For years, many contractors have lamented their inability to buy shingles directly from manufacturers like Owens Corning, Atlas, or IKO.

Earl Ward, the Vice President at Exterior Contractor Alliance in Marietta, Georgia, recently dropped by the Roofing Insights studio to meet with Dmitry Lipinskiy and discuss this same topic.

Simply put, Ward told Lipinskiy that contractors can’t buy shingles directly from manufacturers because they don’t have the manpower or the resources to support such a venture.

Also, manufacturers prefer to sell to distributors like Roof Depot (industry staple in the Twin Cities) because they can move products quickly and generate cash flow because distributors do business on such a massive scale.

Explained Ward:

"Distribution produces cash flow for manufacturers. DSO (Days Sales Outstanding) is very important at the distribution level. The average in the industry is 45 days, but there is always a certain amount of bad debt that a distributor has to incur. It’s important to know that bad debt comes out of their profits, which means they have to raise their prices to cover the bad debt."

This drew the curiosity of Lipinskiy, who asked Ward for the percentage amount of bad debt he has seen in the industry.

"The industry average is somewhere between a quarter and a half percent. That means ten percent of your profits are being lost to bad debt,"

said Ward.

"From a contractor’s point of view, that’s important because if you want to operate above industry standards, pay your bills on time."

Ward added that one downside to distributors is that they keep contractors in business by extending them lines of credit, a tactic that would not work as well if contractors were dealing directly with manufacturers.

For contractors who do $15-20 million per year in volume, they are still confounded by their inability to work directly with the manufacturers.

Ward recalled having a client who asked him this exact question, and once Ward opened up his books and showed him how much overhead he would have to absorb in order to justify working directly with a manufacturer, the client understood why distributors were necessary.

Said Ward of the large amount of overhead that affects how he conducts business:

"There are all these factors that you have to account for and I’m servicing 500-1,000 contractors. If you’re only buying for your company, you can’t afford to operate on the same level as me. My expenses of running my business are about seventeen percent of each sale, and that’s probably about the industry average. No contractor, if he’s only buying for his business, can do it for that cheap."

In addition to that reality, Ward said that the idea of contractors working directly with a manufacturer is a moot point because manufacturers have refused to deal with contractors on an individual basis.

Here’s why:

"You’re buying these shingles direct, but you’re only buying them for what you’re going to sell. You’re not buying them to sell to every contractor in your marketplace,"

said Ward.

On top of the fact that contractors don’t move enough shingles to warrant dealing with big manufacturers, Ward mentions that distributors offer contractors a litany of benefits, such as the ability to buy at any quantity and also being able to store excess shingles that otherwise might not have a safe place to remain idle.

As many contractors know, storing extra shingles is not an easy task.

"If you have shingles in your warehouse, that’s great, but now you have to protect what you’re going to sell ahead of time because you’re buying long before you’re selling,"

said Ward.

"It’s easy to do if you’re homogenized with 500-1,000 contractors that you’re selling to on a daily basis, but if you’re only buying and selling for yourself, you can’t do it for seventeen percent."

Again, cash flow is the reason why manufacturers deal strictly with distributors, and while Ward acknowledges that in an ideal world contractors could save a bit of money buying from manufacturers, that action alone would ultimately cost them money.

"If you buy the direct truck loads that come in, maybe you’re going to buy for ten percent better, but it’s going to cost you over twenty percent to service that business,"

shared Ward.

"When you do the math in your head, it doesn’t take long to figure out that distribution is giving you a pretty good deal. It may look like you could do better, and there are a few contractors out there who inventory their own shingles, but at the end of the day, distribution has the efficiency and economy of scale that not even a $20 million contractor could equal."

Contractors, please remember:

Going through a distributor is not only necessary, but it is also the easiest way to ensure your business does not become overwhelmed with supply issues.

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