How to use your inventory and warehouse to compete with Amazon Supply.



Amazon Supply, a new 8,000-lb. gorilla, has taken aim at many of the customers of PHCP supply houses. Amazon Supply is a separate unit, not an extension of the Amazon consumer side, and uses its own business-oriented website. It now sells valves, pipe fittings, pumps, flow meters, flow switches, hoses, seals, as well as hand and power tools. Nothing stops it from stocking and selling faucets, commodity-type sinks, HVAC parts and supplies and much more. With its expertise in logistics and Internet sales, it will likely siphon away some sales from a number of supply houses. Yet, traditional supply houses can compete with the gorilla.

The threat

“But we have it in stock,” is a likely reaction of people who work for traditional PHCP supply houses. True, but studies show that unplanned spending accounts for the majority of “MRO” sales, and Amazon Supply offers free two-day shipping (on orders of $50 or more) as a way to fill that unplanned need in a timely fashion. For an extra charge, an order can be delivered overnight, and customers can return items without penalty within 365 days of purchase. Financing is also available. It’s conceivable that end users will plan further ahead in order to buy from Amazon Supply and save money.

“But we have technical expertise,” is another likely reaction of supply house personnel. Amazon Supply claims to provide customer service and technical help – although the quality and timeliness of the help remains to be judged.

An indicator of Amazon’s commitment to B-to-B supply is its recent purchase of Kiva Systems, a company that provides mobile robots that automate order fulfillment and warehouse operations. Amazon is likely to use Kiva to help create very low-cost order-filling facilities, although some of the items sold will be shipped by third-party partners (as is now done for consumers).

The entry of Amazon into the MRO supplies space could not have come at a worse time for traditional supply houses. Inventory levels are up from the depth of the recession, but are nowhere near peak levels. And levels of slow-moving items have not been allowed to increase; some slow moving items are no longer stocked. Warehouse staffing levels remain historically low and money is not available to hire workers or buy warehouse technology (even technology that costs much less than Kiva robots).

But there are some actions that traditional supply houses can take to compete.

Inventory

Step 1: To compete with Amazon Supply, a full-line supply house must stock more supplies and arrange to drop-ship new items that cannot or will not be stocked. Historical data can help. Start by identifying supplies not now stocked but that have been sold to current customers who had not planned to buy them - unplanned spending. And determine which requested supplies could not be sourced to satisfy current customers or prospects who needed unplanned items.

Step 2: Purge the list of supplies not likely to be ordered in the foreseeable future. Then use the list to identify those “candidate” supplies now available from current vendors; even if the non-stocks have never been special-ordered from them.

Step 3: Identify supplies that have never been stocked or purchased for customers, but might be; use historical data for similar supplies. Also determine which candidates can be obtained from new vendors and stocked, and determine if candidates that cannot or clearly won’t be stocked can be drop-shipped by vendors or other distributors/sources. At this point, none of the supplies to stock or drop-ship have actually been selected.

Step 4: Determine for each stockable candidate how much would be initially stocked. Divide the list into three groups: candidates with 12-18 months of sales history; candidates similar to supplies sold in the prior 12 to 18 months; and candidates not remotely similar to items sold in the prior 18 months. For those with sales history, use the history to estimate the initial stocking quantity and create a list of “candidate quantities.” For each candidate on the similar list, use the sales history of its similar item(s) to estimate an initial stocking quantity and add it to the candidate quantities list.

Step 5: Contact vendors where there is an established relationship to obtain information on industry-wide sales rates for candidates which similar supplies have not been sold. Determine if a vendor can supply the items for stock – the third group of items on the list of candidates. Taking minimums into account, estimate the initial stocking quantity for each and add the data to the candidate quantities list. For those items that the vendor will not or cannot supply for stock, determine if the vendor can drop-ship to customers; use that data to create a drop-ship list.

Step 6: Also contact vendors without an established relationship and ask each whether it would supply for stock any of the candidate items, similar to other items and not similar. The questions about sales rates and minimums would be asked about the items that could be supplied for stock. Questions about drop-shipping would be asked about other items and the drop-ship list updated.

Step 7: Finally, go back to the candidate quantities list and do a cost-benefit analysis to determine which items are worth stocking. Unprofitable ones may have to be stocked in order to offer a “full line.”

Warehouse

Storage: Increasing the breadth of stock could require making room for the new supplies, but few distributors want to put on an addition to the warehouse. Try making room by changing the way supplies are stored, keeping in mind that speed of order filling will be as important as accuracy.

Receiving: This function is often given less attention than picking, but is just as important because mistakes made here can impact the speed and accuracy of order filling. Be sure to compare each receipt against the purchase order data for it, and when possible, open shipping and outer cartons to verify the individual items and quantities ordered.

Put-away: Like receiving, this function will now need more attention. Instead of putting away those received items that are meant to fill backorders, then picking them, investigate “cross docking” – putting these items in an area near the receiving docks and then ASAP shipping them (along with items picked from stock). This would fill orders faster. Even before doing housekeeping activities such as cleaning floors, put away those receipts of non-backordered items.

Picking: Pick only what is shown on a pick ticket or LCD display on an RF scanning gun – item and quantity. Product knowledge is one way to compete with Amazon Supply by being accurate, so educate new warehouse personnel about the items stocked. Educate veterans with a refresher course. Educate sales people and customer service reps as well.

Packing: The rule for not using pickers to do packing and checking may have to be suspended in order to do a 100% check on orders: pick ticket or packing list vs. what is actually being packed. If there isn’t enough time for a 100% verification, do an exhaustive spot check.

Loading and shipping/delivering: Even if a 100% verification is done during packing, if time permits, verify that every item on each order has been loaded on the designated truck. If time is tight, spot-check trucks and orders.

Counting: If cycle counting isn’t being done now, seriously consider it – even if it can only be done early in the morning before warehouse activity starts. Don’t count until all receipts have been put away and all picked items have been shipped.

Warehouse management: Another way to compete is to hold a weekly meeting to discuss the prior week’s warehouse mistakes, determine the cause(s) and define preventive measures.

Psychology: To instill an attitude of accuracy and speed in warehouse personnel, if/as time permits, and after putting away all receipts, clean the floors and check that items on shelves are stored in a way that pickers can easily see them. Think retail; straighten and arrange stock.

Competing with Amazon Supply does not take a lot of money if a supply house rethinks his/her inventory and operations, strategies and tactics.

Links