Executive Summary. Special Economic Commentary: Macroeconomic Outlook The Road Ahead

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1 Executive Summary Technology has long been a driving force in business, but never before has the speed of technological change had such a profound effect on companies day-to-day operations and long-term outlook. At least that is how it feels for many wholesale distribution executives as they struggle to understand, embrace, and implement the latest business systems, e-commerce technologies, social networking, and mobile platforms that are bringing trading partners closer together than ever. The rapid growth of web-based technologies, social networking, and mobile platforms in particular is creating a fundamental shift in the way business gets done. These capabilities have led to the increasingly connected world we live in, and they are changing the customer experience entirely. Wholesaler-distributors must react quickly and continually. This report is intended to help distributors meet that goal. In the following pages, we outline the economic challenges that continue to shape the business landscape; the ways in which technological advances and the connected world are changing distributor operations now and for the next 3 to 5 years; the new role that distributors must play in this connected world; the ongoing need for business analytics and an advanced understanding of how they can help distributors meet their objectives; some of the key emerging trends that will shape business and our lives in the not-too-distant future; and, finally, a look back at our 2010 report Facing the Forces of Change : Decisive Actions for an Uncertain Economy ( to see how far we have come in understanding the forces that are shaping wholesale distribution. Special Economic Commentary: Macroeconomic Outlook The Road Ahead NAW Senior Economic Advisor Alan Beaulieu provides a special economic commentary covering the next 3 to 5 years. We are projecting that the road ahead will give wholesalerdistributors years of growth and profit opportunities. The economies of the United States and of most countries in the Western Hemisphere will expand through 2013 before softening in A 0.6% year-over-year decline is expected for 2014 in the United States and to varying degrees throughout the hemisphere. Recovery and growth are forecasted for 2015 and beyond. These opportunities will be well hidden by the challenges of national politics, uncertainties in China, and Europe s struggles to regain banking and sovereign solvency. Noise is likely to mask opportunities, so stay focused on the tried-and-true leading indicators that are presented in this section and at the annual January NAW Executive Summit. 7

2 Overall, despite some macroeconomic difficulties, the next 5 years are going to provide prepared and well-positioned wholesaler-distributors many opportunities. Preparation should include spending money on increasing inventory turns and the efficient receiving, stocking, picking, and shipping of inventory. Inflationary pressures will demand that business leaders reduce their exposure to higher inventory carrying costs and handling costs. Those that do not prepare run the risk of being short of the cash needed to handle the expanded opportunities. Chapter 1: Thriving in a Connected World Globalization, consolidation, competition, and disintermediation are among the forces that will continue to affect distributors large and small, prompting industry leaders to transform their supply chains and business models, and, in the process, shift costs, reallocate resources, and seek out new sources of competitive advantage. Adding to the challenge of navigating this dynamic environment is the complexity, volatility, and uncertainty that characterize the business and economic landscape. Among distributor CEOs responding to the online survey for this Facing the Forces of Change report, 74% see the macroeconomy exerting a very significant influence on their business today, and 82% of CEOs foresee a very significant influence of the macroeconomy in Yet another set of forces is creating opportunities to further transform businesses, supply chains, and perhaps most important for distributors the customer experience. Today s connected world enabled by advances in IT and communications, and shaped by innovations in e-commerce, mobility, and social networking offers wholesalerdistributors unparalleled opportunities to connect, collaborate, create, transact, and differentiate with supply chain partners. An independent electrical distributor with operations solely in the United States recently recounted the story of how it secured $80 million worth of business from a customer in the United Kingdom who found the firm via the web. Opportunities such as these would have been difficult to imagine just a short time ago. The connectedness of today s world is raising the complexity of business relationships exponentially. Today, wholesaler-distributors, small and large, must quickly learn to thrive in this world that is forcing channel partners to collaborate and transact in ways that test the boundaries of their imaginations, challenge traditional sources of competitive advantage, and harness their collective capabilities. No matter how small or locally focused your distribution business, you operate in a global, connected world. Some of the product you sell is likely sourced from overseas, prices for your products are influenced by global commodity prices, and your customers can quickly compare your prices and availability to those of your competitors. 8 Executive Summary

