Progressive Distributor - The linchpin of the supply chain

The linchpin of the supply chain

Distributors have relied on technology to adapt to industry changes. If you want to retain your integral place in the supply chain, it’s time to adapt again.

by Cindy Cronin

Looking back at the evolution of business, it is impossible to deny the role that distributors have played in the development of the American and global economies. From the time that manufacturers recognized their inability to effectively distribute products outside their own geographic areas, distributors have played a critical role in expanding marketplaces to the next town, the next state, across the U.S. and, eventually, the world.

Yet, despite the economic value that distributors bring to the process, businesses are in continual pursuit of a goal that never seems to go away: the quest to cut out the middleman. As long as distributors have been bridging the gap between suppliers and customers, companies have tried to find a way to eliminate that link.

That simple fact makes distributors a unique breed among businesses. Distributors are survivors. They adapt and change as conditions demand.

One way distributors have survived is by turning to technology. For example, when they looked for an alternative to the Kardex system, distributors increased their efficiency by introducing the first electronic inventory management systems into their organizations. Electronic punch card systems evolved into single-user and then integrated computer systems that allowed distributors to serve customers more effectively. Database technology further increased sophistication, while EDI represented the initial steps into the world of e-business.

But while technology has been an enabler for distributors, it has also been seen as a threat. The quick growth of the Internet made disintermediation a household term and a major concern for distributors in virtually every industry. The theory was that suppliers would use technology to execute their age-old goal to circumvent distributors.

In response, distributors again evolved. Looking for ways to bring more value to their relationships with suppliers, they began offering additional services such as kitting and light manufacturing. Consolidation also came in like a tidal wave, as investment companies purchased distributors to increase power in market segments, and small- to mid-sized distributors formed coalitions to ward off unwelcome acquisitions. Both trends continue today.

However, time has proved that the Internet wasn’t the death knell for distributors. In fact, the advent of dot-com companies and the move to e-business has further confirmed the need for the distribution link in the supply chain. A great example is Amazon.com, which had to build brick-and-mortar distribution operations to serve its customers effectively.

So where does this leave distributors? With an opportunity. Distributors have the chance to exponentially increase the power of their position in the supply chain and secure their roles as key players in the evolution to an e-business culture. The catch is, it’s an opportunity they cannot ignore. Just because disintermediation didn’t work the first time, don’t assume the idea has been abandoned. It’s up to distributors to ensure they remain not just necessary, but indispensable.

Distributors as owners of the supply chain
There are two primary reasons why distributors have power in virtually every relationship.

1) Distributors own customer relationships. The level of service its distribution network provides heavily influences the satisfaction of a supplier’s customer base. Distributors understand the customers’ needs, know the realities of business environments, and are in a better position to anticipate trends and future changes.

2) Distributors provide value-added services. Whether getting products to market more efficiently, performing specialized product customization or providing marketing and sales support, the distribution business model is based on a simple premise: Distributors provide services their suppliers cannot.

Distributors have a natural power base. The way to expand that base is to build on the value they already provide. Two major trends provide an opportunity to do just that.

The first trend is the increasing value of information. Information is the primary commodity in the emerging e-business culture. On the customer side, distributors have data about demand, usage trends, consumption forecasts and much more. On the supplier side, distributors know production capacity and can anticipate suppliers’ ability to meet demand. All parties in the relationship can benefit significantly from this information, and distributors have the ability to facilitate highly valuable exchanges.

The second trend is the move toward mass customization. Suppliers have visions of tailoring their products to each customer’s needs, and more and more customers are demanding that they do so. Product personalization is increasingly being viewed as essential to winning customers and, more importantly, retaining them in an e-business environment.

Distributors are in prime position to use these trends to their strategic advantage. However, they must be prepared to take on the new roles and responsibilities that a position of power requires. The following are some steps that will be critical:

Update systems and processes that limit a distributor’s value as an information provider. Although distributors gather much valuable information, many cannot access it effectively. Outdated systems and processes severely limit their ability to capture and use the data at their fingertips.

Prepare for collaboration. Success will be determined not just by the quality of information distributors can provide but also by how efficiently they provide it. The greatest value will come from suppliers and customers receiving information nearly in real time with the distributor coordinating those relationships.

Increase the ability to provide value-added services. Distributors have an opportunity to play a major role in suppliers’ efforts to tailor products to the needs of customers. Those that increase their ability to perform even minor customization work to small quantities of products will benefit significantly. Likewise, distributors that offer services such as vendor-managed inventory will increase their value by reducing the risks inherent in holding inventory.

Improve inventory management and forecasting capabilities. This relates to both quality of information and efficiency. The ability to streamline inventory levels provides working capital to expand and increase market share, while the ability to accurately forecast demand increases the value of the information distributors use and provide to others. A reliable forecasting and replenishment process is essential to any collaboration or vendor-managed inventory effort.

As the demands on distributors have changed over the years and as their positions have been challenged, the industry has adapted to the point where it barely resembles its beginnings. Adapting has become a way of doing business. It’s time to adapt again.

The bottom line is that distributors have an exciting near-term opportunity to secure their role as the linchpin in supply chain relationships. By taking advantage of it, they can ensure that the role of the distributor once again withstands the test of time.

Cindy Cronin is president of the North American operations for Ability, a leading provider of supply chain management software solutions to the distribution industry. She can be reached at (770) 671-8690 or ccronin@abilitycorp.com.