Why small distributors fail

Why small distributors fail

According to Fundera, A little more than 75% of small distribution businesses survive the first year, a little more than 65% survive the second year, and about 40% make it through the fifth year of operation; and a high percentage of those survivors stay small and fail to grow to a medium or big distribution player. In this article I will go over the 6 most common reasons that I have found responsible for the failure of a small distribution business.

Reason 1: Insufficient planning

We have talked several times about the importance of planning for the development and healthy growth of companies. But if you are a small distribution business, with limited resources in a highly competitive, low-margin industry, the importance of planning is multiplied. Poor planning is not only at the root of the other factors described throughout this article, but also miscalculation of capital needs, misunderstanding of the market, and growth trends.

Reason 2: Negative cash flow cycle

The key factor in the success of a small distribution business is the construction of a positive “Cash flow cycle”. Any distribution business must purchase products to maintain stock that can then be sold to retailers or customers. The time lapse between when you have to pay a supplier (extended supplier credit) must be greater than the date you collect on sales of all products (extended customer credit) purchased from that supplier. If these conditions are not met, no matter how much you sell, you will never have enough money to keep the business afloat. The graph below illustrates the concept.

Reason 3: Deficient sales & marketing

A significant percentage of small distribution businesses fail due to deficient sales structure and ill marketing policies. The only way to succeed in a complex market such as the USA is by understanding your customers and the market, and designing the sales & marketing strategies accordingly.

Reason 4: Bad products

No marketing strategy works if the product does not respond to the needs of the market. It is very important that distributors quickly assess the responsiveness of a product and pull it off if it does not meet expectations. Many small businesses fail to do this because they become attached to the product.

Reason 5: Deficient process management

The distribution business is highly demanding and cost oriented, with very low profit margins. One of the keys to ensuring survival, especially if you are a small distributor, is efficient Business Process Management (BPM). These are some of the issues that you must take into account to have an effective BPM:

• Understand and clearly document your processes.
• The Inventory optimization is a most for small distributors. With the state-of-the-art technology you can implement an inventory management system with a low investment and small monthly payments. Carefully evaluate the system you will be using and make sure it integrates with your accounting software.
• Carefully define your warehouse layout to optimize inventory movement efficiency. You can learn more about this in our article on warehouse layout optimization.
• Employee turnover is one of the main reasons for an inefficient warehouse operation. It is very important for a small business distributor to implement a human resources policy aimed at retaining employees. In “Motivation techniques to develop committed employees” we highlight some of the actions you can take.

Reason 6: Low resilience to changes in the economy

Changes in the country´s economic environment affect all companies, but distribution companies have added pressures due to the nature of their operation. Inflation, energy costs, the exchange rate, interest rates, among other variables, can affect customer purchases, costs of sales, and product costs. If you structure your company with rigid processes, you might not be able to react to these changes fast enough to ensure survival. We covered this topic in a recent article.

I hope this article has been helpful to you. I will continue to post information related to warehouse management, distribution practices and trends, and the economy in general. If you are interested in this article or want to learn more about Laceup Solutions, please subscribe to stay updated on future articles.

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