Industrial Distributors: How to Gain Competitive Advantage from Market Disruptions www.fortna.com Fortna 1
While there are some positive indicators of growth in the industrial sector and many industrial distributors are seeing good first half results, a number of challenges continue to have impacts that could affect competitiveness for years to come. The changing digital landscape and a number of challenges arising from technology, coupled with outdated distribution networks, inventory forecasting accuracy problems, increased merger and acquisition activity and high employee turnover are just a few of the issues industrial distributors grapple with daily. Whether today s optimism can be translated to stronger long-term growth depends largely on how you choose to respond to these challenges. In this article, we ll discuss the five trends that are currently impacting industrial distributors success and how to overcome these hurdles. Trend 1: Changes in the Labor Landscape Labor continues to be problematic and will continue to have impacts to the business as Amazon and others increase competition for workers in already tight markets. First, the competition for labor has driven an increase in hourly wages that have significant bottom line impacts. For every $1 increase in wages, small to mid-size distribution operations see a $1 million increase in operating costs per year. Those margin hits will have to be covered somewhere. Minimum wage and healthcare laws are also adding to labor costs. With labor availability being a limiting factor, distributors are relying more heavily on temporary workers to meet their needs. Although this keeps costs low and allows for a flexible and scalable labor force, there is still a heavy burden placed on distributors to train and retain talent. This costly training is lost with high turnover rates typical of a temporary work force. Further compounding the challenge, Baby Boomers are approaching retirement age and Millennials aren t interested in pursuing distribution jobs in the same numbers as earlier generations. Moreover, finding and hiring supply chain talent with the experience and knowledge to meet today s challenges is hard. You need to reconsider both the warehouse and the work since the next generation of workers will change the landscape in many ways. Millennials view work-life balance differently than their predecessors and embrace technology as a means to work smarter, not harder. Leaders are figuring out how to create a workplace that will appeal to Millennials values, as well as leverage the insights and expertise of these workers. You may also need to tap into different labor pools by allowing for flexible and part-time hours. Look at implementing automation and robotics as a way to decrease reliance on a dwindling labor pool and make the warehouse a more appealing place to work. Advanced technology and automation solutions can improve productivity by 50 percent or more. Factoring in the costs and potential improvements can result in shorter paybacks and increased ROIs. Trend 2: Disintermediation More than ever, concerns about disintermediation are growing as the digital marketplace makes it easier for manufacturers and suppliers to open up direct channels to the customer in pursuit of higher margins. As manufacturers and suppliers start to serve direct markets, distributors are being pushed out. At the www.fortna.com Fortna 2
same time, customers are demanding more in terms of shorter order-to-delivery cycles and the ability to delay orders so that you are holding larger quantities of inventory for longer. This is creating a situation where you are constantly trying to balance capital, value and service. One way to address the issue of disintermediation is to add to your value bucket. Now, more than ever, you should consider and embrace new technologies, using the information gleaned from them to provide value-add services to customers. Look for ways to turn data into insights, creating a product-service hybrid that customers can t find elsewhere. For example, the introduction of smart technologies that provide data around a product s usage can enable insights to better help customers run their business or optimize the beneficial use of their products. Business sensors are ever increasing (15 billion today and 50 billion by 2020), and you can use the information they provide to drive profits and competitive advantage. Trend 3: Inventory Optimization Inventory optimization becomes a strategic imperative as merger, acquisition and consolidation activities continue to accelerate and distributed order management enables improvements in inventory utilization. The rise in mergers and acquisitions is creating the duplication of resources, which leads to redundant inventory in more than one place. You need an inventory strategy that balances service and cost. Your strategy should align to support business growth, meet varying needs by geography, provide a localized feel and leverage spend. Otherwise, too much inventory will increase capital expense and poison profits, and too little inventory will starve revenue and cost you customers. In addition, the need to add new products in order to attract and keep customers or increase sales can be a struggle. SKU lifecycles are being compressed by changes in product form or functionality resulting from advances in technology. Companies unwilling or unable to eliminate excessive inventory will find themselves with ever-higher SKU counts. More SKUs add complexity and costs to distribution operations. To improve inventory performance, consider inventory segmentation and the reduction of non-critical inventory. Working in conjunction with the sales team, accurately plan and forecast inventory requirements. It is vital to remain disciplined using statistical inventory methods, such as economic order quantities, replenishment set points and statistical inventory targets. In addition, all obsolete, damaged and slow moving inventory should be centralized or removed from the warehouse to create room for active inventory. The distribution network also needs to be reviewed for opportunities to reduce the number of distribution centers or to stock inventory differently at the branch level. Lastly, don t forget to rationalize the SKU base, reducing any non-productive inventory or old product. Trend 4: Omnichannel Omnichannel continues to impact distribution operations as customer expectations evolve and new channels emerge. You are now asked to juggle multiple channels and fulfillment nodes branch, catalogs, www.fortna.com Fortna 3
