Distribution companies face challenges in the era of the Internet. Any business that is perceived to be a “middle man” is under pressure to show that it creates value in return for the (typically thin) markup it earns on each sale. The Internet has increased this pressure: Amazon and other e-commerce sites offer companies and consumers an enormous variety of goods with a few clicks of the mouse. In this first part of a two-part article I will explain practical steps that wholesalers and distributors can take--to grow and succeed.
Distribution Can Be More Profitable
Notwithstanding these challenges, distribution companies that follow best practices in their operations can typically improve their margins. My experience leading and advising distribution
companies makes me think that many distributors, selling hard goods or software products, stocking inventory or buying on order, have an opportunity to boost their profitability and growth.
The mission of a distributor is to get goods from their producer to the end customer or retailer, adding as much value at as little cost as possible. Distributors that stock inventory must find the right balance in planning inventory levels, being able to fill orders, but without tying up too much capital. Efficient logistics that minimize transportation and warehousing costs are essential. So is customer service. What are some tools to help accomplish these goals?
Think Like A Buyer
Much of the potential for distributors to improve their profits revolves around how they think about their core function. Is it “purchasing” or “buying?” A “purchaser” is someone who has been trained to buy products as if they were to be used by their own company, internally. Their mindset is the same as an internal Procurement department: buy at the lowest possible cost. By contrast, a “buyer” buys products with intent to resell them to an end customer. Their mindset is to understand the customer’s needs, preferences and constraints.
Purchasers tend to ask: How favorable are the price, quality and conditions related to delivery? Can the manufacturer meet our delivery requirements? What payment terms do they require? What is the cost of delivery?
Buyers on the other hand use data and intuition to decide what products the market wants to buy and at what price. They tend to ask: At what price can I sell and how many units can I sell? In effect, buyers think about re-selling the product before they decide to buy it. They ask: can I buy the product at a cost that will enable me to sell at a price that produces the margin I need? While they won’t ignore issues like service and delivery, their primary focus is on their ability to sell the product at a sufficient profit.
In my experience, many distributions could improve their bottom line by employing fewer purchasers and more buyers, people who define their role as facilitating the sales process.
Needed: Planners and Planning Tools
Another problem: many distributors lack the kind of inventory planning specialists and systems that are common with retail organizations. Buyers and planners work best as a team. The buyer knows what quantity of goods individual customers will buy, and at what price. The planner can estimate the aggregate quantity that customers will buy and therefore how much the distributor should buy at one time.
In the second part of this article I will outline further steps for distributors to improve growth and profitability.
Click on Armand's picture to see his bio
Contact Armand at armand.shapiro@newportboardgroup.com
