09 June, 2022

Wholesaling 101: Challenges and growth strategies

To avoid running out of stock, retailers need to constantly replenish their inventory. But have you ever wondered where shop owners get their products?

Many retailers get their products from wholesalers — who play the crucial role of bridging the gap between manufacturers and retailers. Thanks to wholesalers, manufacturers don’t need to worry about distributing their products. Instead, retailers are able to get their products from one place.

Wholesalers are an indispensable part of the supply chain, and the global wholesale market is estimated to reach around $64 billion by 2025. So, just how important a wholesaler’s role is in the supply chain? If wholesalers can’t do their job correctly, both manufacturers and consumers suffer. In this article, we’ll go through common issues wholesalers face and practical strategies to overcome those challenges. Let’s dive right in!

 

What is wholesaling?

Wholesaling is a distribution model where businesses buy items in bulk from manufacturers or distributors and sell them to other companies. Wholesalers are able to acquire products cheaply because they only purchase in large quantities. Essentially, wholesalers are the middleman between manufacturers and retailers.

Although wholesalers and retailers are very closely related and perform similar functions, they are different from each other. The difference between wholesalers and retailers can be explained with three terms:

  • Quantity – Wholesalers purchase in large quantities from manufacturers, whereas retailers purchase in small amounts from wholesalers.
  • Purchase intent – Individuals who purchase from wholesalers resell those items at a higher price to their customers. Conversely, individuals who buy from retailers plan to use those items rather than sell them to someone else. Retailers – who purchase from wholesalers – are not consumers; instead, they resell to consumers.
  • Transaction type – Wholesalers are generally business to business sellers (B2B), whereas retailers are usually business to consumer (B2C).

Alibaba is the largest B2B marketplace, and you can find plenty of wholesalers selling their goods to retailers there. In the United States, Orangeshine is a popular online wholesaling marketplace that allows fashion wholesalers to sell products.

 

4 reasons why wholesalers are essential

Reason #1: Wholesalers support manufacturers and retailers

Wholesalers purchase products in bulk from manufacturers. They assemble products from various manufacturers and then sell them to multiple retailers by breaking them down into smaller quantities. This helps distribute products from manufacturers to retailers.

Reason #2: Wholesalers help store products

Manufacturers have limited storage space, and it’s not feasible for them to continue producing items if their storage space is full. Wholesalers solve this problem by purchasing inventory in bulk and storing it in their own warehouses. This helps manufacturers focus more on production and less on worrying about inventory storage.

By taking care of storage on their own, wholesalers facilitate the assembly of products from various manufacturers and safeguard them in one place.

Reason #3: Wholesalers stabilize supply and demand

Since there is time between the manufacturing and consumption of goods, there can be a mismatch between goods demanded and goods supplied. Wholesalers help in striking a balance between demand and supply. They are able to store products when demand is low, and then they can sell products when retailers’ demand rises.

Reason #4: Wholesalers take on risk

Wholesalers are responsible for transporting goods from their warehouses to various retailers. If there’s any damage during transit or storage, wholesalers take full responsibility and cover that loss.

 

Wholesale challenges and how to overcome them

Challenge #1: Cutting out the middleman

Manufacturers and retailers often try to streamline operations and cut out middlemen to increase profit margins. And in this example, the wholesaler is the middleman. By cutting out wholesalers, retailers can save money, and manufacturers can make more money.

Obviously, this is a concern to your existence as a wholesaler. In these situations, your solution might be dropping your prices, which in return would reduce your profit margin. While this might be a viable option for the short term, there will always be another wholesaler who’s willing to offer even lower prices than yours. At that point, you’re simply in a race to the bottom.

Rather than focusing on decreasing your margins, you should focus on increasing the value that you bring to the table. You should ask yourself, “How can I better serve my customers — other than lowering my prices?”

For example, you can help manufacturers take care of logistics and distribution. Bulk purchases can get you a discount from manufacturers, and retailers can benefit by purchasing from you instead of manufacturers.

However, manufacturers are now exploring ways to handle shipping and logistics of their products on their own to increase profit margins. Some retailers are even searching for ways to connect with wholesalers themselves to find a better deal directly.

To offer more value in this case, you should try to leverage your existing distribution network. You might be able to convince manufacturers that they would get better returns by working with you, rather than experimenting and trying to handle logistics on their own. By offering quicker delivery to retailers, you can prove that you provide better value.

As you deal with large amounts of stock, tracking can turn into a nightmare. That’s why it’s essential to invest in a good inventory management system that tracks inventory in real-time and automatically places purchase orders when stock is low. This, too, can be a differentiator.

