Make no mistake, the OP industry is hugely sophisticated in many ways: service levels are among the highest of any industry and electronic ordering systems as well as online trading platforms are well established and accepted. The problem lies in the product itself – office supplies, a declining commodity.
And with volume falling out of the market, it is becoming increasingly unsustainable for costs in the supply chain to remain as high as they have always been. It’s not a new subject, of course, but it’s one that has hit the headlines more often than most others.
Just looking at the ever increasing array of initiatives that enable dealers to get rid of some of their fixed costs, the issues the big boxes are having with their retail stores, and the growing pressures on the manufacturers from all angles, it’s no surprise that the newly coined phrase of ‘cooperatition’ – the combination of cooperation and competition, or even ‘coopetition’ as Luke Chapman prefers to call it in our Final Word – is frequently coming up.
At a crossroads
It certainly appears as if the industry as a whole has arrived at somewhat of a crossroads, a junction that requires more than expanding into adjacent product categories to make up for the shortfall in OP sales.
When OPI talked to a host of OP experts about the challenges the industry is facing, the recurring sentiment was that what is ultimately needed is more and better collaboration among industry players, all in an effort to take cost out of the supply chain.
Says Simon Moate, CEO of office2office (o2o): “This industry cannot sustain operating with the level of costs it currently has. The halcyon days of 35-40% gross margin in the contract market – I can’t speak for the SMEs and online operators as they have different business models – are gone and they’re never coming back. So we have to rethink and collaborate.”
The place to start with is warehousing – often a huge chunk of overall and non-variable fixed costs. As Moate adds: “The offer to end consumers is not in a lump of concrete in an industrial estate, it’s at the front end – customer acquisition and retention, and ultimately getting the product through the door and onto their desks.”
In Australia, where the OP wholesale channel is almost non-existent with virtually all resellers having their own warehouses, this kind of collaboration is exactly what Office Brands CEO Gavin Ward is working on at present.
He says: “We’ve got 158 members in Australia. 24 of them are located in the Sydney basin, each with their own warehouse. We’re currently studying the concept of abandoning these warehouses or the logistics infrastructure around each of them, and creating a centralised facility that can be shared by the members in this area.”
Whether members will take that proposition on board is another matter, he adds. “It’s an emotional thing to get rid of your warehouse and logistics and I certainly don’t think everybody would do it. But I believe there’s a body of people that would be interested and there are some substantial savings to be had in creating such a centralised logistics facility.
“A couple of our members did something similar in Western Australia last year, whereby one business folded its warehouse into the other warehouse and they share the costs and facilities. It worked very well for them and in my opinion even more significant savings could be realised in metropolitan areas like Melbourne, Sydney or Brisbane.”
Ward points out that the idea is not to create an additional warehouse operated by the dealer group, like Independent Stationers’ (IS) RDC in the US or fellow Australian dealer group Office Choice’s former, now defunct, warehouse that stocked products that were otherwise uneconomical to source for dealers. “Instead of taking cost out of the chain,” he says of the latter, “it actually added cost back in. The model we’re considering would only be open to dealers prepared to relinquish their warehousing and they – not their dealer group – would take an ownership share in a new facility.”
It’s early days yet, but Ward is convinced that conceptually the idea is a good one.
Manufacturers would benefit too, shipping larger quantities to fewer locations, in turn helping dealers with better prices for higher or broader order volumes.
On that note, manufacturers too could pool into joint warehousing facilities, shipping more efficiently and cutting down on resources. That has been done by German manufacturer Novus Dahle which has been working in collaboration with Schneider Schreibgeräte on their joint logistics function for some time.
That level of collaboration requires “a special partnership”, however, says Fellowes President John Fellowes. For a number of reasons: “A joint warehousing relationship would need a lot of thorough assessment to find the right connection where strategic variables in business characteristics, standards and aspirations aligned.
“Consolidating a strategic capability like a warehouse represents many implications to a business, including key performance metrics, service levels and working capital. Inventory space and overall cost is also very dependent on each business’s capabilities in forecasting, product characteristics like cost per cube, and other factors which may be difficult for two or more businesses to reach an optimised model.”
In markets where the wholesaling concept is very strong, meanwhile – much of Europe and the US, for example – there are other potential solutions for independent dealers and manufacturers alike. Dealer group-cum-wholesaler Quantore in the Netherlands has a highly automated warehouse and its ‘fine distribution’, as Managing Director Arnold Theuws calls it – the final mile to the end consumer on behalf of the dealer – is hugely attractive and cost-efficient to both its members and other reseller partners.
Being able to offer a more comprehensive manufacturer range is another bonus that benefits both the vendor and the reseller. Theuws explains: “Ten years ago we had between 10,000-15,000 articles. Today, we have 21,000 SKUs and we are taking a long tail of stock from our vendors.
“That way, we can supply our members with their long tail, but we can also distribute to resellers that are not members of ours and tap into completely different vertical markets.”
