How to survive the big squeeze

Technology can help distributors whose profitability is being squeezed by customers and supplier.

by Doug Levin

Over the last 10 years, distributors have been squeezed by demands placed on them by suppliers and customers.

Suppliers expect distributors to take on a more technical sales role while suppliers reduce their sales resources to the distributor. Distributors must also provide more information to their suppliers, including point-of-sale (POS) information, and conduct more business transactions electronically. The list goes on, including insisting that distributors take on more responsibility for inventory levels and assuming higher product costs.

For their part, customers demand that distributors have access to more inventory, provide more technical expertise, and answer their questions more quickly. They also want fast product delivery, while postponing payment until consumption. Customers also want access to more information, such as usage and accounting, want distributors to manage their inventory for them and, of course, want all of this at a lower price.

Squeezed to extinction?
Most distributors I meet run independent, family-owned, multi-generational companies. I usually ask the principals if they would encourage their children to enter the business. A few years ago, their answer was always, “Never! This is a dying business!” What these owners saw, or thought they saw, was a segment of the supply chain that would be eliminated over time. They felt profit pressure from customers and suppliers, and expected both to gradually squeeze them out of the supply chain until they could no longer afford to be a viable entity.

I noticed a distinct attitude change about two years ago. Now, when I ask if they want their children to enter the distribution business, I hear answers like, “I sure hope so.”

What has changed over the last few years?

As the next generation of owners and executives enters the distribution business, they bring with them a new philosophy. Distributors now understand they are part of the channel and not the supplier’s customer. With this philosophy comes a focus on the value they bring to the supply chain, not the dollars they spend with the supplier.

They understand the principles of business, including that you must spend less than you take in; that if you don’t have what your customer wants, they’ll get it somewhere else; and that if you don’t do what suppliers ask, they will find a distributor that will.

Take, for example, POS information. This includes detailed line-item sales data that suppliers demand. In the past, distributors refused to provide this information, or provided it in a format that rendered it useless to the supplier. Distributors feared that by providing POS information to suppliers, they would give away key intelligence and enable suppliers to bypass distributors and sell direct. In fact, suppliers wanted the information to gain a better understanding of the market, to measure their salespeople’s performance, and to improve their manufacturing schedules, all of which benefit distributors.

Today’s distributors take a more proactive approach to POS information, asking suppliers why they want the data and how they intend to use it. They know that if suppliers want this information badly enough, they will either find distributors that will provide it or go directly to the end-user.

Win-win
Progressive distributors use technology to make information sharing with their manufacturers beneficial to both parties. Technology helps distributors give suppliers usable information quickly, accurately and cost effectively. Done properly, the supplier can retrieve demand information in a secure environment. In return, suppliers can adjust their processes to bring the most value to the supply chain.

Suppose a supplier asks for POS data to determine sales commissions. The distributor knows that the supplier pays its salespeople when the supplier sells product to the distributor. This provides an incentive to supplier salespeople to load up the distributor’s warehouse rather than making sure the product gets consumed by the market. To combat this, a distributor can request that suppliers pay commissions when the end-user purchases the product. This helps alleviate unnecessary stock buildup in a distributor’s warehouse and streamlines the supply chain. This is now possible because technology makes data sharing easy, accurate and secure. Rather than resist their supplier’s demands, the distributor works with the supplier and everyone benefits from the new process.

Servicing the end-user
In the past, demanding customers often intimidated distributors. Today, rather than allow themselves to be at the mercy of customers, distributors look for ways to meet end-user needs without sacrificing margins or their place in the supply chain.

Most often, customers want more services at lower costs. Distributors know that end-users will go elsewhere if their demands aren’t met. Technology helps distributors meet this goal while adding value to the supply chain.

Take, for example, the issue of customers who demand lower prices and help in managing their inventory. Inventory control at the end-user’s place of business is as big an issue as inventory purchase cost. Shrinkage (theft), carrying costs and inefficient processes all contribute to the problem. Distributors can implement technology, such as an electronically controlled dispensing system, to help reduce the impact of these costs.

Technology allows the distributor to provide this service at a much lower cost than traditional methods. It also streamlines the fulfillment process by connecting the distributor’s back-end solution with the dispensing system. When the customer takes a new part, the system automatically notifies the distributor. The distributor can bill the end-user and, if necessary, alert the warehouse to replenish the dispenser. Distributors can cut even more costs for end-users by placing the dispensing system in convenient locations so employees don’t waste valuable time wandering around looking for a tool.

End-users that understand the value of this process will pay higher prices – either for products or in fees – or pledge customer loyalty, resulting in guaranteed or increased sales. In this new model, end-user demands actually became an opportunity to raise the distributor’s margins while lowering the end-users’ overall cost.

Distributors that implement processes that maximize technology can avoid being squeezed. Instead, they will create a stronger channel that suppliers and end-users wouldn’t think of abandoning.

This article originally appeared in the May/June 2003 issue of Progressive Distributor. Copyright 2003.

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