Ideas for Controlling Operating Costs

One challenge all kitchen/bath distributors face is the tendency for operating costs to increase even while margins are under pressure due to competitive forces in the market. A major element of these costs is order processing, warehousing and delivery of cabinets and related products.

At the Chicago conference of the North American Building Materials Distribution Association, I moderated a panel discussion for their Kitchen/Bath Distribution Alliance. The panel addressed the subject of keeping operating costs in line with profitability. We were fortunate to have enlisted the chief executives of two of our industry's most progressive and sophisticated cabinet "whotailers" to speak here.

These included Richard Maresco, president of Reico Distributors, servicing Merillat and Wilsonart accounts; and Robert Elliott, president of Kitchen Suppliers, Inc. (KSI) servicing Merillat cabinets, appliances and associated products. Since cabinets are notoriously space-consuming relative to dollar value, the panel members focused on that area of operating costs.

Marketing format
Both firms sell to wholesale and retail customers through their main showroom facility and satellite showrooms strategically located throughout their territory. KSI's distribution area covers approximately a 50 mile radius of the firm's warehouse, located in Brighton, MI. The warehouse is 100,000 sq. ft. This reasonably compact market area is well represented by seven showrooms.

Reico's market is considerably larger geographically, requiring the firm to deliver to accounts more than 100 miles from its 150,000 sq. ft. warehouse, located in Elkridge, MD. Reico's inventory includes 15 door styles, adding up to an average of 122,000 cabinets on hand. This is in addition to considerable Wilsonart laminate sheets and solid surface slabs on hand, plus 13,500 other kitchen/bath related items.

They firm receives five trailer loads, totalling 1,500 cabinets, per working day. Some 70 employees are engaged in receiving, shipping and delivery. Loading and verifying that orders are correctly filled and in time for the scheduled delivery involves an operations manager, plus managers for the day and night warehouse shifts.

Reico, a wholesale-only distributor until 1995, coped with changing market conditions by transitioning during the past three years to a whotailer format. The firm now covers its market with 10 showrooms plus its key dealer accounts. Deliveries to the large market area utilize 32 straight trucks and eight tractor trailers. Communications are maintained through cellular phones in every delivery vehicle. Both KSI and Reico lease their trucks with full-maintenance contracts to ensure road-worthy operating condition. This relieves much of the burden of operating a fleet, while still being less costly and capital-intensive than outright ownership.

KSI and Reico are convinced that hand stacking of cabinets on the floor of their warehouses is the most efficient, least costly way to go. KSI uses racking and lift trucks only for miscellaneous items. As a manager of an appliance and cabinet distributorship with limited warehouse space, I was forced to utilize racks and platform lift trucks for storing cabinet inventory. It was a costly, time consuming process.

Reico and KSI both depend heavily on computerization for inventory control, ordering merchandise and order entry. Reico scans all bar coded merchandise as it is unloaded from factory trailers. Both firms use gravity roller conveyors to route cabinets to their assigned areas.

While cabinets are bar coded at the factory, some of Reico's other products are not. In these instances, they apply their own bar codes. Order entry is computerized so that outgoing deliveries are checked for errors as merchandise is scanned. This minimizes the possibility of human error and resulting complaints and returns by customers.

Both KSI and Reico utilize straight trucks for delivery of cabinets to homes or builder jobs. Since most jobs specify "deliver inside," each truck is manned by a driver and helper. Reico operates 32 trucks with bodies of 22' or 24'. KSI has 11 straight trucks with 26' bodies.

At Reico, tractors pull two loaded trailers in tandem to their Richmond facility where they are dropped off and exchanged for two empty trailers to be returned to Springfield for the next night's run. Local crews in Richmond make deliveries to homes and builder jobs from these trailers.

Reico maintains a branch warehouse in Roanoke,VA, about 250 miles from the main warehouse. Rather than stock, the Roanoke warehouse stores sold orders which the factory has shipped direct to Roanoke for "just-in-time" delivery to customers.

Both Reico and KSI feel that personnel incentives boost performance. At Reico, drivers are awarded $150 quarterly for safety-related performance. Both driver and helper are eligible for $150 per month bonus for achieving 95% perfection in their performance.

KSI divides its warehouse into 10 areas, each manned by teams of two. The teams are rated on a scale from one to 10. Based on performance during any given month, they can earn up to 50 cents/hour added to their pay. If they rate an "8" or better during a quarter, they're eligible for a $100 bonus.

Warehouse and delivery personnel's performance greatly influences customers' opinion of a distributorship.
While many distributorships direct most of their attention to their sales organizations, operations are what weds the customer to the distributor. Profit leaks are prevalent in day to day operations. It takes an informed and aware management to control the many operational details of a kitchen/ bath distributor.