How to overcome the Distribution challenges in this new age?
The wholesale industry is at a critical point in its history in which unprecedented Distribution challenges are faced. Wholesalers and distributors have always played an important role in the sale of goods, acting as middlemen between manufacturers and the end-users, and making sure the products get where they’re supposed to, undamaged and on time; but things are now changing. Manufacturers and retailers are increasingly investing in their distribution networks, effectively dispensing with the middleman and directly supplying products to retailers and consumers. As a result, these distributors are struggling to maintain their position in the market and sustain profitability.
In this article, I will explore the challenges that distributors are facing in this new age and give you, the distributor, tips on how to get ahead in today’s industry.
How important is the Distribution Industry?
Wholesale distributors have played an important role in the distribution and flow of goods for well over 100 years and have been a driving force in the economy but the challenges they face today are unprecedented and bigger than ever before. As a result, some are struggling to maintain their market position, market share, and sustainable profitability.
By 2018 the wholesale distribution industry had annual sales of approximately $7 trillion and the US wholesale distribution industry encompassed 330,000 companies approximately. However, the technological trends we have discussed in previous articles, amplified by the COVID pandemic of 2020 and the paradigm shift that it brought, did change this trend.
The Total Wholesale Distribution ended in 2020 with $5.824 trillion worth of goods distributed over the year, below 4.3% from 2019’s lofty $6.088 trillion. The 12-month moving total revenue (12MMT) rallied late in the year. At the end of 2020, the Total Wholesale Trade Distribution Revenue was 27.1% of US GDP, slightly below 28.0% in 2019.
The 12-month moving average of the US Wholesale Trade Employment (12MMA) in December 2020 was at 5.641 million jobs, the lowest level in just over seven years and down 247,717 jobs from the end of 2019. Employment in the industry initiated a rising trend on a 3MMA basis off a June 2020 low, with 85,233 jobs coming back in the second half of 2020.
Distribution Challenges now and in the future
We have worked with many wholesale distributors organizations and have learned that no one is alone. The end products may be diverse, but the distribution challenges you face tend to be the same. In the following sections, I will dwell on the challenges we see most often in the industry.
No 1 of Distribution Challenges: Surge of e-commerce
The B2B and B2C e-commerce surge has finally hit the B2B industry, forcing distributors to reevaluate their business strategy and consider incorporating e-commerce into their channels.
Most of the older players have reacted to this trend by incorporating reactively some kind of e-commerce option, resulting in “patches” that look unattractive and most of the time unfriendly. This has created an opportunity for “agile” and “resilient” organizations that have redesigned their online space and incorporated e-commerce solutions into their platforms that are attractive to buyers.
No 2 of Distribution Challenges: Retailers Demanding better conditions
Amazon has become the biggest disrupting element for B2B companies in terms of alternatives, reviews, and delivery times. Big retailers such as Walmart and Target have expanded their product offerings and delivery services, imposing penalties on distributors for late shipments and out-of-stock. Wholesale Distributors may also be fined for providing inaccurate product information. Many companies have invested in technology upgrades and additional employee training to meet new standards.
No 3 of Distribution Challenges: Manufacturers going directly to the stores
In order to cope with increasing demands on better prices and delivery times from stores, many manufacturers are bypassing the distributors and going directly to the big retailers. By eliminating one link in the supply chain, they can offer better prices. The advent of new and more efficient logistics systems allows manufacturers to do this. In addition, consolidation in many manufacturing sectors has produced large manufacturers with national distribution systems. The overall effect is a shrinking market size for distributors.
No 4 of Distribution Challenges: Fierce Price Competition
With manufacturers going directly to retailers and customers buying in the marketplace, wholesalers are being forced to offer better conditions and prices to retailers to stay in business. This fact, paired with the constant increase in costs due to inflation and government policies (read “Changes in US economy are affecting your business. Take action!”) is affecting the bottom line of distributors. In the past, distributors limited their cost exposure by pricing products according to a percentage markup on costs; but in this new reality, competition may make it impossible to markup the same percentage.
No 5 of Distribution Challenges: Centralized Buying by Large Customers
In order to negotiate better terms, many retailers are centralizing many of their purchases and letting stores buy local products with lower turnover. Centralized buying is likely to eliminate many regional distributors in favor of large distributors and manufacturers that can deal in large volume and accept lower prices.
How can a Distributor survive in this new reality?
To survive and thrive in this new and ever-changing environment, wholesale distributors must take action! Let’s explore some possibilities.
Streamline the key processes of your operation
Distribution companies, be it B2B or B2C, normally work with a very little net profit, in the range of 3 to 5%, and most of the costs lie in the warehouse and delivery processes. If you want to survive, you have to make your operation as efficient as possible. 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 reducing labor.
- Select a set of Key performance Indexes (KPIs) to monitor the profitability and efficiency of your system.
- Establish a mechanism to continuously monitor the KPIs and take corrective actions when necessary.
- Define your core business and focus on that and outsource all you can from the non-core processes. Emerging technologies like clouding, the Internet Of Things (IoT), and BaaS can help you in this endeavor.
Focus on customer satisfaction
Make your company indispensable to your customers! Out of stock, expired products, and customer service are some of the problems that retailers have to face. As a reference, 9% of all consumers have stopped shopping at one or more retailers in the last 12 months due to out-of-stock products, lack of staff to help them get an item that is under lock and key, or impossibility of finding merchandise verified in stock by the computer system. There are several ways a distributor can help stores improve those issues.
- Get full traceability of your products along the value chain. A proper WMS combined with Route Delivery Software and a Sales Rep App enables you to avoid overstock and out-of-stock in stores while optimizing the time spent in the store.
- Focus on service rather than sales. Even though distributors offer merchandising services as part of the product offering, in reality, the service provided is poor. You can take advantage of this situation by incorporating merchandise and shelf maintenance into the list of things to do when visiting the stores. This action will prevent expiration and absence of products on the shelves, improve product display and visibility, and more importantly, improve the positioning of your sales force with the store managers.
- Consider alternative sales models that benefit the retailer, like PAR level, consignment, or scan-based trade. You can read more on these techniques in our blog.
Empower your salesforce
Sales on the store rely heavily on the sales rep. The more prepared the salesforce the greater the chances of maintaining and increasing sales in stores. It is important to involve the sales personnel in the challenges the company is facing and reinforce training in face-to-face sales techniques.
Evaluate the incorporation of a B2B e-commerce channel
“If you can’t beat your enemy, join him”. Many distribution companies are turning into Omnichannel networks. By using B2B or B2C software, they have increased their turnover without a significant increase in operating expenses since the sales channel is a sales platform like Shopify, and their delivery channel is also a platform that works with all couriers.
I hope this article has been helpful to overcome the distribution challenges you are facing and keep growing. I will continue to publish information related to Warehouse Management, distribution practices, and 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.
If you are new in the distribution business you can also watch this video.