The Evolution Wholesale Distributors Must Embrace

Transcription

1 Business and Technology Insights Inside: Executive Summary Background Implications Guidance Summary

2 Executive Summary The recession of 2008 triggered a number of changes which have adversely affected the wholesale distribution industry. Margins are thinner than ever while costs continue to rise. Worse, buyer behaviors and expectations have permanently changed, making it harder for wholesale distributors to raise prices to pass along added costs. However, even with these challenges, we believe there is a window of opportunity for innovative wholesale distributors to improve their market share, financial position, and most importantly, the value they deliver to their customers and to their customers customers. The most successful wholesale distributors will be those that: Can demonstrate, communicate and substantiate the value they deliver in the broadest possible sense Capitalize on new data and analytics capabilities to improve all aspects of the value chain Produce new value added information and systems to delight and improve their customers businesses The following pages document the journey we believe most wholesale distributors must embrace now or face a future of even thinner margins, greater market volatility and doubtful financial security. page 1

3 Background The recession of 2008 created a new economy: an economy that may dramatically change markets and buyers for years to come. These changes include: A new set of economic realities for buyers of goods and services. A robust economy, pre-2008, gave way to a particularly weak, constrained economy that is still on the rebound. The emergence of a well educated buyer of both business and consumer goods. These are buyers who have learned to embrace the Internet and mine it for all of the pricing, negotiation and other insights they can acquire. A more volatile market for key commodities. Prices for metals, fuel and other products have experienced wide fluctuations in pricing which are being reflected in higher materials and transportation costs. Small changes in demand for certain commodities, like steel or oil, from the developing economies of the BRIC (Brazil, Russia, India and China) countries can move pricing dramatically. More rapid movement of commodity pricing. The speed, not just the amplitude, with which prices have been moving, continues to catch many companies by surprise. What Everyone Now Knows About the Goods You Make and Sell The Internet is an amazing communication vehicle and it has spawned all new sources of information that buyers, consumer and industrial, use to gain insights into pricing, margins, components, etc. One example of these information sources is isuppli ( In their own words, IHS isuppli s market intelligence helps technology companies achieve market leadership. IHS isuppli s Teardown portal provides deeper insights into bill of materials, BOM cost, photo analysis and graphical representation of electronics. Not only is the information abundant, it is also very current. When Apple released the iphone 4S on October 14, 2011, isuppli had reported on its cost and components just four days later. Many buyers of goods still expect to pay prices similar to those found in late Why? For many of them, they don t see any change in the value added by the manufacturers or distributors of the goods they buy. They feel the price they pay has to remain low, as they themselves may not be able to command price increases with their customers. And, these buyers are seeing many more sellers and more buying channels (via the Internet). In other words, competition for business is fierce, pricing is cutthroat, educated buyers have purchasing power, and, differentiation is non-existent. Everything is all about price (or so it seems). Wholesale distributors have two major options to address the realities of this new economy: 1. Understand this change, learn from it and adapt your processes; or, 2. Believe the changes are short term in nature (and watch customer counts and profits continue to erode). Many wholesale distributors used a familiar playbook to manage through the recent recession. They cut costs at every corner to try to maintain profits. But, continued cost-cutting will likely fail to produce additional benefits for many wholesale distributors. Cost cutting does not take into account the more intelligent buyer, the increased number of channels that buyers have to make purchases, and it clearly does not add any additional services that customers demand from their suppliers. page 2

4 Implications Wholesale distributors should be asking themselves four questions: Is our company having the right conversation with our clients? What information should our customers have? Are our required margins being achieved? Where will our growth come from? To answer these questions, Distributors will need to rethink the data analysis, work processes, and their use of modern technology in order to remain relevant. Future Growth and Communication In a mature market, wholesale distributors will not achieve much of their revenue growth simply from growth in customer spending. Much of their growth will likely come from entering new markets (via geographic or product line expansion) or obtaining new customers (via taking market share away from competitors). Either way, wholesale distributors must understand the different dynamics of today s economy. We believe growth will occur for those wholesale distributors that engage with their customers in a more communicative, fact-based manner. Chances are that your organization has not had much communication with the heads of your customers over the last few years. When you have communicated with them, it s probably been regarding two activities: orders placed and permission to pass along increased costs. In the customer s eyes, neither of these communications are value adding. Instead, customers have many latent communication needs that many wholesale distributors have failed to recognize. For example, do you tell your customers: Which products or product lines you carry exclusively for them? How accurate your pick rates are? How few backorders you generate? How much extra inventory you carry to ensure they suffer no stock outs? What product mix changes would result in lower costs for them and higher margins for your company? Many wholesale distributors would have a tough time conducting these information and fact-based discussions with their customers as their current information systems do not produce this type of information. Investments in information technology in the wholesale distribution sector are generally modest with little investment monies available for new IT systems in the last few years. Nonetheless, if a wholesale distributor s information systems cannot produce critical customer facing data that could change the economics of both buyer and supplier in a meaningful way, then these systems are deficient by their very nature. page 3

