Removing costs in a changing industry
Our great but humble industry needs to figure out how to remove costs from the supply chain
As many readers may remember, our family has been in this industry for more than 100 years. Rich’s grandfather, R.R., came here from Germany as a kid and became a master pipefitter in West Newton, a small town in western Pennsylvania. (We understand that the name Schmitt is somehow related to blacksmith so we believe that our family’s tenure in the trades and the industry goes back even further.)
Rich’s dad, Joe, started out to be a plumber, but the WWII experience and Navy-provided education allowed him to move into other areas of our industry — manufacturing, wholesaling, consulting and pioneering this “Smart Management” column in “The Wholesaler”.
Rich just celebrated his 25th year back in the industry after a 17-year adventure in technology and aerospace. Jen just celebrated her 20th year in the industry. Next generation, Carson, just celebrated his 5th year in life and likes dinosaurs, but can already identify tees, wyes and elbows. Samantha just embraced her “Terrible Twos,” and we are pretty sure she can calculate gross margin, but refuses to tell us out of principle.
Our history and future in the industry drive some thoughts about our industry:
1. It is a vital industry: Our country enjoys the safest water and sewage infrastructure on the planet. Of course there are issues, but in very, very few other areas have government, manufacturers, wholesalers, installers and consumers conspired to create this safe, affordable and pervasive infrastructure. Few in our country do not have access to safe and affordable drinking water. Most of the notoriety we get is on the occasion that something goes wrong often forgetting the 99.9 percent (made up number) of the time that it all works.
2. It is a humble industry: Maybe humble to a fault; many in our industry do not promote what we do and what a great industry it is:
- Good careers: Many people in the industry found it by accident or birth, stayed by choice and enjoyed a career and success far beyond their wildest imagination. The industry is ripe with stories of managers and leaders who started in the warehouse or making deliveries and were given opportunities based on performance
- Great relationships: Someone wisely said to Jen, “We are people first,” above all else, partnerships, competitors, alike.
- It is Invisible: When people think about it, they can see that there would need to be a whole industry to support the infrastructure, but only think about it when there are problems. Part of getting good people and good support from our legislators will be to become more visible and communicate what is great about the industry.
3. The industry is changing: Unlike it was 10 years ago, very little is certain. It seems reasonably certain that there will be manufacturers, there will be water and sewage infrastructure companies and that there will be water consumers and waste producers. Beyond that, it is difficult to predict where we will be in 10 years. Companies such as Amazon practice “disruptive innovation” and may have sights on our industry so many of the changes will be externally driven. (More on Amazon later.)
4. We will need to attract good people to the industry: Most of the people in the industry are here by accident. While our family has a 100-plus years of engagement, most people from installers, to wholesalers, to manufacturers didn’t dream of growing up to sell toilets, pipe, faucets, boilers and air conditioners. As teenagers most outsiders thought that our industry references to male or female parts was probably the beginning of an adventure — only to find out differently. Part of the people-attracting process will be to make our industry more visible. We will need folks at all levels from manufacturing through installers. Frankly, some millennials are put off by the non-virtual, stark reality of the hard work and dirty jobs that are a part of the install/service end of the industry. As Joe (Rich’s dad) said, some of the best people he knew in the industry didn’t smell very good at the end of the day because they spent the day working hard.
5. Great people can be trained to work in our industry: If you are lucky enough to find and attract high quality talent to your company, you can teach them distribution. If you don’t find the right raw material, well, as they say, “You can’t fix stupid.” We don’t want to minimize the difficulty of learning our industry; it is complicated. There are many things to learn, but smart people can learn them faster than un-smart or smart-challenged people. (Or whatever the current politically correct term is for “dumb as a box of rocks.”)
6. Need to remove costs from the supply chain: In the changing environment, more customers have more options and there are cheaper alternatives around every corner. To compete, we need to remove cost where possible. Keep lower inventories, insist on an electronic cost update files (see below), provide products and services that allow installers to reduce their costs.
