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  Aug. 3, 2006 - SupplyChainDigest Newsletter
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First Thoughts by Dan Gilmore, Editor

Should You Give Your VARs a Break?

I’ve been catching up this summer on a few topics I’ve been meaning to write about for awhile but haven’t managed to get to. Here’s one: are you treating your local Value-Added Reseller (VAR) fairly?

In the past year, I’ve had some conversations with a few VARs in the auto ID area (bar code printers, data collection, RF, etc.), and also material handling equipment.

Times are really tough for many of these companies that serve as the link/channel between the manufacturers (Zebra, Intermec, Symbol, LXE, Alien, etc.) and the “end users.” A combination of heavy competition, wide availability of product and information over the Internet, increasing commoditization, etc., have led to profit margins on supply chain related hardware to shrink over the years, to the point now where many are making 10% or less on hardware sales.

So, you sell $1 million in hardware to make just $100,000 in gross margin, before selling, overhead and all the other expenses. Not much profit left, if any.

The range is actually wider than that, depending on how much “value” is being added, and the volume of business they are driving (and hence the OEM discount). For example, Warehouse Management or Shop Floor software vendors can usually get 15-20% profit when bundling the hardware into a turnkey “total solution.”

At the other end of the spectrum are low value-added distributors, which frankly compete largely on price. The margins/profits here settle down to a level that keeps some in business. If you know you want a specific bar code printer or scanner, can hook it up yourself, and are just looking for the best price and delivery – this is where you go.

It’s the group between these two – the true “value-added” resellers - that are getting killed.

How? They are brought in to “engineer” the solution – identifying available solutions, the various piece-parts, the pros and cons of the alternatives, tricks to making them work, etc. But then the customer sucks the knowledge out of one or more VAR’s, figures out what they need, then puts the thing out to bid or goes with lowest price, or at the very least drives the price down from the VAR to at or just above the distributor price, though their cost of sales is much higher.

A couple of anecdotes: I spoke with one VAR with revenues up 40% over the past few years, but whose profit is half of what it was due to the hardware margin erosion, and frankly is in danger of not being able to keep it going. Another gave a prospect looking for a shop floor bar code system a solution that was different from the specs and that would save them a bundle in label costs over time; the company then took the bright idea back out to the other vendors and went with one that offered the lowest price.

A large specialty retailer appeared to be partnering with a engineering-oriented material handling company on a conveyor system, improved the initial design based on the company’s recommendations, then took the improve layout out to bid to every distributor around.

What’s interesting is that it’s the VARs and distributors are the ones feeling the pinch of the retail price pressure. “OEM” gross margins at the manufacturer level have stayed nicely at 45-50% over the years. The increased use of “channels” by most has smartly enabled them to stay somewhat out of the really ugly side of the price competition.

I understand we all do this both professionally and personally. Who doesn’t at least sometimes (if not always) go to the retailer with the most knowledgeable staff when buying appliances or whatever, only to then find what you now want at the lowest priced outlet? Some industries/manufacturers have been able to manage this through maintaining channel discipline, but that’s long gone in the supply chain industry.

Some of this is the fault of the VAR’s themselves. They often are engineers or techies who lack selling skills. Many allowed themselves to be too dependent on hardware revenues, and/or are too timid to charge for their expertise. The true value-added resellers should frankly walk away from more business, and/or give a lot less away before the sale is made.

But many tell me most companies demand the expertise but just refuse to pay for it. If there is always some VAR willing to give it away, I guess they’ll keep getting it for free. I also realize that sometimes the end user may also have to go through corporate purchasing processes that drive to this bid-oriented buying.

But my thoughts are these: if someone is delivering valuable advice, they should get some preference in the award of the business. A high percentage of companies that buy “equipment only” later find they have trouble making it work themselves.  There are times when it is the right thing to do is to pay something for someone’s presale “design” or consulting work.

And you have to balance at least a little what appears to be the right thing for the company, at one level, with the right way of dealing with vendors. Agree or not? Of course, I wish I could say this is how we always operate here at SCDigest ourselves, but I’d by making that up.

Do you have any sympathy for the plight of the VAR? Or are their troubles largely of their own making? Should companies “pay” in some way more for getting the expertise, or is grabbing all you can for free and buying the lowball price just the way it works?

