Betting That 'Made in America' Will Sell
Mark Kahn is a man with a personal history in industrial products distribution. He retired from the family business, Production Tool Supply, in 2003. But idleness disagreed with him, so now he's back in the tool business. Only this time he's doing things a little differently: He's only stocking American-made products and he's selling online.
"Buy American" has a ring in the U.S. There are websites devoted to it. Congress loves it--more than one law requires the government to buy American products when possible--because it sounds so patriotic and, they reason, should lead to a more robust economy and more jobs. (There are detractors like the Ayn Rand Institute, but they aren't about to change the national conversation.)
"After a few years of contemplating my life and enjoying retirement, I decided to do something else," said Kahn, CEO of Kahn Tools. Distributing and selling tools is the only industry he's ever known. But he knew that he didn't want to be "another me-too distributor because there was no upside to that."
His angle? Sell only American-made products, primarily to American companies. Not only was it a strong differentiator, given how much of the tool manufacturing business had moved overseas, but it was something he could believe in. "The industrial marketplace, the manufacturing base of this country has been decimated because we handed it away to foreign manufacturers," says Kahn, whose company website launched in May.
Instead of warehousing products, Kahn decided to stay online only and drop ship from a combination of manufacturers, distributors, and master wholesalers. Vendors would probably like to be in a product collection without foreign competition. However, the company faces some major challenges and hurdles that can help other companies better consider the problems they may face.
Supply Chain Complexity
Kahn buys products from manufacturers, but also from distribution sources. When drop shipping, a company depends on the speed, efficiency, and accuracy of its suppliers, which is why it will have hundreds of sources offering a total of hundreds of thousands of inventory items.
Every order becomes a complex balancing act. You need product available. You want it from the most reliable sources to keep customers happy. And yet, you also want to consolidate purchases to keep operations efficient. That is one complex e-commerce system. As Kahn expects that the "typical order size will be $200 or less and the weight under 10 pounds," he needs to keep things efficient ultimately to make money.
Free Shipping Promotions
Sitting atop the naturally complex supply chain is Kahn's offer to send orders of $50 or more for free via UPS ground shipping. The concept is smart from a marketing view. Shipping on small items can push up the perceived cost. Get people to purchase more and you increase the lifetime value of the customer.
But, increasing the order size also possibly increases the number of orders that will have to be placed. Get too many and the cost of shipping will eat up the roughly 30 to 35 percent margin the company gets. Working in Kahn's favor: Multiple items are often variations on a type, like a number of sockets, which increases the chance of getting all of them from one source. Still, it's another layer of complexity.
Keeping the Customer Happy
Tools are a commodity business. Everyone can carry the same products. So, Kahn needs other ways to keep customers happy. Having experienced pre-sales support personnel means that when people have problems figuring out what they should get, chances improve that they will talk to you.
Furthermore, many of Kahn's vendors are also potential customers, because they buy tools in the process of making their own. Kahn figures that these are potential customers. "Why wouldn't they be my customers?" he asks. "I'm paying them. They're buying things from me and I'm giving money to them or other companies like them in the United States."
As you move to complex business models, it's necessary to uncover the dependencies in operations, customer relations, marketing, finance, and other parts of the business.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.