7. Amazon is still coming: Or as Rich likes to refer to them, “the death star.” With their desire for world domination, they will continue to change the industry much faster than most of us want. But that’s their mantra: disruptive innovation. And the current folks in the industry are the “disruptees” or to use a different analogy “the nail” for Amazon’s “hammer.” In one of the sessions that Rich attended at Epicor’s Insights meeting last month, the speaker was explaining the process that Amazon uses to quietly gain share in a category, then to eliminate the distributor and or prevailing manufacturer from the game. “Game” might be the wrong term — maybe “death match” would be more like it.
The speaker, a distributor, described how, to his great surprise and dismay, his own restricted distribution, private label branded item was being sold on Amazon. Surprise! Here is the reality that you can take to the bank, just like not spitting into the wind, taking the mask off the Lone Ranger and trying to be all things to all people: “You cannot out-Amazon Amazon.” They are over $100 billion in sales, smart and ruthless … in the nicest way. Remember your strengths: relationships, industry knowledge, service; this is what got you into the game.
8. Cost update file format: This is a little bit of an aside, but one of Rich’s goals, before he leaves the industry (in 30 years, according to Jen), is to develop an industry standard for the communication of pricing data by manufacturers to their wholesaler partners.
- We cannot imagine the millions of dollars that are squandered by manufacturers and wholesalers in the simple transmission of this basic information.
- Manufacturers still print, as in paper that consumed live trees, list price sheets that are distributed in mass quantities to communicate pricing that is never used except as the starting point for the computer price that is used as the starting point for the actual net price that the item is sold for. (The problem is that all this activity yields no tangible benefit to anyone in the supply chain and often reduces the profit margins for everyone along the way.) For years, we have recommended that manufacturers get out of publishing list price sheets. Do it for the profits that it allows downstream or do it for rainforests that will be preserved for your children and grandchildren. Do it for the efficiencies it will add to the supply chain. Send the distributors their prices and allow them to sell for prices that are profitable for them.
- We do not have inside knowledge, but we would bet that Home Depot, Lowes and Amazon get data files from every vendor with their pricing, and then they set the price in the markets they serve.
- Most manufacturers store their list pricing and wholesaler pricing in a computer system in order to price orders and to create invoices to the wholesalers for the product shipped. The data is there in most cases … it is just getting access to it in a timely fashion.
- For years Rich has recommended that wholesalers mandate that all price/cost changes be communicated electronically. When a salesperson says that the data is not available, tell him/her to clear off some of the other junk on their laptop, bring up Excel and create a price update file for you. At least the manufacturer will be paying for the data entry. Also, for the manufacturers who think taking a picture of your price sheet or creating a PDF, then emailing it to a wholesaler is the same as an electronic price update file — nice try, but no cigar.
- Of course, the first step is getting a legitimate price update file, but then you have to use it. Most ERPs have some basic ability to accept price/cost information directly into the product file. Sadly, many if not most wholesalers do not use the files available, whether it is lack of technical skill, not wanting to learn a new trick or just the simple joy of clerical labor, wholesalers continue to process the a lot of the data manually.
- Why can’t we establish a single standard file format for publishing and consuming this critical information? It is lunacy that the industry has not!
9. Cheap content is a myth: Over the years, we have encountered too many web stores to count. The difference between OK and great is high quality robust content. We have yet to see an offshore outfit producing usable “out of the box” content SKUs by the 10,000s in a low cost sweat shop. Their lack of industry knowledge, will force your team to spend hours of their time cleaning it up. This might change as buying groups get into the game, but history and the number of failed attempts by industry associations we’ve seen would indicate that it’s unlikely. If there were any shortcuts to great content, we would be employing them. The only proven method we have found is hard work.
So it’s probably hot where you are and there are many things to do, so be sure to update cost electronically and tell your association and buying group to start with a small content project, such as publishing a standard for those cost updates. If we can get this accomplished an industry standard for content might be possible.