If you want a glimpse into the future of two-step distribution, one place to look is Building Material Distributors (BMD). Operating out of Galt, Calif., with 1,200 or so dealers across the West among a half-dozen channels, from building materials to ranching supplies, BMD models two-steppers seeking a product mix of only leading brands, working both ends of the supply chain to add value, and employing technology to reduce costs, among other initiatives. Industry experts say strategies like this will be the difference between two-steppers that survive and those that fall away as the housing sector slows down from a 10-year track meet of activity. “We're positioning ourselves to be the distributor of choice,” says BMD president Garry Tabor, referring to both the company's upstream suppliers and downstream dealers.
Like the dealers they supply, two-steppers are reacting to myriad changes in the supply chain status quo, primarily the effect of consolidation among large-volume home builders and the ramifications of that dynamic regarding direct and national accounts with manufacturers, price-driven purchasing, and just-in-time delivery. “We all see the macro issues,” says Dirk Beveridge, president and CEO of 4th Generation Systems, a distribution industry consultancy and educator based in Barrington, Ill. “But the critical issue is how [distributors] are getting deeper and solidifying themselves in this environment.”
To accomplish this, savvy distributors are making geographic and strategic acquisitions, investing in employee and customer training, and addressing manufacturer needs to help entrench their dealers' value on the step below. “Two-steppers are primarily economic transfer mechanisms, but that's changing rapidly,” says Mike Marks, principal managing partner of Indian River Consulting in Melbourne, Fla., which focuses on supply channel strategies across several industries. “Those that can increase their takeaway power for a manufacturer and create demand for a dealer will be successful.”
It's a strategy that could strengthen the entire chain rather than re-establish the once-trendy tactic of eliminating a link or two to cut costs and consolidate functions. “You can make [a link] go away, but not the work that it does,” says Marks. Similarly, he says, by refining their respective roles and responsibilities, rather than offering crossover or competitive products and services, dealers and distributors (as well as others on both ends of the channel) strengthen their value within the channel. “If two people are doing the same thing, one of them is wrong,” says Marks.
The result is a leaner and cleaner LBM supply channel in which only weak players instead of entire links are threatened with expulsion and both value and income increase for everyone. “It used to be a simple buy-sell relationship,” between each link, and primarily between two-steppers and dealers, says Carl Cullotta, vice president of the construction practices group at Frank Lynn & Associates, a channel strategies firm in Chicago. “Now it's an ‘I survive if the dealer survives' mentality.”
Serving Suppliers If two-steppers are going to take a more strategic view of their future in the supply channel, says Beveridge, they need to consider their suppliers, not just their dealer-customers. “The best distributors understand that they're only as good as what they're carrying and have to add value upstream,” he says. “Their suppliers must be engaged and want to partner with them to provide value down the chain.”
To foster such partnerships, Marks recommends distributors solidify their takeaway power, especially concerning commodity products. “Manufacturers need [distribution] partners that can take large chunks of finished inventory from them,” he says, beginning the economic transfer process. “The strongest two-steppers are those with an effective and reliable plan for bulk-breaking and aggregation because no one else [in the chain] is better suited to do it.”
Two-steppers can enhance supplier relationships by removing some after-market manufacturing from their suppliers, such as conducting sub or preassemblies (prehanging doors, for example). “Those positioning themselves to succeed have beefed up their service offerings [to manufacturers] to reinforce their economic role and value in the chain,” says Cullotta.