Tough economic times of the past few years have caused manufacturers to adopt lean manufacturing techniques and just-in-time (JIT) skills to reduce costs, especially their finished goods inventories.

Declining sales have forced retailers to cut costs and limit their financial exposure by dramatically reducing early-buy orders and in-season inventories.

In the middle of this inventory cost-cutting is the distributor, whose role has taken on a new importance for both manufacturers and dealers.

A typical two-step distributor acts as a local extension of the manufacturers it represents, warehousing products on a local or regional basis and serving its dealer customers with timely shipping, customer service and technical and business support. A few distributors may be simply order takers, but the majority have grown and thrived throughout the downturn by increasing their inventory and offering added services to their dealers.

Bob Robinson, Sales Manager for Even Temp Distributing.

“With dealers now understanding what it costs them to carry inventory, distributors are needed more today than ever,” says Bob Robinson, Sales manager for Even Temp Distributing, a Waco, Nebraska, based two-stepper covering the Midwest with hearth products and, recently, outdoor furniture.

“We’re the warehouse for our dealers and our manufacturers,” says Robinson, who points out that a distributor can “bundle” various products into shipments to its dealers, making it easier for the dealer to “buy into” new product categories and to qualify for pricing breaks. By offering quick order-turnaround and often same day shipping, the dealer can carry minimal inventory and still not lose sales.

“A good two-step distributor can offer one source of products for its dealers rather than the dealer having to use multiple sources,” adds Steve Hall, president of Fireside Distributors in Raleigh, North Carolina. Fireside covers all states east of the Mississippi; it sells hearth appliances, grills and outdoor living products, not including furniture.

“We’ve had to make a stronger commitment to carrying inventory,” he says, “but coupled with added customer service, it has given us added opportunities.” Hall points out that Fireside’s 2013 sales are up by double digits, which is more than he projected.

“Our inventory also is up about five percent this year,” he says, “but we’ve had to do that to sustain our growth. Our manufacturers want a reliable partner with good communications and from whom they will get paid.”

He adds that custom orders from dealers have grown substantially. “With us handling these orders on a reliable shipping basis,” he says, “dealers can make the sales and pocket the cash with no inventory.”

“A distributor has three basic things to offer,” explains Mike Hopsicker, owner of Ray Murray, a Lee, Massachusetts, distributor of hearth products, grills and propane equipment and products, serving New England dealers. “We’re the local sales and marketing arm for the manufacturer,” he says. “We offer logistics to the dealer, buying in bulk to become the local dealers’ warehouse, and we offer product technical support.

“Early in the season we bring in 75 percent of what we’ll need. We try to minimize ‘stock outs,’ but we can’t work without 90 to 120 days of inventory. A bigger issue is trying to guess on new products. We’re the warehouse for our dealers, but they have no money tied up. All they have to worry about is growing their sales.”

“Dealers lean on us for inventory,” says Andy Atwood, general manager of L.E. Klein, a Carrollton, Texas, distributor of hearth products and grills in the South Central region. “Freight is such a big issue. We have to order in truckloads, something most dealers cannot do. But we want to be as lean as possible, so we now have to be a lot more selective with our inventory, especially fireplaces because they are always changing, making some models obsolete.”

“One call does it all when dealing with distributors,” says Kirk Newby, president of AES/Associated Energy Systems, a Kent, Washington, distributor of hearth products, grills and outdoor fire features selling throughout the West.

“It can simplify product selection, orders, order processing and delivery for the dealer. But we’re having to work harder for the growth we’ve had every year. Plus we’re seeing competitive pressures with an excess of manufacturing. Our inventory has increased the last two years partially because of more SKUs being added by our manufacturers.”

Steve Hall, Owner of Fireside Distributors.

Although most hearth appliances, grills and outdoor products dealers use two-step distributors, some also buy dealer-direct from manufacturers. Two-step distributors are quick to point out that, while dealer-direct purchasing may work for some large dealers and some product lines, it may be costing dealers money.

“There are places for both distributors and dealer-direct business,” says Fireside Distributors’ Steve Hall. “When a dealer looks at the numbers, dealer-direct business may not make sense. It requires larger purchases, increased freight, longer lead times and can result in carry-over products. Buying through a distributor gives the dealer more inventory turns for more available cash.

“Dealers are starting to understand that they do not want to have inventory,” he says, “and distributors allow them to hold their inventory to a minimum.” Hall points out that even dealers buying dealer-direct may at times be out of stock, allowing distributors to offer timely fill-ins.

“And on a net-cost basis, we can be more than price competitive with dealer-direct,” he says.

