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The Road To Opportunity In Wholesale Distribution
Dynamic forces of change are converging upon the wholesale distribution industry. The business environment is changing and distributors must change, too. This sobering conclusion comes from new Facing the Forces of Change: The Road to Opportunity report (available from the National Association of Wholesaler-Distributors at www.nawpubs.org).
Looking down the road ahead, wholesaler-distributors face a future in which the realities of the business environment differ from the past in novel and challenging ways. The traditional ways distributors make money and grow will be rewritten through a combination of external forces of change and by the strategic responses of innovative wholesaler-distributors.
Despite these challenges facing distribution executives, our report delivers an underlying message of optimism about the industry’s future. Today and in the future, we firmly believe wholesaler-distributors have many new opportunities to put themselves on the road to renewed relevance and increased profits.
Our industry builds from a position of great financial strength and influence in the U.S. economy. In 2003, total sales of wholesaler-distributors reached $2.9 trillion. The industry employs one in 20 U.S. workers and contributes 7% to the United States’ private Gross Domestic Product. Wholesale distribution also drives our country’s economic growth, contributing 25% of the total productivity gains in the U.S. economy during the past decade.
FORCES OF CHANGE
The business challenges ahead will come from a combination of customers, emerging competitors and suppliers. Some of these forces may be familiar, while others may just be emerging in your line of trade. However, our research suggests that all distributors will feel the impact as these forces gain critical mass throughout wholesale distribution.
Trend 1: Customer Self-Service
Self-service options will change the way you do business with customers and transform your salesforce. Customers will roam online, searching for information and taking over more of the pre-sales and transactional activities typically handled by their wholesaler-distributors. Distributors will not have a lock on information needed by customers to make purchasing and sourcing decisions, since manufacturers and online sources will make such information readily available.
In response, wholesaler-distributors of all sizes will complement their traditional selling methods with online technologies. Wholesaler-distributors expect to receive one-third of their revenues from online orders by 2008. Smaller wholesaler-distributors will catch up to larger companies by 2008 as the costs and complexity of today’s technologies drop.
Customer self-service will also significantly erode the perceived value of the wholesale distribution salesforce in educating customers about new products. The majority of wholesale distribution executives believe the Internet could actually replace their salesforce as a source of product information. Manufacturers will seriously question the effectiveness of the distributor’s salesforce going forward. As a result, sales positions in wholesale distribution are forecast to grow at half the rate of overall U.S. job growth over the next five years.
Trend 2: Strategic Sourcing
Customers will gain additional bargaining power against distributors by analyzing their internal spending data. Strategic sourcing, a three step-process for reducing purchasing costs, enables customers to make more informed, rational sourcing decisions.
As a result, customers will become more confrontational, rely on increasingly sophisticated sourcing initiatives, and use new technologies to counter the field-level sales tactics of distributors. Aggressive tools such as online reverse auctions, in which lowest product price wins, are here to stay and will continue to grow.
Furthermore, Pembroke Consulting’s research indicates that customers will push for better internal contract compliance from end-users within their organization. Expect the elimination of regional pricing for large customers, local price matching by small wholesaler-distributors, and new constraints on the ability of local buyers to choose brand and supplier. Wholesaler-distributors larger than $1 billion should expect to get nearly half of their revenues from contracts by 2008.
Trend 3: Fee-Based Services and Pricing
Fee-based services and fee-for-service pricing will grow sharply, but significant barriers will remain. Our data show that over 80% of wholesaler-distributors plan to charge fees separate from product costs. Customers will accept fees, but slowly. Some will simply change distributors rather than pay for service.
Fee-based services promise improved profitability for those distributors who can deliver innovative services with genuine value to the customer. Customers will consider paying for new services offered by distributors that can lower their costs and drive profits. We caution that attempting to charge new fees for currently free services will not work. Fee-based services will also require continuous reinvention over time to remain relevant.
Moving to fee-based services changes the relationship between customer and distributor. Distributors will be forced to deliver specific, measurable results as well as maintain a high level of excellence in their core activities.
Manufacturers, under product pricing pressure from both imports and domestic competition, have also identified services as a business opportunity. In fact, most manufacturers in our study plan to build on their design and research activities and offer fee-based services directly to end users, with or without their distributors.
Trend 4: Logistics and Fulfillment
Third-party logistics companies are on a collision course with distributors for control of the supply chain. Going forward, competition for wholesale distribution’s core logistics and fulfillment functions will greatly intensify. Eighty percent of the 200 largest logistics companies already offer pick-pack-ship services in direct competition to wholesale distribution. More than half of the Fortune 500 currently outsource supply chain functions to logistics companies.
Suppliers will treat logistics companies as viable alternatives to wholesale distribution. A majority of suppliers to distributors expect logistics companies to be competitive with wholesaler-distributors for customer order processing and fulfillment. However, wholesaler-distributors will retain a distinct advantage in post-sales service and support.
Alternative channels now provide additional options for material purchasing along with service levels that differ from traditional distributors. Customers turn to these channels for different buying situations, chipping away at wholesaler-distributors’ longstanding share of channel sales.
THE ROAD TO OPPORTUNITY
New challenges bring new opportunities for savvy distributors. As products increasingly become commodities, customer service will become the true differentiator. Distributors have an opportunity to become suppliers of customized and differentiated relationships throughout the supply chain instead of merely reliably providing goods.
Wholesale distribution has survived by continuously reinventing itself over and over again. Facing the Forces of Change: The Road to Opportunity highlights many strategies and tactics for wholesale distribution executives:
- Get to know your customers all over again. Through years and years of day-to-day account servicing, distributors have developed an in-depth and unchallenged familiarity with customer needs and expectations. Test the understanding of yourself and your management team with external, objective data from customers. To understand the true service needs of your customers, sit down with both good and bad customers and walk through their buying processes.
- Offer new fee-based services that directly improve the customer’s profitability and operations. Distributors can leverage existing relationships, build on traditional competencies, offer new value, and get compensated appropriately for the new value added that is provided.
- Remain a cost-effective channel by encouraging self-service by customers to reduce costs and boost internal productivity. Self-service should be the default alternative for customers whose level of spend does not justify labor-intensive interactions. Many distributors are already seeing internal cost reductions when customers begin entering their own orders.
- Train your salesforce for tomorrow’s challenges. Salespeople, who are accustomed to selling on price, will need training to compete in the evolving world of services and solutions. Evaluate each of your salespeople to determine if he or she needs training in qualifying customers, uncovering problems, identifying solutions or bringing the company’s resources together for problem solving. Make sure compensation plans are based on customer-focused needs, not just on history.
- Act now to reinvent supplier relationships. Online auctions will force distributors to cut back on sales people and request more drop shipments to customers, undercutting the fundamental distribution role desired by manufacturers. If distributors do not take the lead, manufacturers will simply take more and more business direct.
- Offer unbundled supply chain solutions to suppliers and customers. Distributors of all sizes are leveraging technology, warehouse infrastructure and logistics as a fee-based service without performing sales and marketing activities.
By adopting these and other strategies, your company can successfully seek out the new paths to profitability outlined in Facing the Forces of Change: The Road to Opportunity.
© 2004 Pembroke Consulting, Inc. Adam J. Fein, Ph.D. is the founder and president of Pembroke Consulting, a firm that helps senior executives of wholesale distribution, manufacturing and B2B technology companies build and sustain market leadership. He can be reached at (215) 523-5700 or on the web at www.PembrokeConsulting.com. This article is adapted from Facing the Forces of Change: The Road to Opportunity, which is available for purchase online at www.nawpubs.org.
afein@pembrokeconsulting.com
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