Warehouse inventory is still the No. 1 reason customers do business with a particular electrical distributor.
What is the main function of an electrical distributor? Having been involved in the electrical-distributor industry for more than 50 years, it has always been my understanding that the main function of an electrical distributor is to provide users of electrical material with a single source of supplies. Additionally, this main source of supply should provide customers at a 90+ percent fill rate on orders, which should be delivered from the distributor's warehouse inventory at a competitive rate.
Who else might supply this inventory? An agency warehouse, factory redistribution warehouse or large distributor chain redistribution warehouse. These source are often available, but is there really any substitute for local-branch inventory? I don't think so.
Trying to improve cash flow and bottom-line profit, end users such as contractors, OEM, MRO, commercial industrial, government agencies, etc., increasingly do not want to tie up their money with unnecessary inventory. If this trend continues, electrical-supply users won't be able to wait additional days to get delivery on an order while the distributor assembles the order from other sources and/or locations; the customers won't have sufficient back-up inventory in their own warehouses to fill in until the needed material arrives from the electrical distributor.
Manufacturers have historically used distributors as the main link in the sale of their products to the end user. They have used this method because it has always been the most effective way to competitively get their products from the factory to the end user. At times, extra-large orders and special circumstances make it advantageous for all parties involved to have direct shipment from the factory to the end user without physically going through the electrical distributor warehouse. This is logical and realistic. However, most supplies need to be supplied from the distributor warehouse.
If an electrical distributor wants to be the No. 1 supplier to a customer, he must have sufficient inventory for same-day pick up or delivery from his warehouse inventory. If a distributor needs to back order too high a percentage of the order, he may turn a profitable order into a marginal profit. Back-order items cost more to process and also aggravate the customers when their delivery is late and affects their job-completion date.
If a distributor has the warehouse inventory so low that he is back ordering standard catalogue items excessively, his computer must be short cycling. Telling salespeople to get the orders and then having the material delivered in a few days after assembling it from different sources won't make you No. 1 on your customers' call list.
If a manufacturer is being fair with its distributors in a given market area by limiting the number of distributors of its product in the area and providing necessary technical/sales aids through agency or direct factory reps, then the distributor needs to fulfill its role by having sufficient inventory in the warehouse to fill customer orders at 90+ percent.
Every distributor would like to have that perfect amount of inventory dollar investment in warehouse stock so they never lose an order because of lack of inventory and so that no unnecessary funds are tied up in excessive inventory. Everyone wants that perfect balance.
My experience has been it is better to be a bit heavy on inventory. It means you can solicit new customer business to add to your existing customer base and still have enough inventory to fill the new customers' orders without dropping on your fill rate with existing customers' orders. In other words, build an order rate into your computer-order cycle that will cover both existing customer business and new anticipated business. Having a strong inventory will also encourage the sales force to seek new customers because the inventory will be available to service the new business.
It's amazing how much business is generated when your reputation in the marketplace is such that customers take it for granted that your company will always have their orders filled at 90+ percent. The industry has become very high tech, but inventory still drives the sales engine.