4 distribution trends to consider for your 2022 Business Plan
The end of the year is approaching and we must work based on the business plan for next year. In the distribution industry, things are complicated by the profound changes that the sector has had over the last two years. We have analyzed it in previous articles. In this article, I will summarize the business distribution trends that we should consider when drawing up our 2022 plan.
What are the challenges faced by distributors?
We have worked with many wholesale distributor organizations and have learned that no one is alone. End products can be diverse, but the distribution challenges you face tend to be the same.
Actions and reactions to the pandemic affected the supply chain on several levels.
- Production yields declined due to labor shortages, labor time constraints, and delays in raw material delivery.
- Transportation costs skyrocketed sometime during the recovery phase of the pandemic. If part of your portfolio comes from Europe or Asia, the impact is severe both in cost and time.
As a result of the restrictions, distributors have experienced bottom-line and image repercussions: 83% of companies report suffering reputational damage as a result of global supply chain disruption, and 64% of US & European companies report revenue losses of 6 – 20% in 2020.
The questions you need to ask yourself to start working on your plan are:
- How much did my revenues decrease in 2020?
- What is my revenue level today?
- What is my average drop size?
Retailers Demanding better conditions
Big retailers such as Walmart and Target have expanded their product offerings and delivery services, and are asking distributors and brands to lower prices and raise the response and service level. To reinforce this, they are imposing sanctions on distributors for late shipments and out-of-stock. Questions for the planning process:
- What is your current service level?
- How was it affected by the pandemic?
Shortage of labor and higher wages
The peak unemployment rate of 14.7% in April 2020 was the highest monthly rate recorded by the Bureau of Labor Statistics (BLS). The measures taken by the current administration have not stimulated the average worker to go back to work. Many distribution companies are struggling to find quality people for the amount of money that they used to pay before COVID, and the pressure to keep these labor costs up will continue at the expense of profits that, for a distribution company, are already low. Think about it: Why continue to work for the same pay in a “pandemic risk” environment if unemployment brings me the same and sometimes even more money? This situation has led to companies rising salaries which in turn, adds pressure over the inflation trends.
Questions for the planning process:
- What has your employee turnover behavior been over the past two years?
- What is the current productivity in labor-intensive processes like pre-sales, picking, and routing?
Fierce Price Competition
In order to cope with the growing demands for better prices and delivery times from stores, many manufacturers are bypassing distributors and going directly to large retailers. On the other hand, to negotiate better terms, many retailers are centralizing many of their purchases and allowing stores to buy local products with less turnover. Since manufacturers go directly to retailers and customers buy from the marketplace, wholesalers are being forced to offer better terms and prices to retailers to stay in business.
- What have your price behaviors been in the last two years?
- Are you losing market share because of prices?
Inflation is a natural process in the economy of all countries. Every company is affected by inflation but distribution companies have added pressures due to the nature of their operation. Some of the reactions to the pandemic in 2020 triggered an inflationary cycle that is affecting all companies but very especially distribution companies. These are the reasons:
- When the pandemic struck, the Federal Reserve and the Federal government, together, flooded the economy with more dollars. To give you an idea, in January 2020, the M2 money supply was around $15.41 trillion. By April 2021, just 16 months later, the M2 money supply was at $20.11 trillion, representing an increase of 30%. While this may have boosted the economy and helped avoid a more severe recession, it also contributed to higher inflation.
- Transportation costs are insane. There has been a global average 10-fold increase in transportation prices since the start of the pandemic. For the Asia-USA Pacific Coast route, the increase is twice as much. As a result cost of products has risen.
- Labor shortages: as explained above, increasing wages to entice employees to return to work adds to inflationary pressure.
- Rising oil prices: the current administration´s commitment to balancing energy production with climate control has reduced production capacity to the point where we are once again dependent on imports to meet demand. From being self-sufficient in December 2020, we are now importing 394,000 barrels per day by October 2021. This has led to a gas price increase of the order of 49%. This has increased the cost of delivery for distributors.
2022 Distribution Trends
Many distributors have already reacted to counter the challenges. The common factors in these reactions are shaping the 2022 trends for the industry. Let’s review them.