He adds: “In the last 2-3 years, we have seen more and more vendors closing down some of their warehouse capabilities, working from smaller facilities and using Quantore for their distribution. With order values getting lower and orders less frequent, manufacturers are not geared up for the kind of distribution that’s required today – Quantore is.
“ACCO, for example, has a European distribution centre, but they don’t want to ship lots of small orders to different resellers as that’s really inefficient for them. So at the moment we are expanding ACCO’s assortment and with that broader assortment we can serve our members as well as ACCO’s customers – all resellers, not direct – that are not our members. And it’s all done on a central billing ‘del credere’ basis.”
Quantore is also currently in the process of talking to a number of vendors about taking over their entire logistics function.
Them and us
In its combined dealer group/wholesaler function, this is perhaps an ideal scenario and one that is unlikely to be replicated in, say, the US where the relationship between the wholesalers and the dealer groups is more of a ‘them and us’. Product selection and e-content are particular areas of discontent.
Independent Stationers’ CEO Mike Gentile points to the flaws in the existing arrangements: “The real issue that we have in the independent dealer channel is that we have our e-commerce websites designed and operated by entities that develop them for their own purposes and not the best interests of the independent dealer community (IDC).
“Dealers’ websites need to be reflective of the needs of their end users. The wholesalers offer products that they want independent dealers to buy. What independents need, however, is what their end user wants to buy. It has to be end-user focused and not be dependent on the bigger rebate from a certain manufacturer. Staples has 300,000+ SKUs on their website; we’re lucky to have 50,000 and we only have 50,000 because it’s what SP Richards and United Stationers want their dealers to buy from them.”
Strong sentiments and criticism that OPI will be following up with said wholesalers. The upshot is that there appears to be an inherent distrust – not to mention a chasm in terms of priorities – between the various parties in the US supply chain. The fact that merger talks between the two main dealer groups were recently suspended (see also ‘Nobody said it would be easy’) further adds to that perception of disunity.
IDC/wholesaler joint venture
Dave Guernsey of large Virginia-based dealer Guernsey is sharp in his assessment and suggests a potential solution. “Putting together a consortium that was disciplined in terms of providing full-on support to chosen manufacturers, would likely present some benefits.
“Let me be entirely crazy and even suggest – clearly I’m losing my mind here – a joint venture that included the broad IDC and both major wholesalers. It could be a major force behind dealer competitiveness and I suspect that an open book arrangement would end up with stocking dealers more fully embracing use of the wholesaler’s infrastructure.
“It would also result in greater leverage using world-class warehousing and distribution resources which, of course, takes cost out of the supply chain.
“In a nutshell, the wholesalers benefit if the IDC is more competitive and as a result wins share. There are redundant programmes the wholesalers are currently providing to the various groups – programmes that could be rolled into one – and the best that can be said about e-content is it’s simply a mess.”
It would be wrong to conclude that dealer/wholesaler/manufacturer relationships elsewhere are all cosy. One only has to look at some of the initiatives rolled out by Spicers in the UK over the past couple of years to see there are tensions, but there are some examples that restore the faith in the notion of collaboration – whether it makes plain common sense or requires a little thinking outside the box.
On the common sense note, UK dealer group Office Friendly enjoys a close relationship with its first call wholesaler VOW. They even share the same building and the cooperation and ‘co-habiting’ is clearly paying off, as Managing Director Steve Harrop points out. “I don’t know anything about VOW’s financial side or any of their administrative aspects – we have a completely different computer system. But we share the physical location and I outsource my HR, my payroll, my company car, our insurances etc to VOW. I pay a fee for that, but I can aggregate certain things like our four or five company cars with their 30 or 50 or 100 company cars and I get their rates. It just makes sense for us and it’s working well.”
Office Friendly/VOW’s relationship may not solve the supply chain inefficiencies, but it’s perhaps a reminder that collaboration comes in many different guises.
Picture this anecdotal scenario from o2o’s Moate, for example: “If you take a pin, stick it in a location where we are as well and draw a five-mile radius around it, within that radius you have at least another five 100,000 sq ft (10,000 sq m) warehouses storing 85% of the same stuff. Each of these warehouses have an enormous amount of cost associated with them.”
While that scenario calls for a rethink, it’s far from obvious and even further from being easy.
Moate adds: “If you suggest to Office Depot to share a warehouse with a competitor, the first reaction will probably be to laugh it off. What we have to do is to find out where the value is. When you look at purchasing prices, for example, the differences are probably miniscule, so if people feel the competitive advantage sits around the price book for the core products they stock, I think those days are long gone.
“Rather that competitor A working with competitor B, perhaps a more likely scenario is for a major 3PL opportunity to be created, like a super wholesaler, managed by resellers – outsourced warehousing on a collaborative basis. Imagine a 1 million sq ft facility in the middle of the country with a hyper-efficient logistics service and satellite outlets collaboratively organised and run. It might not happen in my career, but ultimately it’s where it’s going to go.”
From pie-in-the-sky scenarios to feasible solutions, there’s plenty of food for thought in the OP industry which could make a tangible difference to the bottom line.