Why 2-Steppers Exist in Building Products Distribution

Why Does 2-Step Distribution Still Exist in Building Materials?

By Rod MacKenzie

The title of this article is one of the more frequent questions I field when I review the building materials supply chain with a client.  It’s understandable - while other industries have shortened their supply chain, the structure of the building products supply chain has remained remarkably intact despite all attempts to shrink it.  So why does this anachronism of a distribution model still exist?  The answer is one part history, one part product attributes and one part business logic.

Building Materials Supply Chain History

Long ago, the building materials supply chain had been hamstrung due to inefficient means of transportation.  Building products, which tend to be awkward and bulky, were manufactured and sold in a very small geographic area.  But railroad expansion, interstate highway construction and a deregulated trucking industry all played roles in improving shipping efficiencies and allowing manufacturers to reach a wider geographic audience. 

Equally important to reaching a wider audience was the development of the “middle stage” or “2-step” wholesaler.  These entities have played a vital role in growing the reach of the building materials manufacturers by taking large quantities (shiploads, barge loads, railcar and truckloads) of material and breaking them down into smaller quantities for resale in the marketplace.  In addition, their proximity to the market is critical as most manufacturers are in rural areas near sources of raw materials (i.e. near the trees) and must ship efficiently (i.e. full truckload or railcar load) to keep costs low. 

Previous to the 1980s, the 2-steppers were the perfect medium – they took product from a multitude of manufacturing partners and distributed a broad array of products to a multitude of dealers/retailers.  They were the proverbial hourglass of distribution – many to one to many.  Their position as market maker couldn’t be challenged as their customer base - the dealers/pro-yards, hardware stores, contractors and home builders were extremely fragmented and unable to congeal enough buying power to purchase material direct from a manufacturer.

But in the early 1980s, several new industry players emerged to balance the power in the supply chain.  First, the arrival of the mega home improvement center put many of the 2-steppers core customers, the local dealers (that dabbled in home improvement products) out of business.  As the “big boxes” grew, they created a new customer segment (the DIYer) and built their own 2-step distribution network to feed their ever growing number of stores.  Ever since, the 2-stepper has only been a bit player in assisting the big boxes with their supply chain needs.

Second, after the cleansing of weaker dealers in the industry by the mega home improvement centers, a dealer consolidation led by ProBuild, Stock Building Supply and others concentrated the purchasing power of a very fragmented market.  These new collectives finally had the purchasing power to challenge the 2-stepper on pricing and arranged for shipment of commodity products (the bread and butter items of the 2-steppers) directly from manufacturers. 

Lastly, the emergence of a new supply chain player, the “specialty dealer” or 1-stepper – came to market with a new business model.  Instead of the wide but narrow product offering of the 2-stepper, the 1-stepper came to market and focused on specific product categories - a narrow but deep product offering that played well with job-specific contractors. 

All of these industry changes took business away from the 2-steppers and evened out the power in the supply chain.  The changes even forced some major manufacturers to divest their 2-step wholesaler operations (i.e. Georgia-Pacific divestiture of what is now BlueLinx).  These changes didn’t render the 2-step distribution model obsolete - it simply redistributed the power in the supply chain relationships.  The 2-step distribution model in building materials continues to this day based on its legacy customer base and its continued value-add in the supply chain.

Product Attributes

Another factor contributing to the ongoing existence of 2-steppers is the attributes of the products they handle - think awkward, bulky and expensive.

Awkward

Many of the products handled by 2-steppers are difficult for material handlers.  For example, engineered lumber, (wood-I-beams, LVL lumber, etc) usually come off the manufacturing line in 48’ lengths.  But the 2-steppers have specialized equipment, storage facilities and delivery equipment to handle these type products.  They also have equipment for cutting these beams to desired length for the customer, if needed.

Bulky

A railcar load of plywood or lumber takes up a good bit of space (about 2.5 truckloads).  A truckload of vinyl siding and related accessories can take up a good bit of space as well.  The 2-steppers have facilities to store these products (out of the weather if the product is not wrapped to protect it from the elements) and maintain a standing inventory.  In addition, due to their awkward and bulky nature, no one has come up with a UPS/Federal Express shipping option for most key building products -  the 2-stepper is it.

Inventory Cost

As noted above, the industry changes of the 1980s led to a channel shift in how many building products went to market.  The big box distribution centers, 1-steppers and consolidated dealer yards all started taking deliveries of relatively low cost, fast turning products directly from manufacturers.  But the inventory items that were expensive to buy (i.e. moulding $50,000+ per truckload) and had longer inventory turns stayed with the 2-stepper.  While the 2-stepper continues to stock and sell commodities (lumber, plywood and OSB), their product offering is weighted more to specialty building products than ever before. 

Business Logic

Do you remember the basic physics lesson that “energy cannot be created or destroyed”?  Well the building material supply chain steps/activities are sort of like that.  As much as people try to simplify the supply chain, either on a white board or in real-life, they find that supply chain steps cannot be eliminated – they are simply transferred.  Companies can be eliminated from the supply chain, but the underlying activities of those companies must be handled by someone.  As mentioned above, the big box retailers buy as much product as they can direct from the manufacturers to avoid the 2-step markup.  When doing so, they can’t bring all that material directly into their stores.  They must break bulk in large corporate owned facilities (their Region Distribution Centers) and ship mixed truckloads of product on multi-stop runs to their stores.  Their bet is they can do it better and cheaper than the 2-stepper albeit with the same number of activities.  But to do so, they had to duplicate something that already exists and perform the same activities that the 2-steppers have been refining for the past 75+ years at a lower cost to replace them – all at a very high capital cost.  The same logic applies to the 1-stepper and the dealer consolidators. 

Also, the local dealer/lumberyard still exists.  Contrary to popular belief the Big Boxes are not everywhere!  Many dealers are fiercely independent but their order sizes are normally smaller than truckload quantities (and during the recent recession even smaller).   In fact, during this prolonged period of residential building malaise, the 2-stepper has been leaned on more than ever by the dealers to reduce their inventory investment without sacrificing order fill levels.  

Summary

So the 2-stepper is alive and well.  In recent work on the building materials supply chain, I was surprised to find almost 1,000 2-steppers in North America!  Although their power base has shrunk, they still play a key role in servicing smaller dealers, storing and handling awkward and bulky products and keeping stock of more expensive, but slow turning specialty products. 

In addition to these key functions, I believe that the 2-steppers can play a pivotal role in assisting manufacturers launch new products in the marketplace.  They have the reach and scale to develop markets for new products.