Blog Post
Every business experienced some form of disruption last year. And as an industry, distributors are still working out solutions as they continue to adjust to ever-evolving market challenges.
As such, distribution leaders are rethinking their strategies in order to stay relevant, competitive and exceed customer expectations.
Enter the new rules of competition for today’s distributors.
To see what’s happening in distribution and how to prepare and respond to disruptions, we went straight to these industry all-stars for a debrief.
- Ian Heller, Founder and Senior Partner, Distribution Strategy Group
- Magnus Meier, VP and Global Head, Wholesale Distribution Business Unit, SAP®
- Erik Severinghaus, EVP of Business Development, Conexiom®
- Judd Marcello, EVP and Chief Marketing Officer, Conexiom®
This panel of experts discussed everything from macro forces affecting distributors to supply chains to retaining top talent, so here is just a sliver of the conversation. Watch the replay of the entire conversation here.
Topic 1: What trends are you seeing among distributors that contribute to competitive pressures?
Ian: There are several forces of disruption and sources of disruption. Some of them are short-term, some are long-term:
Most of the workforce is now millennials, and they have different needs. They’re more fluent with technology because they’ve had all it all their lives, which means there are increasing ecommerce expectations.
Next, ecommerce is not just about having a great website; you need an entire foundation of strong technology to provide the capabilities that meet customer expectations.
Also, massive cybersecurity concerns were enhanced during the pandemic as more people work from home and vulnerabilities increased.
Then, there’s the move to the cloud, which is a competitive advantage, because it means that you don’t accumulate technical debt.
Finally, marketplaces are scooping up simple transactions that used to go to distributors. The end game for these non-complex transactions is going to go to marketplaces that are operated by big players.
All these trends are driving increased consolidation, so you see active strategic buyers and private equity (PE) groups that are buying distributors. If you ask them, they’ll tell you how they value distributors, and what they’re looking for, so you’re probably going to be either a consolidator in the near future, or you’re going to be a consolidate seller. If you’re a consolidator, you need to compete on scale. You’re going to need process consistency and a state-of-the-art platform that enables integration so you can get the value out of an acquisition. If you’re a seller, you better have a great management team. PE are looking for operational efficiency: well-run companies, documented processes and great systems.
Whether you’re a buyer or a seller, there is no path that doesn’t require the best technology that you can afford and the best operational efficiency you can achieve. That’s the commonality of what’s required going forward, no matter how you’re going to compete.
Topic 2: What are you seeing in terms of digital transformation as it relates to these forces of disruption?
Magnus: Digital transformation is an enabler of business models. This is an entirely new way of thinking: It switches from a reactive model to a proactive model. In the past, when you’re in a reactive model, it’s enough to report on things that are happening. But where you gain an advantage is by knowing where you’re stuck, where suppliers are falling short, because you can anticipate what’s going to happen, and plan and mitigate risks.
A business model that we are now seeing is a hyperfocus on services, which goes up to the level of solutions. Recently, high-tech distribution sites have started to market themselves as solution aggregators, just to underline how they are interested in long-term customer relationships, taking care of the product lifecycle and the customer lifecycle.
The second layer, besides the business model, where digital transformation plays a role is enabling the operational level. Throughout this pandemic, SAP talked to many customers that were grateful to own a modern ERP system because the data is at hand. Having that technology gives distributors an advantage, and this is the value of digital transformation.
Topic 3: How do distributors go about implementing everything from business strategy to operations to customer experience?
Erik: First, figure out what is most important to your business as a distributor, and be better at that than anyone else in the world. Have the best services, have the most responsive, proactive salespeople, and then all the other stuff—do those other tasks as efficiently as possible, so you can shift resources to the point of specialization, where you can be better in your niche than anybody else.
The technologies that enable you to do that is, obviously, having the right ERP system, like SAP, which is absolutely critical to that transformation.
At Conexiom, we believe that the right processing system enables order-to-cash (O2C) and procure-to-pay (P2P) business processes that are critical to operations. What we see across our distribution clients is that more than 50% of distribution orders come through as emailed PDF or Excel files… so even millennial buyers don’t want to type data into two different systems. Even in a world of digital transformation, the number of manual orders coming in is increasing, not decreasing, which is counterintuitive to a lot of people that assume that those things are going away.
What is necessary to enable that efficiency and resiliency is having a way that we can process these things automatically to meet customers where they are and bring in the benefits of a digital order. We help process those orders with the same customer-service expectations you expect from an ecommerce order, a marketplace order, or any other type of digital order. And that’s why we partner with SAP, so distributors can gain the benefits of a modern platform, like SAP, to then achieve that efficiency and resilience.
Topic 4: How can distributors preempt issues within the supply chain?
Magnus: A great example is what happened at the Suez Canal. We talked to a few distributors this past spring and asked them, “Does this impact your business?,” and they responded, “We don’t know.” That’s probably the worst response you can get, because they’re not connecting the buyer with the seller, they act independently and that’s how it’s always been.
We’re working with customers to create internal collaboration. To get the buyers talking to sellers to overcome those challenges. So now they leverage technology to understand what implications that has and trigger follow-up processes. This is a trend that we are seeing—overcoming silos and tying in documents such as advanced shipping notices.
Erik: The only way that you can really start to think about that kind of stuff is really through having transparency and visibility across the supply chain, all the way through to the demand side. To Magnus’ point earlier, whether it’s because of trade agreements, geopolitical or biological threats in the form of a pandemic that continues to undulate throughout the world, all these forces are driving less predictability. And businesses are operating at greater scale than ever before. So, this requires transparency, understanding, and an ability to track what boxes or what containers are on what ships, and if one of those ships goes bump in the night, how customers will be affected.
Topic 5: How can you win using services as a differentiator?
Ian: The big players, by and large, are not great at services, with some exceptions. Services almost always represent the introduction of variable costs into the business model. To compete, introducing services, which are inherently variable costs, is important because it also allows you to add value deeper into the organization.
For example, if you start doing replenishment of bins near the production line or dedicated jobs like delivery of materials or safety training on site, and you get really good at that, you become essential to that customer and the value you add to their business.
Traditionally, the problem that distributors have is they just roll the costs of services into the gross margin of products, and they have not monetized them or charged the cost back.
I recommend discovering what services you can add that are differentiated and set you apart from major players because you’re more nimble, closer to the customer and you’ve got local branches and sales reps. Figure out what that is, put a general manager in charge of it, treat it the way that the manufacturer treats new product development, figure out how you monetize it with a P&L, and you’re now building a business that’s much different and adds value.
Topic 6: How can distributors navigate the talent shortage to attract and retain the right talent?
Ian: People are still grappling with the talent shortage. If you want the right talent, think through your work-from-home policy, salary, long-term incentives, and other benefits to make employees want to stay. You’ve got to offer a competitive workplace environment, not just against other distributors, but against other companies.