In every challenge resides an opportunity, or so say optimistic entrepreneurs when referring to today’s less-than-business-friendly economy.

While many distributors in the jan/san industry have taken biting hits to their bottom lines during this economic downturn, others have gained market share and improved profitability, sometimes dramatically. The secret? Distributors that constantly focus on business improvement — regardless of the given economy — can thwart many of the difficulties that arise during recession. Innovative businesses will succeed in this “new, new economy” — one that no longer tolerates mediocrity.

The opportunity to become one of these play-to-win distributors is there for everyone, says Adam Fein, president of Pembroke Consulting, Philadelphia, and author of Facing the Forces of Change, but only if they have the savvy and focus to capitalize on it.

“I believe smart distributors will be rewarded in the future. In periods of change, like we’re going through now, companies fight for very small changes in market share,” Fein explains. “Change opens up the opportunity for bigger gains.”

In Facing the Forces of Change, Outlook 2003, the recently released companion edition to Fein’s supply-chain bible, he solicits 10 of the best-known distribution consultants in the industry for perspective on the earlier trends mapped out in the 2001 edition. Working in conjunction with the National Association of Wholesaler-Distributors (NAW), Fein was looking to see if his earlier trends held up in the context of upcoming 2003.

Seven trends, in particular, (many of which appear in the book) represent developments that distributors can leverage for success in 2003. Sanitary Maintenance talked to many of the same experts about how they translate into business opportunity in the coming year.

Conditions to Leverage
1. With the death of the dotcoms, it has become increasingly clear that technology is a viable tool for distributors, not a strategy. Secondly, technology can be advantageous to any business that assesses need correctly and uses the technology to its fullest.

“Most dotcoms went B2B2B: business to business to bankruptcy,” says Fein. “A few years ago, distributors were worried about these companies, but they didn’t have the appeal to customers that the service level of a distributor did.”

Now that distributors no longer feel the competitive pressure they did during the recent dotcom phase, they can use what they have learned from it, combined with their own research, to determine what technology (Internet or otherwise) means to their own companies, says Steve Epner, founder and president of BSW Consulting, St. Louis. He says technology — beyond the Internet variety — can, among other things, help distributors reduce internal costs. Many of these cost-saving strategies are right under companies’ noses.

The first step should be assessing the capabilities of current technology.

Most distributors are only using 15 to 20 percent of their technological capabilities, says Epner. “Most don’t take advantage of warehouse management and purchasing software very well.”

Epner says he has seen companies that have invested $150,000 on a billing machine and all they’re using it for is general billing and accounts receivable. In situations such as this, there’s tremendous opportunity to exploit the many capabilities of the technology.

“One of the things I suggest people do is every three or four years pretend they’re buying a new computer system,” Epner advises. Come up with a list of the capabilities you desire or problem areas with the current system, and take that to the vendor and ask them if they already have those things built in. Most of the time the answer is yes, he says.

And for those considering new technology investments: “Distributors need to understand what they want to use it for before investing,” says Fein.

If a distributor is thinking of investing in or upgrading their Internet presence, he or she should remember: “The Internet is primarily for information, not commerce. It’s used for information on products, their company’s offerings and password-protected exchange networks,” he adds.

“For the distributor who serves very small or unsophisticated customers, the opportunities are in the productivity of their own business,” Fein says. “The larger and more sophisticated the customer, the more that technology has to be a part of your strategy. Not every distributor needs to invest a lot in technology right now.”

2. Filling positions with quality candidates is easier, and current employees are more amenable to change.

The current economy means that business can’t automatically grow regardless of inadequate staffing or other internal inefficiencies, says Dave Kahle, president of the DaCo Corp., a sales consulting firm based in Grand Rapids, Mich., whose latest book, 10 Management Secrets for Time-Starved Salespeople, hit the shelves in November.

“The positive side of that is that the flaws of the structure, organization and people are much more visible,” he says. There’s no room for success in spite of itself, and areas of inefficiency become more apparent to executives looking for the cause of decreased sales. This new perspective gives distributors the opportunity to enact organizational change that may be postponed during prosperous times.

The opportunity to ramp up the sales function is twofold, says Kahle. The labor pool is much deeper, and the current staff, knowing that their positions are less secure, tend to be more adaptable to change.

While only a few years ago employers waged bidding wars over qualified salespeople, employers now often have access to a number of qualified applicants.

