In the first part of this article, I discussed some approaches to the challenges that distribution companies face in the era of the Internet: specifically, thinking like a buyer and using planning tools. I would like now to suggest several other techniques for wholesalers/distributors to create value.
Needed: Better Data
Too many distributors don’t categorize the products they sell down to a level that is specific enough to manage their inventory effectively. They have only a few categories to use in managing hundreds or thousands of SKUs. Distributors that sell as many as 3000 to 4000 items often limit themselves to a few broad categories, such as, for example in the case of a lighting company, table lamps and hanging lamps.
To get better data and analytics to manage the business better, distributors need enough categories to do meaningful analysis of customer buying patterns. A distributor who can accurately break their products down into a larger number of classifications will do a better job of managing inventory at the SKU level. It is far easier to manage inventory and avoid out-of-stock situations when managing categories that each have 100 products, rather than trying to manage categories that each have thousands of products.
Needed: More Focus On Segments
Many distributors could also benefit from a stronger focus on segments of the market, to differentiate their sales strategy and pricing by segment more than they do currently. They are not prepared, for example, to approach a showroom customer differently from other types of customers. Differentiation between segments, including for example the company’s warranty market, will allow manufacturers to penetrate markets in greater depth, providing the opportunity for better mark-ups and improved customer service.
Distributors: The Path to Survival and Success
Distributors that create real value are typically those that handle an array of products from a range of manufacturers. Distributors whose value add to customers consists essentially of buying shipments in large boxes and breaking them into smaller boxes for resale will be under pressure and will likely go out of business. As retailers get larger and more sophisticated, they are increasingly able to perform such low level distribution functions themselves.
Distributors that will succeed are those that have planners who can manage a just-in-time inventory, dealing in a wide variety of products and managing an intricate product flow, while minimizing the working capital tied up in inventory. Remember that, for a distributor, it is inventory turn that determines profitability. Inventory turns times gross margin on sales is a distributor’s profit. A company that is earning 50% margin on sales but turning inventory only 3 times a year is less profitable than a company with 20% margin that is turning inventory 10 times.
Distributors looking to grow the revenue and profits might consider the ideas discussed in the two parts of this article. Despite all the talk about “disintermediation” by the Internet, companies that create value - by helping manufacturers distribute their products and by getting customers the products they need when they need them - will be winners.
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Contact Armand at armand.shapiro@newportboardgroup.com
