of-sight, paperwork and trade credit costs per transaction regardless of size. The counter niche and service model needs rethinking.
SMALL, “SPECIAL ORDERS” ARE BIG LOSERS TOO! (?)
The supply-chain cost of a “special-ordered” item drop-shipped to an end-user and billed to the distributor is (thanks to three-steps of trade credit and paperwork costs) a magnitude of $200+ before freight and commission costs. Emergency shipments of parts and pieces to end-users go faster and much cheaper with the “Fulfillment by Amazon” (FBA) model.
AMZ will stock rarely-picked items on consignment from manufacturers for FBA fees. We can then order these “long tail” items along with popular heavily-discounted items with “one-click” and “no freight” (if we are “prime”). Manufacturers are “disintermediating” traditional distributors and dealers out of the (losing cost) odd-item buy, but popular, profitable item add-on sales are also being nibbled at.
A “reintermediation” scenario for channel partners would be to set up a master distribution center (utility) to do similar fulfillment services direct to end-users. But, the buying information and a commission would go to the distributors and/or dealers assigned to the “direct-buying”, credit-card using end-users. Channel intermediaries would then have an incentive to sign up and teach end-users how to take care of their own small, special orders. The fulfillment utility could be outsourced to a fulfillment partner like Quietlogistics.com that runs multi-tenant warehouses at UPS and FedEx hubs populated with Kiva robots. Traditional channel players can either seize this opportunity or wait for alternative e-channel players to provide better, faster service to the end-users on odd/small items and steal some best-item volume.
THE SUPER-PROFITABLE ITEMS WILL GET ATTACKED
5% of the most profitable items in a distributor’s warehouse will typically generate 500%+ of the net, peak profits. These lush profits offset all losing items and leave a financial-operating-profit remainder. Just as AMZ sells most popular books for 40%+ off, the cash-cow items will be sold for less by the alternative e-channel players. Big cross-subsidizing profits will be exploited by e-commerce, direct-seller strategies.
WHAT SHOULD DISTRIBUTORS DO?
Your future is already here in other more progressive channels. Research these to discover how: Kiva System robots; eCommerce direct companies using FBA; channel “reintermediaton”; factory coop utilities like Colinx; and QuietLogistics as a channel- utility fulfillment partner.
Create (or outsource to Waypoint) the cost-to-serve models your business needs to determine the net profit or loss on every line item (and much more!). Use line-item, net-profit information to determine the profit/loss boundaries for different solutions for different sub-sets of customers and items. One standard set of channel processes for all items and customers yields big cross-subsidies that new channels will exploit.
Because distributor costs are mirrored by channel partners, a distributor with cost-to-serve and cost-to-buy information can start new discussions with both sets of partners. Connect the dots. Get robots working for you (at least indirectly) to turn losing activity into winners and insure a brighter future.
Merrifield Consulting Group LLC