How To: Go Lean in Distribution
by Christina Lee on October 9th, 2008
As some sort of business nutritionist, Dr. Perry Daneshgari has prescribed to over 300 companies a diet of lean operations – cutting out wasteful activities that drive up internal costs. More than ten years after he founded his company, MCA Inc. , distributors are finally catching on and demanding to know how they can also cut that “fat.”
In a phone interview, he shared wih goWholesale a few of his lessons:
Managing inventory is becoming more crucial than having it. Distributors recognize that bottom lines are disappearing, because they’re carrying more inventory. To reduce cost of inventory, you need to make sure you turn over your inventory faster. So the lean approach is, try to improve inventory time to reduce costs.
Bottom line, operation costs need the most improvement. Most distributions pretty much have a fixed growth margin, as that is determined by the market. But they can control their operation costs, by improving inventory, improving shipping.
A typical problem we see is in the warehouse layout or inventory management. Typical distributors would lay out their warehouse not necessarily based on what customers order. Even if they have any of what they call ABC items – fast-moving – they organize based on line item. Customers don’t buy based on line items; they buy based on their order.
At a grocery store, you just don’t buy a jar of jam or a loaf of bread. You usually have an order in mind, whether you are going to shop for food, or if you are going to shop for a party.
If a warehouse is optimized for receiving, then naturally the picking suffers. If there’s a lot of time you’re spending on picking the items, then you’re spending a smaller amount on inventory movement.
The most important concept that lean is really based on, is that the customer’s input has to drive your operations. A company’s entire operations has to be designed, greased, and pointed toward only what the customer wants.
You should not worry as much about your competitors, because that is really secondary to what the customer wants. Until the customer buys stuff from you, you have nothing.
Really, you have to go from cost-based pricing to price-based costing. You have to see what the customer is willing to pay, and then think about how much profit you’re willing to make. …
Historically, distributors would take their costs, which include overhead costs and costs of material, and then they add a profit or gross margin to it. In order to win over customers, they reduce the price, but they still work with the gross margin. For example, if you buy an item for $100 and you’re at $50 in overhead costs, you have sell that item for at least $160 to make money, right? That’s cost-based pricing.
Price-based costing says, the market is not going to pay $160, the market is going to pay $155 – but I still want to make 10 percent. The material cost is $100, but the area I have to work on is my own cost: inventory, people, how I deal with my money.
For more information, wholesale-distributors can turn to the newly released “Lean Operations of Wholesale Distribution ,” which Daneshgari co-wrote with MCA’s Director of Research Michelle Wilson for the National Association of Wholesaler-Distributors.