Critical business contacts for building service contractors include bankers, an attorney and a good distributor. Finding good supply distribution may be the most crucial of those three.
Unfortunately, many BSCs see their suppliers as adversaries. The problem, in part, is a huge communications gap. In many markets, distributors have not done a very good job of adapting their companies to the ways contractors operate. Distributors also have been fairly ineffective in educating BSCs about the costs and value of good distribution.
Contractors, on the other hand, often see the distributor’s role simply as that of a box mover. They rate everything on price of the product purchased and are not interested in the value-added services distributors might be able to provide.
The irony here is that contractors understand and sell the value of outsourcing the cleaning function. What they often fail to understand is that distribution is a business every bit as complex as cleaning.
Your price is not your cost
To bridge the communication gap, BSCs need to realize the price of an item is not the cost. Let me give you an example.
Let’s say you are doing business with a distributor who sells you everything at a 10 percent discount. He delivers the products to your work sites and takes them to the custodial closets on each floor at every building you clean.
His company is willing to separate your invoices, sending some to you and some to your customer. He’s gone 30, 60, sometimes even 90 days without payment to help you grow your business. He’s always on the lookout for new products and processes that can help you. In fact, he’s even helped introduce you to a couple of new clients. He routinely trains your employees using effective presentations with good materials. He seldom makes a mistake or back-orders products, and when he does, he quickly and cheerfully corrects the mistake.
Now let’s imagine a competing distributor comes to you and offers you a 30 percent discount if you give him all of your business. There is a catch — he doesn’t deliver to the individual sites. He will, however, deliver to your main office location.
You decide to take the cheaper price. You build or rent a warehouse area in which to store the two months of product you must purchase at one time. You also must pay to heat and light the warehouse. You hire a delivery staff and trucks to deliver your low-price products. You must provide product training yourself. Under the new arrangement, when orders are shipped incorrectly you have large quantities to deal with rather than small. Big problems replace small ones.
Looking at price alone, you thought you were saving 30 percent. What you didn’t factor into the equation were the “carrying costs.”
Cost is only one of several factors related to procuring products. In addition to raw cost, BSCs need to add costs of acquisition and possession. Combined, those expenses are called “carrying costs,” and they easily can add 15 percent to 50 percent to the price of the goods.
Acquisition costs include paperwork, shopping time, expediting, mistakes and internal handling. Every time you issue a purchase order, it costs you. When you allow an employee time to shop for the lowest price, you’re paying for that time. The time it takes for a product to arrive costs you. If you order too much or too little, there is a cost associated with that mistake. And if you have to handle products internally, it can be expensive.
Possession costs include interest on money you may have to borrow to buy the product, as well as storage and control costs, inventory taxes, shrinkage, obsolescence and insurance.
Three buying objectives
There are three main objectives that can help BSCs buy smart. First, minimize procurement costs. Don’t become so fixated on the price of an item that you can’t see you have to build a huge bureaucracy to maintain low price. Look hard at what your organization will have to do to get a product at a certain price. Most BSCs only can talk about the cost of the goods. Ask about internal handling costs and their knowledge gets hazy.
Second, minimize your average investment in inventory. Many custodians are deathly afraid of running out of product. I frequently see two to three month’s worth of product stuffed into custodial closets, as well as the trunks of supervisors’ vehicles. How much do you currently have on hand and how much do you really need? Try to reduce what you carry, handle and store.
Finally, while you’re working to minimize inventory, maximize on-hand availability. Determine what it will take to have what you need without running out. The goal is to set up your system so you never run out of supplies or materials.
Let’s do lunch
Now locate and sit down with a distribution expert. Talk about your costs, your three objectives and ask him or her for ideas on how to improve what you are doing. This conversation will be very similar to one you would have with your clients if they came to you and asked, “How can we clean our building better?” instead of just trying to beat you up on price all the time.
Talk with as many distributors as it takes until you get the answers that will work for your company. A quality distributor can provide tremendous value-added services such as just-in-time delivery, inventory management, terms, training (not just product demonstrations) and mistake-free handling to help you to lower your total procurement costs.
Not every distributor does business this way. With today’s “price is everything” mentality, good distributors may be tough to find, but they do exist and they’re worth the effort. BSCs who can partner with that kind of distributor will, ultimately, get more for their money.
John Walker is a regular Contracting Profits columnist. He is a veteran building service contractor; owner of ManageMen consulting services, Salt Lake City; and founder of Janitor University, a hands-on cleaning management training program.
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