Distribution-centric software advantages

Before selecting a software package, distributors must understand the differences between solutions designed for manufacturers and those targeting distribution.

by Don Webb

During recent years, some wholesale distributors have implemented application software from billion-dollar vendors that specialize in manufacturing software but also offer distribution software solutions. Often, the installations have been extremely difficult and expensive, sometimes leading to bankruptcy of the distributor. By comparison, software packages that specialize in satisfying the requirements of wholesale distributors have had much higher success rates. There are good reasons for this disparity.

It is natural that software companies with Manufacturing Requirements Planning (MRP) systems, sometimes called Enterprise Resource Planning (ERP), should offer solutions to wholesale distributors. After all, every manufacturing company also distributes product. Therefore, every MRP/ERP solution also contains sales order processing and purchasing, among other capabilities. Since software exists that applies to distribution of product, why shouldn’t this be marketed to distributors?

On paper, this makes sense from the software vendor’s viewpoint. From the wholesale distributor’s point of view, there is significant appeal as well, because distributors can purchase software from a billion-dollar software provider instead of smaller companies that specialize in wholesale distribution software.

But wait. There are fundamental differences between the manufacturer’s position in the supply chain and the wholesale distributor’s. These differences are reflected in the software requirements and software package capabilities.

Different links in the same chain
The manufacturer has significant control over its outbound supply chain and also exercises significant influence over the inbound supply chain. On the outbound side, if the manufacturer has either brand recognition or a low-cost product, distributors and customers will accommodate the manufacturer’s rules to place a purchase order. They will wait until the product arrives and be satisfied. Generally, they will order a product the manufacturer intended to manufacture, not non-stock “special order” products.

On the other hand, wholesale distributors often are caught between billion-dollar manufacturers and significant customers (any customer with purchasing power is significant). At the transactional level, even billion-dollar distribution companies are caught between powerful manufacturers and demanding customers. The wholesale distributor has limited power to do anything except acquire the product the customer needs and ship it to the customer. This requires application software with tremendous flexibility not required by the distribution module of an MRP software. However, distribution-centric software packages provide such flexibility.

For example, a customer may call requesting a product the distributor does not stock. The distributor may need to modify product in stock to satisfy the customer’s requirement, transfer it from another branch, or purchase the product specifically for the customer. It may be a non-stock product that does not even exist in the distributor’s system prior to the transaction.

The distributor must record the requirement in a quotation, source the product and quote it, along with other products from stock or other vendors. If the customer accepts the quote, the distributor must purchase the product and either ship it directly from the vendor to the customer, or receive it and combine it with other products to ship to the customer. The cost from the vendor, possibly plus freight, must pass from the purchase order to the sales order automatically. The distributor then has to calculate sales commissions, probably based on gross profit. None of these requirements generally applies to the distribution operations of a manufacturer, yet they are critical to most wholesale distributors.

Flexibility is paramount
Additional important distinctions exist for distributors that perform value-added assembly operations. MRP generally involves producing quantities of standard products in pre-determined configurations. Repetitive production of multiple products with multi-level bills of material that share subassemblies with other production schedules requires MRP. MRP involves significant complexity and tremendous discipline, and a level of inflexibility in terms of satisfying customer demands that operate on shorter cycles than the current production schedule.

By contrast, wholesale distributors that perform light manufacturing operations have an entirely different environment. They may have multi-level bills of material, but they’re usually for producing single units or a few units on short notice. Generally, they do not have repetitive scheduled production of multiple units of the same product and do not share subassemblies with other products on repetitive production schedules. Therefore, distributors do not require MRP and will suffer if their value-added operations are burdened with the complexity and rigidity of an MRP system.

MRP systems are not useful for producing single units customized for a single customer, possibly in a unique or rare configuration, which is the rule in value-added industrial distribution operations. Distributors require flexibility, and secondly, correct association of actual costs with resulting revenues. Generally, this requires use of average cost plus labor and overhead allocation, not standard cost accounting associated with MRP/ERP systems.

Distributors should be careful in their software selection process to make sure software offers the flexibility they require. Think about the processes that might not be required by manufacturing enterprises. These could include weighted average cost, LIFO, FIFO, non-stock items with separate “actual cost,” customer quotations integrated with supplier quotations for the same product, special sales orders integrated with purchase orders for the non-stock products, returned goods claims from customers integrated with vendor claims, and numerous other requirements.

If the software cannot satisfy these and other distribution-centric requirements, manual processing will result in unnecessary costs and inefficiencies. Consequently, when a wholesale distributor selects an MRP/ERP solution, the result has often been either failure or long-term inefficiency. Distributors should learn from the expensive lessons of other distributors and recognize the important differences between distribution-centric software and manufacturing-oriented software.

Don Webb is president and chief executive officer of Prelude Systems Inc., a provider of customer-centric enterprise solutions for customer service, integrated customer relationship management, asset management and e-commerce for high-volume industrial distributors. He can be reached at dwebb@prelude.com or (800) 922-0099.

This article originally appeared in the January 2003 issue of Progressive Distributor. Copyright 2003.

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