“If you’re buying dealer-direct, it takes a much larger purchase quantity to get similar net prices to what we can offer,” says L.E. Klein’s Andy Atwood. “If a dealer is sitting on inventory, that costs him money. We offer freight and smaller quantity purchases. Dealers can consolidate orders for various products, and we offer faster order turnaround.

“We have more field and in-house sales people to help, and our customer service is one-on-one rather than corporate. Unless a dealer is moving huge volumes of product, dealer-direct doesn’t make economic sense.”

Atwood also points out that L.E. Klein, like many distributors, holds periodic trade shows in local areas, offering new products and product education to its dealers.

“Our core business is the ‘mom and pop’ dealer, not the big monster dealers who go direct,” says Even Temp’s Bob Robinson. “Dealers just don’t realize how much money they tie up by going dealer-direct.”

Not all dealers are convinced, however. Tim Nissen, owner of Home Fire Stove in Salem, Oregon, does mostly dealer-direct purchases.

“When stuff doesn’t work, I can talk direct to the factory,” he says. “Both my gross margins and my net margins are better, but I buy in larger quantities.” He admits, however, that products purchased through distributors are not held on his shelves and have delivery times that are “more like JIT.” By purchasing his venting through a distributor, he got next day delivery and saved $30,000 last year.

Gary Spinuzzi, owner of Big Horn Stove & Spas in Pueblo, Colorado, also combines dealer-direct business with two-step distributor purchases.

“I buy direct in truckload quantities,” he says. “I only save about five percent, but I have the expense of that inventory. Plus, delivery is more cumbersome because of the shipping damage I often experience with dealer-direct purchases. Doing business through a distributor is pretty flawless now. The days of taking 40 stoves at a crack are over in this economy.”

“I used to go dealer-direct, but I’ve now found distributors work better for me,” says David Coppinger, president of Taproot Hearth & Patio in Williamsburg, Virginia. “As the breadth of today’s product lines expands, it’s difficult to keep inventory. I’m really getting picky about inventory, and it was painful maybe throwing out thousands of dollars of obsolete stuff.”

Coppinger adds that, when he was purchasing dealer-direct, the manufacturers wanted “hefty” early-buy orders in order for him to get good gross margins.

“When I went to two-step distribution, my gross margins were five percent less, but my net margins were better. That small loss of gross margins was more than offset by my greater inventory turns and quicker delivery.”

While traditional two-step distributors service dealers, another type of distributor concentrates on builders.

Trent Scholler, President of MS Distributors.

Installing distributors, sometimes called one-steppers, offer primarily hearth appliances, such as fireplaces and venting, to builders. Their service includes complete turnkey installation as part of the package.

“Installing distributors sell to residential and commercial builders on an installed basis because those builders want the product installed. It’s easier for them that way,” explains Trent Scholler, president of MS Distributors in Toledo, Ohio, a traditional two-step distributor as well as an installing distributor.

“More and more installing distribution is being controlled by the large, national production builders,” he says. “So pricing is literally dictated to us, and they beat us up hard on pricing.”

Scholler points out that during the new construction downturn, the builder side of his business had a “ridiculous” amount of bad debt.

“Builders are not the best pay in the world, particularly smaller regional builders,” he says. “When the money dries up, the little fireplace guy is way down on the totem pole.”

Hearth & Home Technologies does a huge amount of hearth business through installing distributors, in addition to its two-step distributor and dealer business. According to Roger Oxford, senior vice president of Strategic Accounts, “Our installing distributors are mostly in the top 100 metro areas and focus on builder-direct sales. They do this by having outside builder salespeople, builder selection centers, terms for builders and installation crews that service new construction.

“In the smaller markets, dealers are the primary resource for servicing builders. The overall new construction market has changed dramatically in the last two years from the previous five years. Nationally, new construction permits are back to growing at a 20 percent pace per year and are challenging our distributors to keep up with this growth.

“With the outlook very positive for the new construction market in 2014, and at least the next two or three years beyond that, our installing distributors are returning to hiring and being in a growth mode.”  

Chuck Nuno, President of West End Brick ‘N’ Fire.

“During the bad economy, one-steppers undercut us,” says Chuck Nuno, president of West End Brick ‘N’ Fire, an Ontario, California-based two-step distributor selling hearth products and grills in Southern California. “But with building coming back, some of that is going away. This now allows dealers to get back to selling the smaller builders.”

“Retailers now expect us to have it in stock, so we have to have inventory,” says MS Distributors Trent Scholler. “If we want to stay in business, when a dealer calls, we better have it in the barn. When sales were jamming, there were more dealer-direct purchases. Now both the dealer and the manufacturer need distributors.”

“It’s our obligation and in our best interest to make it easier for our dealers to enjoy profitable business. In today’s economy, I guess you could say the two-step distributors over the last few years have become the unsung heroes of our business,” says Even Temp’s Bob Robinson.