Challenge #2: Slow shipping

Delays from wholesalers can lead to stockouts for retailers, which can reduce customer loyalty. Modern consumers are accustomed to 1-2 day delivery thanks to Amazon. This has, in turn, also raised the bar for wholesalers. Retailers now expect wholesalers to quickly deliver products so that they can serve their own impatient customers.

The challenge for wholesalers is not just shipping more quickly; in reality, it’s both shipping quicker and making fewer mistakes. Inaccurate delivery affects wholesalers’ reputation and often requires paying a fee.

Accurate delivery can be a great value add-on for savvy wholesalers. If you successfully provide quick and precise delivery, you’ll be able to convince retailers to buy from you.

This is exactly why it’s necessary to invest in good order management software. Barcode scanners can also be implemented to cut down on packing and picking errors, too. You can scan items at multiple stages, which further boosts accuracy and speed of processing.

Optimizing your warehouse helps reduce storage costs and speeds up inventory processing — which in turn, leads to faster shipping.

Challenge #3: Inventory damage

Damage to inventory is also another huge factor in a wholesaler’s performance. The core function of wholesaling lies in storing inventory and distributing it to retailers. Property damage is a serious threat to any wholesale business, and it can lead to huge losses in both value and ability to store products.

There are several ways stock can be damaged — fire, earthquakes, flooding, and more. Transit can also damage items due to heat, or if the ride is too bumpy. Mistakes from workers can lead to damages, too. This is exactly why it’s so important to constantly troubleshoot both equipment and machinery.

It also might be a good idea to get your property insured to help cover losses when natural disasters do occur. Plus, employee-related damages can be reduced by offering adequate training on products and their use.

Lastly, you should make sure to check product quality as soon as you receive them. This way, you’ll be able to detect damage and return products before they become inventory.

Challenge #4: Slow growth

Every business aspires to grow fast and constantly improve sales. Fostering relationships with your partners is a great way to help in accelerating the growth of your wholesaling businesses.

International expansion can also aid in getting more customers. When you focus on building contacts locally and internationally, you can expand your customer base. The COVID pandemic has proven the value of an online presence and international supply chains.

Challenge #5: Fines and penalties

In the early stages of their career, many wholesalers do whatever it takes to get contracts with manufacturers.

While having a contract certainly offers assurance, it can also backfire. If contract guidelines are not correctly adhered to, manufacturers can legally penalize wholesalers. And these penalties have to be paid, whether mistakes occurred accidentally or intentionally.

Therefore, rather than signing a contract hastily, you should first consult a lawyer and get a comprehensive understanding of all the terms and conditions mentioned in the agreement.

A lawyer’s cost when going over contracts is negligible compared to the amount that could be paid in the penalties. Only once you are fully aware of the terms should you proceed with the deal.

If you have any concerns about specific conditions, you should openly discuss and negotiate with your manufacturer. If your manufacturer refuses to negotiate, you can always go to another manufacturer who meets your demands. Remember that a signed contract is the foundation of your relationship with the manufacturer — so it should be carefully considered.

Challenge #6: Theft

Employee theft and shoplifting led to retail sector losses totaling $61.7 billion in 2019. The wholesaling business is not immune to theft, either. Since wholesalers deal with large quantities of goods, theft can compound quickly and lead to significant losses.

Theft can occur in warehouses and transit, so investing in security is necessary. You can install security cameras to monitor goods on your premises regularly. You should also consider arranging for staff to monitor goods when in transit and when unloading inventory.

Challenge #7: Inaccurate data

Wholesalers need to know exact quantities for goods purchased, goods sent to retailers, inventory in stock, and more. Storing information manually in ledgers can lead to human error and cause severe losses, which makes it challenging to get accurate information about current levels.

Real-time data helps when trying to meet the demands of manufacturers and retailers. A manual counting process simply isn’t good enough when dealing with massive numbers. Therefore, the best option is to invest in real-time inventory management solutions.

One solution is Radio Frequency Identification Tags (RFID), but they can cost up to $50 per unit. Still, RFIDs allow you to accurately track inventory without employees having to enter any data. Since wholesalers already operate on thin margins, implementing RFIDs might not make financial sense.

A cloud-based inventory management system does the same job and offers real-time information about inventory without being as expensive. Plus, It also helps create a dashboard and generate reports to get important information at a glance. This allows you to make data-driven decision-making.

 

Grow by focusing on value instead of price

Wholesalers are an important part of supply chains — but they can’t get complacent about upgrading business practices. As retailers explore technological advancements like ecommerce stores, wholesalers must also upgrade their systems and processes to keep up with new challenges.

Ultimately, to survive in the long run, wholesalers need to focus more on delivering value, and less on lowering prices. That’s where Cin7 can help separate savvy wholesalers from their competition. Get in touch with the Cin7 experts to learn more about how we can help you with automation, data collection, and more.

 

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