How to Start a Wholesale Distribution Business

While entrepreneurs in some industries seem to be able to raise money with a snap of their fingers, most have to take a more detailed approach to the process. Perhaps the best starting point is to figure out just how much you need.

In the wholesale distribution sector, startup numbers vary widely, depending on what type of company you're starting, how much inventory will be necessary and what type of delivery systems you'll be using. For example, Keith Schwartz, who got his start selling belts and ties from his basement in Warrensville Heights, Ohio, started On Target Promotions with $700, while Don Mikovch, president of the wine distributor Borvin Beverage in Alexandria, Virginia, required $1.5 million. While Schwartz worked from a desk and only needed a small area in which to store his goods, Mikovch required a large amount of specialized storage space for his wines-and a safe method of transporting the bottles to his retailers.

The basic equipment needed for your wholesale distributorship will be highly dependent on what you choose to sell. If you plan to stock heavy items, then you should invest in a forklift (some run on fuel or propane, others are man-powered) to save yourself some strain. Pallets are useful for stocking and pallet racking is used to store the pallets and keep them in order for inventory purposes.

For distributors who are sourcing, storing and selling bulky goods (such as floor tile, for example), a warehouse of sufficient size (based on the size of products you're selling and the amount of inventory you'll be stocking) is a necessity. To ensure that the distribution process operates smoothly, select a location that allows you to move around efficiently and that includes the necessary storage equipment (such as pallet racking, on which you can store pallets). Don't forget to leave room for a forklift to be able to maneuver between racks of pallets and shelves stored in the warehouse.

As a startup distributor, your initial inventory investment will depend on what you're selling. Expect to carry some inventory, no matter what the product is, but also understand that your choice of goods will have some effect on how much you'll need to shell out upfront. Schwartz was buying surplus apparel, so $700 gave him plenty to work with for the first few months. When Garth Gordon and Vivienne Bramwell-Gordon, president and vice president, respectively, of Tampa, Florida-based Phones Etc., founded their company, they invested about $2,400 to purchase a shipment of high-end telephones. They quickly turned them around for a 300-percent profit and have been in the business of distributing refurbished Avaya telecom equipment to small companies and nonprofit groups ever since. Today, Phones Etc. carries about $600,000 in inventory at any given time.

Bill Green, managing partner at WSG Partners LLC in Cherry Hill, New Jersey, says the best way to determine inventory needs is to look at your customers' needs. If they're the type who "need everything yesterday" (contractors working on job sites would fall into this category), then your inventory will need to be ample enough to meet those last-minute requests. However, if there's usually a three-to-four-day span between order-taking and delivery, then you may be able to skimp a bit on inventory and instead focus on forming solid, reliable relationships with vendors who can help you meet those timelines.

"The most successful distributorships are the ones [whose owners] are working as close to their customers as possible and who can predict their needs and be there to provide value-along with the products," says Green. "That doesn't necessarily mean you need a huge warehouse and inventory, but you will need to find vendors who will 'hold' that inventory for you until your own customers ask for it."

Inventory Matters
In today's competitive business arena, companies are on perpetual diets. Owners and managers strive to run the leanest possible companies with the fewest employees and least amount of inventory and liabilities. In the distribution sector, some companies are being run with very low inventories-thus reducing their major sale (nonequipment) investments. Others choose to stock up in order to have "just what the customer ordered" on hand when the need arises.

There are caveats to both strategies. For starters, when a company chooses not to stock up, it runs the risk of being out of an item when the customer comes calling. At the same time, the distributors who overstock can find themselves in a real pickle if they can't get rid of merchandise they thought they could unload easily.

Being a distributor is all about "turning" inventory (selling everything you have in stock and then replenishing it)-the more times you can turn your inventory in a year, the more money you will make. Get the most turns by avoiding stocking items that may end up sitting in your warehouse for more than 90 days.

Stocking Up.Or Not?
How much inventory you buy at startup is going to depend heavily on exactly what you're selling, how far away your customers are located and how demanding they are. For example, if you're supplying customers within a 20-mile radius of your warehouse with janitorial goods like paper towels, rubber gloves and hand soap, then you can base your stocking quantities on the number of customers multiplied by an average usage by each. Their usage is most easily determined by asking them just how much they normally procure on a monthly basis.

On the other hand, if you are servicing a varied customer base located in different geographic areas, you may need to stock a little more than the entrepreneur in the previous example. Because you probably won't be visiting those customers at their locations, it may take a few months before you can determine just how much product they will be buying from you on a regular basis. Of course, you must also leave some breathing room for the "occasional" customer-the one who buys from you once a year and who will probably always catch you off guard. The good news is that having relationships with vendors can help fill those occasional needs quickly, even overnight or on the same day, if necessary.

"The biggest mistake companies make is developing an inventory load that is larger than what they really need," says Rich Sloan, co-founder of small-business consultancy in Birmingham, Michigan. "The investment winds up sitting out in the warehouse when it could be put to much better use." Sloan says companies also jump into inventory purchases too quickly, without factoring in their customers' wants and needs-yet another way to wrap up too much investment in items that will be slow to move. "The trick is to keep it as lean as possible. That's a very smart, lower-risk way to go."

At Keith Schwartz's wholesale belt and tie distributorship in Warrensville Heights, Ohio, all it took was a $700 investment in closeout ties to get started. He resold them to a drugstore, pocketed the profits and reinvested the money in more inventory. It's a simple formula and one that works well for the small startup entrepreneur who is operating with low overhead.

The distributor who has already invested in a location, vehicles and other necessities should also factor product life cycle into the inventory equation. Those with longer life cycles (hand tools, for example) are usually less risky to stock, while those with shorter life cycles (food, for example, usually has a short life cycle) can become a liability if there are too many of them on the shelf. The shorter the life cycle, the less product you'll want to have on hand. Ultimately, your goal will be to sell the product before having to pay for it. In other words, if you are buying computers, and if the manufacturer offers you 30-day payment terms, then you'll want to have less than 30 days' worth of inventory on the shelf. That way, you never end up "owning" the inventory and instead serve as a middleman between the company that's manufacturing and/or selling the product and the one that's buying it.

To sum up the tricks to stocking a wholesale distributorship:

  • Don't overdo it when it comes to buying inventory.
  • Try to get a grasp on your customers' needs before you invest in inventory.
  • If you can get away with doing it cheaply at first (especially those with low overhead), then go for it.
  • Be wary of investing too much in short- life-cycle products, which you may get stuck with if they don't sell right away.
  • Stock up to a level where you can sell the product before you have to pay for it.
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