Buyers leverage demand planning from distributors

Karen Prema -- Purchasing, 4/20/2006

Office buyers looking to better leverage their spend can learn a lot from what their distributor partners tell them. The old mantra of "buy more, get a better price" does not always hold true, but more strategic buying and demand management techniques can provide cost improvements to buyers at all volumes . Demand management is a purchasing strategy that savvy office buyers are tweaking for their own needs. There are two sides to demand management: managing demand in the supply chain and consolidating spend.

According to Tom Heisroth, president of Staples National Advantage, office buyers can save a significant amount of money by consolidating their spend and eliminating small orders that increase transaction and administrative costs. For instance, Staples worked with a customer to reduce small orders, or orders under $25, from 20% of their overall spend to 4%, which saved the company $500,000 in administrative and transactional costs.

"We didn't increase their spend, but just took the small orders out of the supply chain," Heisroth says. "They also ordered electronically and didn't place an order for a box of pens. By coupling the orders and working with sourcing, we can get the message out that reducing small orders won't impact the end user."

Another aspect of demand management is demand shaping—a distributor can work with buyers to optimize their ordering by day of the week and time of day to lower overall supply chain costs.

According to Heisroth, Wednesday between 1 p.m. and 5 p.m. is the busiest times to place orders, which means they take longer to fill. Staples guarantees that if an order is placed by 3 p.m. Wednesday it arrives Thursday, which can create supply chain bottlenecks for both buyer and provider.

Fuel prices have climbed sharply in the last year, which increased operating expenses for transportation-heavy businesses, notably office distributors. Staples relies heavily on diesel trucks to make its deliveries, so its overall costs were impacted by fuel rates. But rather than instituting a fuel surcharge to buyers, Heisroth says Staples, "raised our average order size $7 across the board to mitigate the vast majority of increased fuel cost."

At first buyers were apprehensive about Staples' working with them to consolidate orders. "They'd say 'Oh, you're just asking me to buy more,' which is understandable at first," Heisroth says. But once the buyers sit down with their distributor, they realize the priority is not getting a $150 order to a $200 order, but getting a buyer to consolidate two $15 orders into one $30 order.

In fact, Staples even custom built a piece of software for one of its banking customers to help consolidate its weekly orders. Instead of orders being shipped as they come in throughout the week from various buyers at the company, the items are dropped into a box to be delivered once during the week. Staples also narrowed down the customer's product list.

It sounds simple, but it saved the company $2 million a year, says Heisroth. Through demand management and consolidation, the banking company saved almost $4 million in one year.

Mark Hoffman, president of North American office products at distributor Corporate Express in Broomfield, Colo., also emphasizes that reducing small orders not only has an economic advantage for customers, but an environmental impact. But Hoffman says buyers he talks with are not so much apprehensive about placing large orders, but are just used to the convenience of Internet ordering when they need something and don't think about aggregating spend.

Hoffman says the distribution industry doesn't recover increased fuel costs as readily as transportation companies, so, "Lighter delivery days help us balance our delivery load."

He suggests buyers place orders on Thursday and Friday when possible, to be received on Friday and Monday, which "allows us to balance our fleet much more effectively" and pull costs out of the supply chain.

Hoffman says procurement organizations typically want to minimize the number of SKUs available to end users and e-commerce is the best way to limit the SKUs that are available. "We can truly limit what the customers can show its employees," says Hoffman.

Another demand planning strategy is to drive more end users to private-label or generic brands whenever possible. It's a trend that's catching on, according to Corporate Express. In 2005, 26% of its total sales were private label, up 19% from 2004.

Corporate Express, for example, can work with a purchasing organization to determine what products are bought most frequently and at what price points and provide alternative suppliers or private label products for savings.

"People that want both quality for their employees but want to save because of pressure from their CEOs really embrace the private label option," says Hoffman.