“There’s a great opportunity to acquire some quality people upon which you can build the next round of growth,” Kahle says.

“At the same time your current employees are aware of all this. They realize that they need to be thankful for their jobs and not be negotiating for the greatest amount they can wring out the company,” he explains. “And they’re much more amenable to changes right now.”

There are a number of areas for distributors to work at, including revisions of sales compensation plans, says Kahle. He advocates a strategically oriented compensation plan. One with an emphasis on a certain market segment or product category, for instance. (Software available today can help distributors do this.)

“Most compensation plans are vestiges of days gone by, meaning they were devised many years ago for a different set of circumstances.” Managers should scrutinize compensation based on the new, true definition of a salesperson today.

And if salespeople still aren’t performing to expectations, now could be the right time to terminate. The hard reality of the economic situation lessens the emotional nature of the decision, Kahle adds.

Salespeople can no longer just be problem-solvers, “weekly visitors,” or information providers like they could be five years ago, Kahle says.

“If he or she is going to survive, he must be someone that roots out the customers’ problems and objectives and creatively proposes his company’s objectives and benefits.

“They must be consultative sellers or they’re just not going to last,” he adds.

3. The shakeout following industry consolidation proves that local distributor businesses have survived based on their strong customer relationships. Conditions are ripe, however, for another period of increased merger and acquisition activity.

“Consolidation has come to a standstill,” says Fein. “The downside is that companies that want to exit the industry in the next 12 to 18 months will have a harder time getting fully paid for their businesses. On the other hand, the failure of the consolidators signals that the local distributor entrepreneur still maintains very valuable customer relationships that are hard to disrupt.”

James Mulick, founder and president of Ameridan Resources in Pittsburgh, focuses on mergers and acquisitions among wholesale distributors. He says the recent election could bring about some tax changes that could spur merger and acquisition activity — good news for distributors hoping to sell. Lower interest rates could also jumpstart the stock market and push up the value of privately held companies, he predicts.

For those companies looking to acquire, Mulick suggests they evaluate prospective acquisitions with a “customer-centric” focus.

“In the past, a fair amount of merger and acquisition activity has focused on business growth and geographic coverage. Now, the focus will be more on deepening relationships and making new relationships,” he explains.

Whatever 2003 brings (Mulick predicts a few large transactions during the second half of the year), distributors who run customer-focused businesses can be confident of their place in the supply chain. And for those who want to sell, values will rise as more money becomes available to prospective buyers.

4. Development of fee-based services allows distributors to enter a new realm of business differentiation and profitability.

Why do fee-based services deserve distributors’ attention in 2003? They can enhance profitability for distributors and serve a variety of customer needs in the face of today’s ultra-competitive marketplace. And, service-related margins can teeter between a handsome 30 to 40 percent — sometimes more, says Mark Dancer, vice president of Pembroke Consulting.

Dancer defines fee-based services as activities performed for a customer on a specific fee basis — this doesn’t include support that the distributor often provides as value-added.

An example of a fee-based service: providing reverse logistics from a customer’s site. If a distributor’s trucks already stop at a customer site, they could hypothetically take away waste or other materials on a fee-for-service basis. In the electrical market, for instance, a distributor became certified to handle a customers’ waste products, explains Dancer. Both customer and distributor benefited.

“The danger is for distributors to think that because they do something for the customer that they can charge for it. Instead, think about what problems and issues the customer wants to solve in their business. Then think about building on your capabilities by adding new ones,” he suggests.

Developing fee-based services that customers will value is a challenge, but it can be done. A four-step process can serve as a model.
  • Get the facts. Understand and quantify a customer’s problems.
  • Question your judgment. Test the services with customers to ensure the customers will truly value them.
  • Add new competencies (e.g. services). Build on your offerings by developing something new and unique.
  • Provide your service to your best customers in the interest of enhancing those relationships.

“There are opportunities [to provide fee-based services] because distributors are on the front line,” Dancer adds.

5. Distributors can reduce inventory expenses by sourcing through wholesalers — and they can access unlimited product inventory to meet customer demand.

“The environment today puts a strain on all distributor organizations from the standpoint of inventory control, inventory expense, and adapting to a changing market,” says David Brown, president of the Sanitary Supply Wholesalers Association (SSWA). “The wholesaler function lends itself to a distributor being able to streamline inventory costs.”