3 Adopting a more expansive view of the value chain and harnessing the power of e-commerce, mobile accessibility, and social media are essential to succeeding in this connected world. Indeed, four out of five distributor CEOs see mobile technologies exerting a very significant impact on their business by 2017, up from just 50% today. Additionally, by 2017 distributor CEOs anticipate generating more than 20% of their sales via e-commerce on average, more than double today s level. Chapter 2: Reimagining the Role of the Distributor Distributors today and in the future are faced with an unprecedented number of change drivers, as well as an accelerating pace of change. Among the more influential and persistent factors driving the change are globalization, consolidation, competition, and disintermediation. Consolidation has been reshaping distribution for at least the last 25 years, but today it is having a different effect. Previously, consolidation shifted negotiating leverage across the value chain, with larger entities typically gaining leverage (because they were able to push through price increases or demand incremental discounts) and smaller entities seeing their leverage reduced. Consolidation is now exerting a broader influence that extends into areas such as value-added services, core service expectations, and information sharing. Suppliers, for example, increasingly expect that distributors will share detailed information about sales performance, changes to the opportunity pipeline, sales force activity, price and promotion dynamics, the competitive landscape, and the design and performance of products. These expectations are rapidly evolving and, in most cases, expanding. In addition, some other factors now exerting greater influence are commoditization, demographics, and the role of technology. Collectively, these factors are driving a greater degree of change at a more rapid pace than ever before. In this environment, wholesaler-distributors must continuously reassess not only their role (that is, their value) but also how they create that value (that is, their business model). Chapter 3: Analyzing and Optimizing Everything For years, distributor executives have heard business leaders, consultants, peers, and others talk about the growing need to advance the application of analytics to their business. To further the dialogue on analytics, Facing the Forces of Change : Decisive Actions for an Uncertain Economy devoted an entire chapter to the subject, explaining that leading distributors are leveraging foundational analytic approaches such as Six Sigma, Total Quality Management and Lean, customer segmentation, as well as price, inventory management, and optimization to identify, quantify, and prioritize Executive Summary 9

4 opportunities for efficiency or incremental revenue or margin. The underlying message was that leading distributors are embracing a broad array of increasingly sophisticated analytics for sustainable competitive advantage, converting data into insights and insights into action. The adoption and evolution of analytic activities continues, although serious performance gaps remain in areas such as price optimization, understanding cost-toserve, and assessing sales force productivity. The analytics domain has also undergone an advancement revolution, adding several new questions to distributor concerns: What is meant by Big Data, and how is it relevant to wholesaler-distributors? My company has already done customer stratification, price optimization, and inventory segmentation, is it worth it for me to do more analysis? What are advanced analytics and how do they apply to my business? This chapter provides perspective on the evolutionary and revolutionary dimensions of the analytic landscape and develops responses to those questions. In the process, you will see how analytics have changed quite dramatically in the time since the 2010 Facing the Forces of Change report was published. Leading distributors are not only advancing the application of analytics, they are also applying advanced analytics. Chapter 4: Important Developments to Watch This chapter introduces new trends likely to exert considerable influence on wholesale distribution over the next 3 to 5 years. This report speaks a great deal about the growing use of IT in wholesale distribution and the transformative roles that e-commerce, mobility, analytics, and social networking will have. However, there are other technology revolutions happening that distributors need to consider as they develop their strategic plans. The trends outlined here were chosen specifically because of their potential, as yet mostly unrealized, to transform wholesale distribution. Not all of these technologies will mature or become accessible from a cost perspective, and not all of them have relevance to every wholesaler-distributor. Nevertheless, the potential exists for them to radically change business models, organizations, staffing models, and value propositions across a wide range of industries, including wholesale distribution. In some cases the technologies have already been in use for some time for a noncommercial activity (sometimes by the military), in other cases the technology is still in the labs, and in other cases the technology has made the leap from lab to market, but current applications are limited. The risk is that distributors dismiss these technologies either in whole or part for any one of these reasons. 10 Executive Summary

5 So what are these technologies? The following is a list that either various distributor executives have made reference to or that have a reasonable possibility of directly affecting wholesale distribution: 3D printing also known as additive manufacturing Robotics in all its various forms Drones the flying ones Driverless vehicles cars, trucks, and buses. Chapter 5: Facing the Forces of Change : What s Changed Since the 2010 Report? In the 2010 report Facing the Forces of Change : Decisive Actions for an Uncertain Economy, we urged wholesaler-distributors to take a longer-term look at their business in light of the sea change occurring in the global economy and, by extension, in wholesale distribution. The report addressed the new economic environment, ruled by uncertainty and unpredictability, and its intersection with lightning-fast changes in technology as fundamentally altering the way wholesaler-distributors view themselves and go to market. In many ways, these changes and challenges have only intensified. Business partners are more connected than ever before, distributors are reinventing themselves at every turn, data analysis is driving more strategic decisions, and new business trends emerge almost daily. Indeed, it has probably never been more important to take a predictive and proactive approach to your wholesale distribution business. Only by considering longer-term implications now while aggressively managing today s business will distributors position themselves for success in the new economic environment, we stated in the 2010 report. Distributors continue to deal with many of the challenges written about in 2010, and the roots of their new challenges lie in many of those previously identified trends and issues. A look back at the 2010 report through the lens of the 2013 Facing the Forces of Change report offers key insights into how far wholesaler-distributors have come in dealing with many of these industry challenges while providing a glimpse at what lies ahead. Executive Summary 11