As the pandemic forced many businesses to switch online, many B2Bs followed suit, transitioning away from traditional ways of doing business that in many ways became untenable during the crisis and adopting e-commerce solutions. This allowed them to meet their buyers where they were, provided greater insight into their inventory, and injected a much-needed dose of predictability, visibility, and control into their operations.
The adoption of B2B e-commerce has been so rapid that according to Forrester, the US B2B eCommerce market will reach $1.8 trillion by the end of 2023, surpassing the $529.7 billion for B2C. Even further, year-over-year total web sales at the end of the first quarter of 2021 showed an increase of 463%.
Distribution Trends: B2B eCommerce will continue growing
The shift to multichannel shopping is happening, whether you are ready for it or not. Distributors who do not enter the e-commerce space are at great risk of losing customers. The change may be small at first; But as customers find an online resource to purchase products and have an experience more similar to what they enjoy in their personal online experience, that change is likely to occur more frequently.
If you haven´t already, we highly recommend that you consider starting e-commerce sections. Initially, it could be a leverage of the B2C solution in B2C software like LaceUp’s B2B WHOLESALE E-COMMERCE, an opening to B2C later on.
Distribution Trends: Distributors are turning to resilience and agility
When it comes to your distribution operation, agility and stamina are the names of the game. Raw materials backlogs, labor shortages, and capacity limits continue to force companies to struggle. In a recent Capgemini Research Institute report, 62% of respondents said resilience would be a key priority in their business plans.
There are numerous ways that distributors can increase their resiliency. We explored some of them in our article “WHAT ARE AGILE AND RESILIENT ORGANIZATIONS?”. A resilient distributor is one with agility, diversification, contingency planning, and visibility.
Agility reflects how quickly a company can pivot, including increasing or decreasing production or creating new distribution channels.
Diversification applies to the sourcing of products and the mode of transportation and partners used to move those goods.
Contingency planning incorporates elements such as demand planning and the ability to prepare for visible and unforeseen disruptions.
It doesn’t matter how big or small your distribution operation is. For small companies, it is easy to reorganize around these principles and grow based on them. But big companies can and must turn toward resilience even if it means going through a reorganization process.
Distribution Trends: Customer will demand more Operation Visibility
Visibility and customer service have always been important to any distributor, but they will be vital in 2022 and beyond. According to Forbes, more than 90% of supply chain executives said visibility into their distribution operation is important to success, but less than a third have achieved real visibility. Failure to provide shipping updates to retail customers in advance can have significant consequences on a company’s overall customer experience and loyalty.
Even with uncontrollable factors like shortages and backlogs, visibility can help quite frustrated consumers. For example, saying to a customer, “Sorry, your shipment is delayed, but it should be arriving at your doorstep in 5-7 days,” is much better than saying “Sorry, we are not sure where your order is or when it will get to you.”
You can plan for better visibility into your operation with a combination of processes and procedures and integrated distribution software that streamlines purchasing, warehousing, and delivery operations.
Distribution Trends: Costs will continue rising
Each and every challenge faced by distributors increase operating costs. Consequently, seeking cost reduction and structure optimization has become a trend. There are several strategies you can follow to achieve this goal.
- Implement a warehouse management system that gives you visibility into inventory movement, asset usage, and manpower reduction.
- Select a set of Key Performance Indexes (KPIs) to monitor the profitability and efficiency of your system.
- Establish a mechanism to continually monitor KPIs and take corrective actions when necessary.
- Define your core business and focus on that and outsource as much of the non-core processes as you can. Emerging technologies like clouding, Internet of Things (IoT), and BaaS (Blockchain as a Service) can help you in this endeavor.
By realizing the position of your company in the face of the challenges that the sector has experienced, knowing where other distributors are going and understanding the distribution trends , you can begin to develop your 2022 business plan.
I hope this article has been helpful. I will continue to publish information related to Warehouse Management, distribution practices and trends, and the general economy. If you are interested in this article or want to learn more about Laceup Solutions, register to keep you updated on future articles.
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