Leveraging technology to improve profitability
BY ANDREW MCGLASSON
Special to The Wholesaler
Distributors today chase opportunities that are increasingly pulling their operations globally, while pressures on their current supplier and customer relationships demand that they focus on improving and reinforcing their current scope of operations. The question this leaves many distributors asking is, “So where do I start?”
Today’s supply chain is becoming increasingly more complex, and wholesale distributors are experiencing pressure from both suppliers and customers to provide incremental value -- a requirement of the current competitive landscape. Distributors struggle to balance cost and customer demand without negatively impacting profit margins. This increased complexity and pressure -- combined with greater competition in the market -- is driving the urgency to improve in order to survive.
Although globalization provides new opportunities, it also adds complexity to the supply chain. Consolidation, whether through mergers and acquisitions or through aligning with other companies to form buying groups, enables companies to quickly scale to improve market share, but often results in redundancies across the newly formed organization.
There are ways to smooth these operations -- collaboration, centralization and integrated supply are business models that are emerging within the distribution industry. But, traditionally, sharing product and customer data between a supplier and a distributor is labor-intensive. Because it has been a manual process, it is more likely to result in data inaccuracies and out-of-date information. In addition, personnel in a newly formed organization -- as a result of consolidation or growth -- may not be utilizing common reporting tools and, therefore, may have disparate processes that could result in supply chain and operational inefficiencies.
As part of their overall business strategy, distributors should consider employing solutions that provide improved operational and demand visibility across the entire organization, enabling them to make informed decisions during growth activities such as market and customer expansion.
Gaining operational visibility requires more than a crystal ball
In this environment, viewing growth initiatives and current revenue performance in terms of profitability is the first step in ensuring that revenue production is cash-flow positive. Financial analysis of the distribution industry shows that businesses are stretched so far that for the average $100-million wholesaler, pursuing one additional percentage point of revenue growth would generate negative 6% in cash flow; whereas pursuing an additional percentage point in total operating expense improvement or days in inventory would generate $250,000 in revenue.
Many distributors, especially those who have gone through an acquisition, do not have a comprehensive view of their inventories. The assertive growth many distributors have experienced has produced multiple pockets of inventories throughout, and the overstock often results in increased time in the supply channel, creating a drain on overall cash flow for the entire organization.
Technology is important for a newly combined organization because it can provide a comprehensive view of their operations -- a significant value if an organization is operating in silos or has different levels of sophistication between one department and another, one category and another, or one geographical area and another. A comprehensive view enables distribution organizations to maximize the overall performance of their capital investments -- to drive out inventory redundancies, to gain a better understanding of the costs of supplying new customer demands, and to accurately calculate what those demands are.
A rear-view mirror approach to driving business performance
By analyzing their own corporate performance and that of their competitors, distributors can determine where they need to go by seeing where they have been and, most importantly, by seeing where the largest return on invested capital lies.
Using mathematical tools to apply a historical performance-based forecast to the new customer base enables distributors to effectively manage demand and gain greater visibility into their supply chain. This is especially helpful for distributors looking to capture economies of scale from recent acquisitions since it allows them to capture an overall forecast for their expanded operations and to optimize their inventory buys.
Even distributors selling into a new market halfway around the world can utilize a historical forecast to determine demand. But distributors must realize that it requires the application of powerful forecasting algorithms to calculate new market demand.
For example, a distributor may evaluate their sales history at a macro level, determining that last year they sold $20 million of wires and $40 million of semiconductors. Based on a goal to increase overall growth by 8% this year, they may decide to build a plan that simply increases the amount of inventory sold last year by 8%. This is not a sound view of inventory management -- to say nothing of the actual demand for those items.
By utilizing technology, distributors can get a customized, comprehensive forecast by account, location or supplier of what the demand will be for a particular piece of inventory based on that product’s unique history -- even taking into account seasonality, how long it takes the supplier to ship product and buying efficiencies the supplier may offer.
A sourcing strategy to limit risk
As distributors grow, so does the complexity of the new inventory they are carrying and what it takes to supply them. New inventory means new sourcing requirements and, often, new compliance regulations. Distributors seeking a competitive edge should identify strategies that help them address these complexities and the resulting data.
Distributors expanding their businesses -- whether globally or across North America -- face challenges and risks involved in the management of their newly acquired inventories. In an effort to mitigate the risks associated with global sourcing, distributors have begun utilizing comprehensive buying calculations and dual sourcing. This strategy allows distributors to find the best product, from the best supplier, at the best cost, and with a level of reliability that ensures inventory levels meet customer demand.
With dual sourcing, distributors may source from one supplier who commits to a lower cost but whose geographical location requires longer lead times, while also allocating part of the inventory buy to a supplier geographically closer to them, thereby lowering the risk. However, in an effort to manage the risk equation overall and guarantee that the customer will get the product they want in a reliable timeframe and at a cost feasible for them, distributors are faced with balancing dual sourcing with a higher out-of-pocket expenditure.
Business-specific solutions make the difference
Economic pressures will continue to drive distributors to grow, extending their organizations into new geographical regions and targeting new industries. Current business models must evolve to serve that growth with greater inventories, customer service and value-added services. This stretches a distributor’s organization, including the efficiency of their operations, their profitability, and ultimately their ability to generate cash flow. Distributors need to ensure that the strategies undertaken to pursue additional top-line revenue or improve competitiveness in the market are not being done at the expense of profitability.
So where does a distributor start when considering the right technology fit to address the main points of growth? First, a distributor must realize that whether they do business around the country or around the world, their supply chains will grow more complex, making supply chain and inventory management even more critical for maintaining profit margins. Armed with this understanding, distributors can then identify a technology strategy best suited to their specific business goals and growth plans.
Distributors striving to increase business efficiencies while reducing costs will need supply chain planning and execution, as well as demand planning functionality, in order to truly distinguish themselves from the competition. Additionally, distributors can dramatically improve the movement of inventory through the supply chain -- significantly reducing days in inventory and improving revenues -- by integrating with suppliers and customers so that all are sharing forecasting and demand information.
It is important for distributors to understand that, no matter where they are in their growth initiatives, technology plays a critical role in allowing companies to capitalize on those endeavors. By providing greater visibility into the company’s operations, technology enables companies to realize ROI faster, increase efficiency and improve customer service.
Andrew McGlasson is Infor’s global marketing director for distribution, responsible for building on Infor’s considerable strengths in the distribution industry to help drive measurable business growth among existing customer communities and distributors facing strategic change. McGlasson brings a rich history of successful selling, marketing, management and strategic leadership in the wholesale, transportation and retail technology sector. For additional information, send an e-mail to inforinfo@infor.com.