Let us know your thoughts.

Dan Gilmore


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See reader Feedback below!


“People don’t come to work to be No. 1 or No. 2 or to get a 20% net return on assets. They want a sense of purpose. They come to work to get meaning from their lives.”


Christopher Bartlett

Harvard University


Aug. 3, 2006

Building Products Giant Johns Manville Achieves Major Improvements in Transportation with Load Control Center

Centralization, new TMS, and cross-company collaboration drive savings and service benefits

Aug. 3, 2006

Annual GMA Unsaleables Benchmark Report Shows Some Progress for Manufacturers, But Distributor Costs are Flat

Case Studies identify Supply Chain practices that reduce unsaleables for manufacturers, distributors and retailers; Heinz and H-E-B cited for excellence


Aug. 3, 2006

Chinese Manufacturers Rapidly Enhance Quality and Sophistication, Encroaching even More on Western Production

Wall Street Journal story says gains in automotive parts sign of broader upstream trend


July 27, 2006
What are the Limits to "Leanness?"

Some companies are pushing the envelop too far, some experts believe

July 27, 2006
When Changing Businesses Processes, How Much Time Should You Expend Documenting the Current Ones?

The current model may be a needed link to get employees to accept and understand the change, one consultant suggests


Q. Relative to the nearby piece on Unsaleables, what is a "swell allowance"?

A. Click to find the answer below


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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

Catching up on a variety of letters and topics this week, although we're still behind.  We will have a new ability to publish more letters shortly. We had a few letters, one of which we include below, on our piece on Will You Become Your Own “4PL"?  featuring an interview with AMR's Greg Aimi, asking how is this view differnet than the way a traditional transportation department is organized? Aimi provides some clarity below. We also have a nice response from someone who works for a major 4PL.

But our feedback of the week is from Bradley Morris, VP of Global Logistics and Fulfillment from Nu Skin Corp., who says our summaries are better than the reports themselves! Yes, we like that kind of feedback!

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week – on the State of Logistics Report 2006

Thanks for the succinct summary of the report. It is more useful to me than the actual report. I always enjoy your columns because of their straightforward yet insightful views and analysis, and I find that they are generally very accurate.

Bradley R Morris

Nu Skin International

VP Global Logistics & Fulfillment

On being your own 4PL:

So how does a 4PL differ from the ol' Traffic Department?  

Lauren Kotas Brand, PPM
Director of Marketing & Trade Development
Canaveral Port Authority

In my opinion there are only two ways of going about this.

1. Completely outsource the logistics function. Have the external company assume responsibility for the logistics budget. Measure them on meeting the budget, just as one would measure an internal department.

2. Build the skills internally - use off the shelf visibility tools (Glog, Transentric), logistics engineering software (i2, SSA) . Build a core team primarily focused on visibility, strategic logistics engineering, and compliance.

Having a strategy that mixes both methods will lead to suboptimal results - the internal team will constantly interfere with the functioning of the outsourced entity. For the first approach to succeed, it is critical to let the company do their outsourced entity do their job. However, this requires a high level of trust. The second approach requires significant investment in visibility tools and skilled resources that can perform complex logistical modelling and evaluate large amount of visibility data.

Sameer Savant

Lead Engineer for a major 4PL

AMR's Greg Aimi Responds:

Major differences between the traditional traffic department and orienting yourself like a "4PL":

  • It's less about doing things than it is managing things
  • You'd focus more on process models and process design
  • Develop analytics and monitor performance so that you can continuously improve prior bullet
  • You would have to focus on development of service-level agreements with many more operating parties (globally)
  • Have systems that measure performance against compliance to agreed upon service levels
  • Have information systems that offer transparency to orders, shipments, and inventory so that procurement, production, , distribution, and planning can be matching demand with just the right amounts of inventory --
  • If not, then they could know enough to do "demand shaping (promo, pricing, substitution, etc...)" with the excess or shortage

Greg Aimi

AMR Research


Q. Relative to the nearby piece on Unsaleables, what is a "swell allowance"?

A. A fixed percentage "discount" given to retailers/distributors applied to all products invoiced by the manufacturer and delivered to the distributors’ warehouse to account for Unsaleables caused by manufacturer issues

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