Why Do Distributors Economically Exist?
Most “merchant” distributors cannot answer this question effectively. So, they fear the unknown, economic boundaries for:
- Suppliers selling more customers direct.
- Suppliers selling (partial) lines through Amazon.
- Integrated Supply distributors taking over their biggest accounts.
- Digital disruptors stealing both spot and big, commodity orders with lower prices.
But, with cost-to-serve analytics (at the line/SKU level), distributors can allay fears and seize new opportunities.
The “Merchant” Model and Its Blind-spots
Merchant distributors (historically):
- Got factory franchises to…..
- …buy inventory (in large quantities) to then…
- …proactively sell their SKUs – in assorted, small quantities – to area end-users.
- Suppliers’ wishes? Grow demand: by cold calling to win new accounts; and teaching customers to use both new and improved products.
- The supplier-dictated, business-model stresses: list-price markups, commissions and selling MORE! More: reps, customers, suppliers, SKUs, orders, sales, margin dollars and volume rebates.
- These metrics are blind to a customer’s margin dollars less service-activity costs for a profit or loss. So: many, losing customers are hiding within a distributor’s aggregated financial numbers to reduce profits.
Use Activity-Costs Like Third Party Logistics (3PLs) Players
3PLs do the same activity-cost, services that distributors do, but without merchant services or metrics. Knowing activity-costs, 3PLs co-design custom solutions using unbundled, services-for-fees. Distributors in some channels already do this for key accounts along with fulfillment services for some suppliers. This is one of two trends forcing distributors in more channels to become Activity-Cost Flexible.
Two Trends to Embrace
Trend one: open book, integrated, automated selling. It started in the drug and grocery distribution channels in the ‘80’s. These 3PL-type solutions (starring barcodes) dramatically lowered “total procurement costs”. The innovative winners (about 3%; the rest disappeared) then invented a menu of additional services-for-fees for both customers and direct-selling factories. This type selling has since spread to: hardware, hospital supplies; industrial MRO; etc.
Trend two: B2B digital-first, millennial buyers. These next-gen buyers don’t want regular, field sales calls (or to pay for them with higher prices). They will ask incumbent merchants to match digital-sellers’ prices on big-ticket, spot buys. The merchant model cannot oblige. The service-cost-bundle is too expensive. Counter instead with a 3PL pitch to capture 100% of the business on a win-win basis.
For best, cost-to-serve analytics consider: www.waypointanalytics.net.
And, for what to do with the new math, skim my 12-webinar curriculum.