Advice on Starting a Wholesale Distribution Business

If you are considering starting up a wholesale distribution service you need to fully understand the role. Wholesale distribution handles buying the products in large quantities from the source and then send them to the companies who will either be using the product or selling them in-house. With different types of distributors covering retailers, merchants, contractors, industrial and commercial users they cover everything from durable goods to nondurable ones.

Here is some further information on the wholesale distribution role and how to get into the game:

Three types of operations can perform the functions of wholesale trade: wholesale distributors; manufacturers' sales branches and offices; and agents, brokers and commission agents. As a wholesale distributor, you will probably run an independently owned and operated firm that buys and sells products of which you have taken ownership. Generally, such operations are run from one or more warehouses where inventory goods are received and later shipped to customers.

Experts agree that to succeed in the wholesale distribution business, an individual should possess a varied job background. Most experts feel a sales background is necessary, as are the “people skills” that go with being an outside salesperson who hits the streets and/or picks up the phone and goes on a cold-calling spree to search for new customers. In addition to sales skills, the owner of a new wholesale distribution company will need the operational skills necessary for running such a company. For example, finance and business management skills and experience are necessary, as is the ability to handle the “back end” (those activities that go on behind the scenes, like warehouse setup and organization, shipping and receiving, customer service, etc.). Of course, these back-end functions can also be handled by employees with experience in these areas if your budget allows.

And here is a little bit more information on the whole operation and costs involved:

A wholesale distributor's initial steps when venturing into the entrepreneurial landscape include defining a customer base and locating reliable sources of product. The latter will soon become commonly known as your “vendors” or “suppliers.”
No two distribution companies are alike, and each has its own unique needs. The entrepreneur who is selling closeout T-shirts from his basement, for example, has very different startup financial needs than the one selling power tools from a warehouse in the middle of an industrial park. Regardless of where a distributor sets up shop, some basic operating costs apply across the board. For starters, necessities like office space, a telephone, fax machine and personal computer will make up the core of your business. This means an office rental fee if you're working from anywhere but home, a telephone bill and ISP fees for getting on the internet.

No matter what type of products you plan to carry, you'll need some type of warehouse or storage space in which to store them; this means a leasing fee. Remember that if you lease a warehouse that has room for office space, you can combine both on one bill. If you're delivering locally, you'll also need an adequate vehicle to get around in. If your customer base is located further than 40 miles from your home base, then you'll also need to set up a working relationship with one or more shipping companies like UPS, FedEx or the U.S. Postal Service. Most distributors serve a mixed client base; some of the merchandise you move can be delivered via truck, while some will require shipping services

While they may sound a bit overwhelming, the above necessities don't always have to be expensive-especially not during the startup phase. For example, Keith Schwartz, owner of On Target Promotions, started his wholesale tie and belt distributorship from the corner of his living room. With no equipment other than a phone, fax machine and computer, he grew his company from the living room to the basement to the garage and then into a shared warehouse space (the entire process took five years). Today, the firm operates from a 50,000-square-foot distribution center in Warrensville Heights, Ohio. According to Schwartz, the firm has grown into a designer and importer of men's ties, belts, socks, wallets, photo frames and more.

To avoid liability early on in his entrepreneurial venture, Schwartz rented pallet space in someone else's warehouse, where he stored his closeout ties and belts. This meant lower overhead for the entrepreneur, along with no utility bills, leases or costly insurance policies in his name. In fact, it wasn't until he penned a deal with a Michigan distributor for a large project that he had to store product and relabel the closeout ties with his firm's own insignia. As a result, he finally rented a 1,000-square-foot warehouse space. But even that was shared, this time with another Ohio distributor. “I don't believe in having any liability if I don't have to have it,” he says. “A warehouse is a liability.”

Once you have done the necessary research on your soon-to-be customers and competitors, you will have a much better idea what type of niche your new company can fill. Profitable niches in today's wholesale distribution arena include, but are certainly not limited to, reselling products that require some degree of education on the seller's part. Take, for example, the pencil analogy: Selling traditional pencils is easy, but selling mechanical pencils that require a specific technique-and a refill-takes smarts. In the latter situation, a wholesale distributor comes in extremely handy because they can educate the customer, who can then educate his own end user, about the benefits and operations of the mechanical pencil.On the other side of the coin, too much product and geographical specialization can hamper success. Take the barstool example. Let's say you were going to go with this idea but that in six months you'd already sold as many barstools as you could to the customer base within a 50-mile radius of your location. At that point, you would want to diversify your offerings, perhaps adding other bar-related items like dartboards, pool cues and other types of chairs.

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.

Distributors can use the following formula when it comes to markup: If it costs the manufacturer $5 to produce the product and they have a 100 percent markup, then you (the distributor) buy it for $10. Following the same formula, the wholesaler would double the cost and sell it for $20. Thus, there is a 400 percent markup from manufactured price to the wholesaler's customer.

I only included the basics of this article to get you started and focused on what this type of business actually is.

Do you feel this is a good cover of the basics or is there more detail you would like me to go into on a specific step?

Article Source: Entrepreneur

Image Source: Sean Mulgrew on Flickr