Wholesalers help distributors reduce costs, he contends. Wholesalers can supply a steady flow of product with a lower level of inventory. Wholesalers also enable distributors to expand their product lines without increasing or adding inventory, while allowing distributors to penetrate current accounts. Distributors can add to their revenue stream without the costs associated with the addition of new customers.
These benefits are more important than ever before, Brown says.

In addition, wholesalers are also facing stiffer competition, and are expanding their menu of services as well. Many now offer incentives to distributors, and provide marketing assistance when needed.

“I think the more progressive wholesalers are recognizing that that’s part of doing business, and if you want to be considered as a viable alternative to factory-direct, one must provide those same services.”

6. Longtime flaws in the manufacturer/distributor supply channel leave room for efficiency improvement.

A recent study by the Industrial Performance Group (IPG), Northfield, Ill., revealed that 82 percent of manufacturers and 92 percent of distributors said sales performance and profitability were negatively impacted by problems in working relationships.

“The sales/distribution channel represents a significant opportunity to improve profitability by reducing the unnecessary costs that occur due to waste and inefficiencies,” according to Robert Nadeau, IPG’s managing principal.

“As customers continue to demand more from their suppliers and margins continue to shrink due to severe price warfare, identifying and eliminating these unnecessary costs can be the difference between increased profitability or just getting by.”

Most waste comes in the form of:

  • fixing mistakes
  • expediting orders
  • holding excess inventory
  • waiting

“All of these problems are directly related to the poor flow of information between manufacturers and distributors,” he says.

So by finding better ways to share information (communicate), distributors (and manufacturers) can achieve improved profitability.

“Even if sales are flat, distributors and manufacturers can grow their net profit by as much as 30 percent just by eliminating these problems,” Nadeau says.

“The good news is that changing the nature of manufacturer/distributor working relationships is much easier than most people realize. For many manufacturers and distributors, the hardest part of the process will be changing the way the working relationship is viewed and managed,” Nadeau explains.

Once supply-chain members realize the costs associated with these inherent problems and make the decision to act, the first hurdle to overcome is the lack of trust that exists among supply chain members.

7. Distributors have compiled a tremendous amount of information on customers, giving them the resources to identify customer needs and grow market share.

There’s an innovation gap for customers, and distributors have the opportunity to fill it by creatively using sales and marketing capabilities, says J. Michael Marks, principal and managing partner of the Indian River Consulting Group, Melbourne, Fla.

“The first thing you should do is find ways to gather information on customers and segment and do research by groups of customers.” Instead of ranking customers as small, medium and large, though, Marks suggests segmenting them into groups such as apartment managers or commercial maintenance customers, for example. Then do research to determine what those segments need or want in the way of products or services.

The market research can help distributors expose the opportunities they have, says Marks, allowing them to distance — and differentiate — themselves from the competition.

Based on research and the information they collect, distributors can develop services that fill a perceived customer need. However, distributors must be open to the possibility that what they’re offering is not something the customer wants, Marks cautions. If that’s the case, they must rethink the service.

A Brighter Outlook
“I believe there is a window of opportunity for the distributor,” says Kahle. “The window is a result of the downturn in the economy. When business grows every year, you don’t have to be good to grow your business.” Not so in today’s business environment.

Fein predicts: “I think the market is fragmented enough and there are enough opportunities that anyone who is playing to win can have a viable, successful company in the year 2003.”
Seven Business Developments to Leverage in ’03
1. With the death of the dotcoms, it has become increasingly clear that technology is a viable tool for distributors, not a strategy. Secondly, technology can be used to the advantage of any business that assesses need correctly and uses the technology to its fullest.

2. Filling positions with quality candidates is easier, and current employees are more amenable to change.

3. The shakeout following industry consolidation proves that local distributor businesses have survived based on their strong customer relationships. Conditions are ripe, however, for another period of increased merger and acquisition activity.

4. Development of fee-based services allows distributors to enter a new realm of business differentiation and profitability.

5. Distributors can reduce inventory expenses by sourcing through wholesalers — and they can access unlimited product inventory to meet customer demand.

6. Longtime flaws in the manufacturer/distributor supply channel leave room for efficiency improvement.

7. Distributors have compiled a tremendous amount of information on customers, giving them the resources to identify customer needs and grow market share.

Facing the Forces of Change, Future Scenarios for Wholesale Distribution, and its companion edition, Outlook 2003, are available through the National Association of Wholesaler-Distributors Distribution Research & Education Foundation.




POSTED ON: 12/1/2002