5 Margin Pressure The complexity of today s economy is compounded with use of technology and availability of data in customer s hands. Customers now have more access to pricing information through the ease of research on the internet. The ease of doing simple research almost compels customers to do the most minimum price check over the internet before moving forward. This pricing knowledge has placed a deflationary pressure on goods and services making it imperative that wholesale distributors are aware of the market information before their customers are and educate them on potential pricing schemes that might be present in the marketplace. MANUFACTURER WHOLESALE DISTRIBUTOR CUSTOMER There are other impacts on your margin than the deflationary pressures from your customers. A continuing compounding effect on margins is the escalating direct and indirect costs in your business. Healthcare costs continue to raise. Fuel costs are volatile with an overall upward trend in play. Increased oil prices are driving increases in transportation, packaging, and component prices. Labor costs, while down for many workers in recent years, are not staying flat. These escalating costs are in stark contrast to the deflationary price pressure being exerted by buyers. This results in a clear profit margin squeeze that must be managed properly. The typical wholesale distributor operates on very thin margins. A slight variation in the price of goods, transportation costs, labor costs or overhead, can result in disastrous financial outcomes. To illustrate this, we have shown the impact of price increases in cost of goods sold and SG&A costs for a real auto parts wholesale distributor. While this company has experienced losses throughout the recession, a relatively small 4% increase in SG&A and cost of revenue will effectively double their losses. Profitability of wholesale distributors is highly sensitive to even minor swings in key cost areas. (values in millions USD) Total Revenue Cost of Revenue Gross Profit Selling, General & Administrative Operating Income or Loss 2010 Actual 12,639 If costs increase... 3% 4% 5% 6% 12,639 12,639 12,639 12,639 11,298 1,341 1, ,637 1,002 1, , ,921-1,032 11, ,939-1,163 11, ,958-1,295 page 4

6 Guidance Given the state of business for distributors, there is a need to operate with a level of precision, efficiency and cost structure a step above where most are operating. The best wholesale distributors will embrace a three-part evolution -- an evolution that could reassert their stature within their vertical. The Evolution of Modern Wholesale Distribution VALUE DELIVERED Update Existing IT System Increased Customer Knowledge Acquire & Integrate 3rd Party Data Monitor Data to Detect External Social Emerging Purchase Needs Create Category Management Tools Calculate and Evaluate Profitability by Customer Suggest New Product Mixes New Collaboration Opportunities New Analytics (Company & Customer) New Business Insights TIME The first step in the evolution is to create a serious discipline around cost accounting in their company. If the current information systems are insufficient to support this, then they must be upgraded. Once a company understands the costs of each individual product, each customer it serves, the profitability or lack thereof of each individual product (on a fully loaded cost basis), etc., only then can it s representatives have meaningful discussions with their customers. Your customers may be floored to learn about some of the inventory decisions your company makes regarding their organization. They may have failed to realize just how many unique items you carry just for them. They may not understand how expensive some of these products are and what their low order volumes translate into on a carrying cost basis. Your customers need to understand how much cost you incur to delight them with every order they place. Until they understand these issues, they will not change behaviors; they will continue to focus on low price as the major determining factor of where and how they place orders. Your company must change the dialogue if it expects to change the outcomes. page 5

7 In the second step of the evolution, businesses must develop powerful analytic and forecasting capabilities. The skills, data and technologies needed to be proficient in this area are essential for driving future growth. We believe that the best wholesale distributors will have in-house talent and systems that: Determine product stocking levels and deliver maximum profitability across a number of changing commodity and other econometric variables. Continuously monitor the overall profitability of your customers and on the orders they place. This analysis is supplemented with specific recommendations that the sales force can act upon in order to drive better customer behavior and optimal financial results. Integrate new costs, profitability and service-level insights with sales, marketing and customer education initiatives. In the third level of the evolution, we believe companies must move beyond the use of internal transaction data. They must embrace the use of third-party data feeds from industry groups, benchmarking organizations and, most importantly, point-of-sale transaction data of their customers. We have already seen, to tremendous positive effect, the results of merging internal replenishment information with the point-of-sale data coming from a customer s customer. In this stage of the evolution, we expect to see more companies utilizing cloud-based analytic applications. These tools will be populated with internal ERP data as well as customer data, customer s customer data, and unstructured data. Unstructured data includes information found on the Internet in blogs, tweets, news stories and other information sources. We believe that the best companies will exploit the insights found in these new sources of information to correctly predict new buying trends which can be used to signal adjustments in product re-ordering, new product introductions and stocking decisions. Summary We believe the wholesale distribution sector has been changed not only as a result of the economy, but also because of changing buyer values, the rise of more available information (i.e., transparency) on the Internet, volatility in commodity markets and other macro economic factors. Furthermore, many of these changes may be with us for many years to come. The best wholesale distributors will be those that can determine the best, most successful product mix to carry in this particular economy. But, equally important, is that these companies must also identify the best customers to possess as well. Part of that determination will be based on a new kind of analysis distributors must conduct on their own product mix and outwardly with the customers they choose to do business with. Knowledge of the customer s business can only be gained with new forms of communication and new data to communicate with those customers. The post-2008 wholesale distributor must be one that possesses great information and knows how and when to communicate it. They will leverage cloud-based technology platforms, not only due to their inherent cost advantages, but also the surrounding technologies, analytics, and revamped work processes possible with these platforms. Is your company ready to compete in the modern wholesale distribution world? page 6

8 Contributors Matt Haller Principal Daniel E. Beil Director About Baker Tilly Baker Tilly is a full-service accounting and advisory firm whose specialized professionals connect with you and your business through refreshing candor and clear industry insight to provide high value results. Our specialized expertise and global reach in audit, tax, and management consulting support your organization s goals with knowledgeable, competitive insights. As an independent member of Baker Tilly International, the world s eighth largest network of accounting firms, we bring you access to market-specific knowledge in 120 countries. We believe that exceptional client service comes down to a single idea...trust. The trust that comes from working with people dedicated to understanding your business needs. People who respond to the challenges you face today and anticipate the opportunities of tomorrow. Our clients recognize the differences that set us apart. Proactive, personal, and responsive client service Active in a strong global business network Informed observations and recommendations from experienced professionals who know your industry Team approach that ensures continuity and access to partners and managers Broad industry and service offerings with deep specialization We bring our skills, integrity, and energy to each client engagement. Connect with us: connecting@ page 7 Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought Baker Tilly Virchow Krause, LLP