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Low Margin Distributors

I’m in the middle of a 7-week training assignment for a private equity acquisition. One PE owned distributor purchased a smaller PE distributor. Surprisingly, they retained the executive Management of the smaller company and assigned them global responsibility for the new combined company. Bringing the parent company online with Eclipse, the ERP system from the smaller company is why Zerion was hired. Here are a few observations about what it takes to operate an extremely low margin segment of distribution.

It’s all about expense control and small employee head count at branch locations. It’s also all about well-defined SOPS and accountability for following them. Business's largest expense is payroll and G&A. Next is rent, utilities, inventory expense. This company operates out of 2500’ leased warehouse space in major market suburban office complexes most likely averaging about $10-$15 PSF. It's important to keep rent expense manageable.

Not much we can do about utilities, but supply chain and inventory dollar management is critical. This requires a strong operations department. Too many distributors simply promote long term salespeople into joint or individual operational roles that they aren’t qualified to handle. Today’s distributors must understand carrying costs in order to establish reasonable economic order quantities. This provides accurate GMROI and better manages inventory investment.

With smaller employee head counts, a better opportunity to share the upside with branch managers and salesman exists. As profit exceeds monthly expenses, it falls to the bottom line quickly. Sharing a percentage with key personnel will benefit all. This company provides incentive based payroll which is also necessary to keeping payroll expenses in line with sales.

Finally, making employees accountable makes the difference. It seems too many family owned distributors that once enjoyed fantastic margins haven't caught up with the expense climate. As margin has eroded, expenses have risen. The biggest difference I see is that Corporations and PE distributors create a climate of accountability where family owned companies create a climate of love. The key to success is to balance the two. Not an easy task but very doable with some direction from the top.

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