How a Good Distributor Cuts Your Costs, Improves Profitability

As integration companies look to improve profitability, they should look toward their product distributor partners and factors such as product availability, warehousing, freight savings and intangibles that can save money and pad bottom lines.

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How a Good Distributor Cuts Your Costs, Improves Profitability

The pro AV industry is vibrant and growing. With a constant influx of innovative AV technologies, a convergence with IT systems and an expansion in the use of connected devices, AV integrators can look forward to a healthy market in the years to come. Indeed, according to a report by AVIXA, the trade association for audiovisual professionals, the AV market in North America racked up $65 billion in sales in 2016, with revenue expected to hit $83 billion by 2022. Top segments for market share include media streaming, storage and distribution followed by services for systems installation and integration.

Such growth is indicative of a dynamic market – one which is increasingly characterized by more complexity, shrinking hardware margins and stiff competition. Consider that for AV integrators, the traditional model of generating revenue – primarily derived from building and selling the hardware components of an AV system – is now shifting to more of a software-based solution. In this kind of environment, sourcing products – whether direct from a manufacturer or through a distributor – can have a material and significant impact on an AV integrator’s profitability.

When it comes to sourcing AV products, the market in North America is currently split nearly equally between direct (Tier 1) suppliers and distributors (Tier 2). While the prices of Tier 1 products may  be less expensive – simply because there is no middleman in the equation –many integrators take a more flexible approach to sourcing in that where they get their products can change based on the situation for any given project.

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Product Availability Impacts Bottom Line

Mesa, Arizona-based Level 3 Audiovisual designs, builds and integrates AV systems for clients in several markets including government, healthcare, higher education and corporate.  “We have several manufacturers that we buy through direct, and then manufacturers that we buy through a distributor,” says Wendy Reyes, purchasing manager at Level 3. “We figure out which is the best way to go for each of those manufacturers.”

According to Reyes, pricing combined with stock levels are among the top criteria that can make distribution a more profitable choice.

 While some products are only available direct, when it comes to distribution, pricing is only one facet of the equation. Product availability is another important consideration that can affect integrator costs and profitability. Meanwhile, when it comes to a project-based business model, efficiency is critical in order to keep cost and labor hours down.

“We like distribution because we can purchase various manufacturers all from one place,” Reyes says. “It makes it easier when I’m looking for tracking, looking for pricing. There’s one company we can go to for that information.”

According to Reyes, pricing combined with stock levels are among the top criteria that can make distribution a more profitable choice. After all, the value of getting a product for a less expensive price will be negligible if that product isn’t delivered within the available window for installation.

“A lot of it does come down to pricing and also availability,” she says.” There are some manufacturers that don’t go through distribution and for those I don’t have to check anything out. But I know that if I have a distributor who is local and the manufacturer [is on the other coast] the local distributor is the one who can help get me the item quickly. Or if it’s going to save more on freight costs, I’ll go through distribution instead of the manufacturer as well.”

Factoring the Cost of Freight

Another significant metric to consider is freight, according to Jeff Andersen, CEO of VCRNOW, a provider of audio, video, lighting and security systems based in Red Oak, Texas. Due to the volume the company does with a distributor, “sometimes we are not charged freight, whereas with a manufacturer, I’m charged freight every time,” he says. “On really large orders, that could be a substantial amount of money.”

By Andersen’s estimates, freight on large orders can account for 2-3 percent of the final price tag of the landed product. Thus, free shipping translates to considerable savings that go right to the bottom line.

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Storage Saves $25K Per Year for Dealer

It goes beyond free shipping, however, for VCRNOW, which leverages its relationship with value-add distributor Accu-Tech that has 35 stocking locations across the country. “I can build out product and they’ll put it together for me,” Anderson says. “They’ll do some generic put together for me for a very decent price that prevents me from having to use crew for minor tasks that save us a lot of money.”

Distributor Accu-Tech holding storage space for VCRNOW “saves us $25,000 a year in initial costs because we didn’t have to rent more space,” says Anderson.

Plus, Anderson says Accu-Tech will also store it for VCRNOW until it’s ready to be deployed on a project. “So it doesn’t take up unnecessary space in my warehouse, which is a really big deal for us in the summer. We’ve got close to 3,700 square feet of just warehouse and in the summers we’re trying to find space all the time to make things work and Accu-Tech will sometimes hold space for me until I need it. It saves me on square footage and on lease price.”

That service by distributor Accu-Tech saved dealer VCRNOW significant money. “We purposely last year added more square footage,” Anderson explains. “Then we figured out we were able to cut that by half because Accu-Tech was able to store things for us. That saves us $25,000 a year in initial costs because we didn’t have to rent more space.”

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Cashing in on Intangibles

A residual effect, perhaps one that’s more difficult to put a dollar value on, is that freeing up the stocking space allowed VCRNOW to improve its infrastructure. “They’ve increased my time tables for me to able to build out racks, program them and have them ready for a client,” Anderson says.

Reyes says that Level 3 will go with a higher priced distributor that offers free shipping if the final cost overall is cheaper.

VCRNOW has several school district customers, a group that’s notorious for waiting until the last minute and creating a need for quick turn-around times. “It saves me a week or two of time, just because it’s sitting on the shelf and then I’m ready to go. My CFO loves it too, because I’m not pre-ordering stuff on what might be coming in. Accu-Tech is taking on that responsibility for me, so that way I’m not spending money on inventory that we may or may not sell.”

For Level 3, the prospect of free shipping can influence the choice of distributor. Indeed, Reyes says that Level 3 will go with a higher priced distributor that offers free shipping if the final cost overall is cheaper.

For VCRNOW, working with a distributor also reduces inventory and labor costs. The company has created AV packages for large stadiums, and its distributor will purchase and locally stock some of the frequently used products and store them until they are needed. When the products are needed, they are delivered via same-day courier, thereby eliminating downtime. The distributor also puts together some products and stores them for VCRNOW – a fee-based service that is cost effective, as it saves by Andersen’s estimates up to 15% on labor costs.

For AV integrators facing competition on many fronts, keeping profits flowing is a two-pronged strategy around both controlling costs and growing their business. Working with a distributor that offers a combination of competitive prices, product availability and cost-effective services can certainly enable these integrators to tackle both challenges at once.