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Wholesalers typically consider their roles in the trolled to keep the related benefits within their
supply chain as intermediaries. They think they bottom lines (see figure 1 on page 2).
have little influence over purchasing conditions as Despite their size, wholesalers sometimes
prices are either set by the strength of a manufac- endure less favorable purchasing conditions than
turers brand, or by the market (if the product is one-time-only and smaller customers. The best
a commodity). Because wholesalers typically use a prices are typically offered in the project busi-
cost-plus approach to setting prices, they focus ness where large customers request competitive
primarily on improving their cost-to-serve perfor- bidding directly from suppliers. This lack of
mance and their bottom lines. sourcing competitiveness may represent a major
The wholesale industry is typically character- threat for the wholesaler business model
ized by an extremely high share of cost of goods encouraging larger customers to bypass the whole-
soldaround 70 percentand profitability in a saler and go directly to the manufacturer to
range from 3 to 5 percent. Profits, therefore, are demand better prices.
sensitive to variations in purchasing conditions. For wholesalers, the answer to this increas-
All things being equal, a 1 percent improvement ingly challenging situation is to adopt a retailer
in purchase price can lead to a 14 percent improve- approach to buying leveraging their commer-
ment in earnings.1 In short, purchasing has a huge cial value to manufacturers while also strengthen-
impact on wholesalers overall profits, provided ing their price negotiation skills to increase
that pricing models are adjusted and strictly con- purchasing power and profits.
1
Throughout this paper, earnings refers to earnings before interest and taxes (EBIT).
Figure 2
Categories are prioritized to balance potential benefits with ease of implementation
Illustrative
Evaluate potential impact High Evaluate ease of implementation
Direct Priority 2 Priority 1 Technical complexity
Calculate potential margin Determine wholesalers capabilities
increase Evaluate supplier base experience
Indirect Market pull
Potential impact
Figure 3
Copper price versus product price
Price 1
LME copper index
130 1 Typical two-month
Product price
delay between decline
120 in LME* copper index
and product price
110
2 Immediate price
increase after
100
LME copper index
3 increase
90
3 In 18 months, LME
80 index decreased by
27% as product price
70 increased by 10%
2
60
50
0
2008 2008 2008 2008 2008 2008 2009 2009 2009 2009 *London Metal Exchange
Jan. Mar. May Jul. Sep. Nov. Jan. Mar. May Jul. Source: A.T. Kearney analysis
Evaluate the wholesaler-supplier relationship. dations from their sales force, technical support,
The relationship between wholesalers and suppli- and spare parts management.
ers can be assessed on a category-by-category basis How much the supplier contributes to the
to determine (1) how much the wholesaler sup- wholesalers performance. Suppliers contribution
ports its suppliers and (2) how much the supplier to wholesalers performance requires an assess-
contributes to the wholesalers performance. ment that combines insights from internal and
How much the wholesaler supports the external data sources. The assessment is performed
supplier. The share of sales a wholesaler gives at category levels evaluating sales performance
a specific supplier contributes to the suppliers in the market and with the wholesaler in terms of
ability to increase market share. Wholesalers can market share and growth. It should also establish
support and differentiate their suppliers in a the true profitability of each supplier for the
number of ways. For example, they can make wholesaler, comparing them to other brand suppli-
product available at different levels, such as ers and private labels in the category.2 The return
immediate in-store delivery or one-to-two day on marketing investment (sales uplift related to
availability by delivering from distribution cen- specific commercial investment) should also be
ters. Wholesalers can also provide different types included in comparing supplier performance.
of sales and after-sales support, such as share of Determine negotiation scenario for each
catalogs and position in showrooms, participation supplier. Armed with the fact-based assessment,
in promotions and loyalty strategies, recommen- wholesalers can evaluate a suppliers performance
1
Based on gross margin and year-end rebates and additional costs such as inventory (capital cost) and logistics.
Figure 5
Scenarios wholesalers can apply in category negotiations
Over-seller
Positive scenario:
more items, more promotions, Supplier 1
more inventory space
Suppliers position
Supplier 1
(status quo
scenario)
Negative scenario:
less items, less promotions,
less inventory space
Supplier 1
Under-seller
Note: Over-seller has more share at the wholesaler than in the market; under-seller has less share at the wholesaler than in the market
Source: A.T. Kearney analysis
Authors
Laurent Dumarest is a partner in the Brussels office and can be reached at laurent.dumarest@atkearney.com.
Joakim Karlsson is a partner in the Stockholm office and can be reached at joakim.karlsson@atkearney.com.
Benoit Nachtergaele is a principal in the Brussels office and can be reached at benoit.nachtergaele@atkearney.com.
Guillaume Cretenot is a consultant in the Brussels office and can be reached at guillaume.cretenot@atkearney.com.
Copyright 2009, A.T. Kearney, Inc. All rights reserved. No part of this work may be reproduced in any form
without written permission from the copyright holder. A.T. Kearney is a registered mark of A.T. Kearney, Inc.
A.T. Kearney, Inc. is an equal opportunity employer.
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