online, mobile apps, etc. and accelerate service as a key differentiator. As ecommerce continues to expand, smaller, more frequent orders shift from pallet and case to custom-packs and each picks. Additionally, with more Millennials entering the workforce, there s a growing trend toward online ordering. Fulfillment and distribution must be geared to support that. And remember that the digital channel represents more than sales it s influence. The digital channel influences offline sales, as customers seek information and inventory online and complete transactions in more traditional ways. However, it all has to be consistent, seamless and frictionless. You must adjust to the new reality that you are now selling around the clock every day of the year through your online presence. The information customers see online has to match what the branch or customer service representative can deliver in terms of inventory, price and service levels. Failure can cause loss of trust and erode confidence in the brand. With increased competition from Amazon in the U.S. and Europe, customers demands around speed will continue to increase and create a different set of order profiles as B2C experiences drive B2B buyer expectations. Shorter order-to-delivery cycles, such as next day or same day delivery, are no longer nice to have they are necessary. Customers now expect a one-stop shopping experience that requires a broader array of products and value-added services. But, B2B order processing is more complex than B2C requiring purchase orders, negotiated discounts and more. To meet these demands, you need robust back-end systems integrated with sophisticated front-end systems. These projects take a long time to implement and require a roadmap to ensure alignment along the way. Those who are not taking first steps now will be left behind. Commitment to a long-term strategy, while making short-term changes, takes vision and resolve. Having a plan of attack is essential. First, define your ecommerce, direct-to-consumer and omnichannel fulfillment rules of engagement. This means determining what products to offer and how to distribute them. Next, confirm and refine the customer segments and channels, deciding how to offer and manage fulfillment options, such as in-branch pick up or ship-from-branch for digital orders. Lastly, determine your delivery structure and explore whether third party options are appropriate. By keeping these five aspects in mind, you ll avoid costly mistakes and remain competitive. Trend 5: Increased Competition from Amazon Amazon continues to cause a change in buyer norms, behavior and expectations. Customers have grown accustomed to seeing inventory availability and promise-to-deliver dates on screen, in addition to frictionless, one-click ordering and easy payment options. And with technology as a core competence, Amazon could make it very easy to integrate with existing procurement solutions. You have to look at your online platform through the lens of the customer and develop a B2C mindset to address these new service expectations. Amazon s culture is one where innovation and failing fast are rewarded. They re always thinking of the next big thing, changing and challenging traditional distribution methods. They take chances with the www.fortna.com Fortna 4
idea that they can learn from and improve upon each iteration. They do this in service to delighting customers in new ways, which in turn, builds loyalty. For example, Amazon saw the flailing U.S. Postal Service as an opportunity to do something that most people never thought of enable Sunday delivery. And when parcel carriers ran out of capacity during peak holiday shipping season a couple years back, Amazon decided it was time to take matters into its own hands and launched a plan to create more capacity with its own line of delivery vans, tractor-trailer trucks and cargo planes. Its infrastructure is now set up to deliver same day to 44 percent of the U.S. population. Other innovative examples include utilizing 3D printers on trucks, voice ordering via Alexa, and auto-replenishing subscription services. You can start differentiating yourself from Amazon and other competitors by adding more services to your offerings. Services that help customers make or save money will provide value. For instance, one distributor found a way to increase value to the customer by providing vending machines in their customers facilities. The vending machines help their customers manage inventory better, eliminate shrink and obsolescence, and minimize the order function. Their customer is better able to track consumables and gets better information/insight into how those products are being used across the organization. It is part of the value basket for their customers and drives loyalty and customer stickiness. Continue to leverage the deep product knowledge and expertise of your associates. Amazon sells products, but lacks the depth of knowledge about their products that you can provide. Remember to separate the hype from the real hazards when it comes to Amazon. Summary Technology is permeating and disrupting every aspect of distribution today. With new omnichannel expectations, increasing competition from both suppliers and ecommerce challengers and broader array of products to manage through outdated facilities and networks, distributors are challenged on a number of fronts. Investments will be necessary to ensure that recent growth can be sustained over the long term. First, take all encompassing look of your business operations not just focusing on labor, disintermediation, inventory or omnichannel, but addressing them holistically. Next, develop a strategy to tackle all five areas of threat and that answers the what-if questions. Determine how distribution operations, service centers and branches should be used and how that integrates into the overall network. Likewise, as explained above, take steps to ensure the entire buying experience is seamless and frictionless, examine ways to reduce the dependence on labor through automation and continue to add to your value basket by bundling services with products to add value that makes it hard for customers to go elsewhere. To win the competition for scarce labor, you ll need to strive to be the employer of choice by making a better work environment for not only current employees, but also for a growing population of Millennials entering the workforce. If you are feeling the impacts of one or more of the five industrial distribution trends covered in this article, it s time to consider a change in strategy that will help you overcome the challenges and drive competitive advantage. www.fortna.com Fortna 5
How can we help? Fortna helps companies assess their operations, develop a strategy and roadmap for competitive advantage and build a business case for investment. To learn more, ask the industry experts: 800-367-8621 info@fortna.com www.fortna.com ABOUT FORTNA For over 70 years, Fortna has partnered with the world s top brands companies like ASICS, O Reilly Auto Parts and MSC helping them improve their distribution operations and transform their businesses. Companies with complex distribution operations trust Fortna to help them meet customer promises and competitive challenges profitably. We are a professional services firm built on a promise we develop a solid business case for change and hold ourselves accountable to those results. Our expertise spans supply chain strategy, distribution center operations, material handling, supply chain systems, performance improvement and warehouse control software. www.fortna.com Fortna 6