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It’s Not Your Grandfather’s Industry Anymore

It’s Not Your Grandfather’s Industry Anymore

July 1, 2021

Original Article from Fastener News Desk. Read Original Article >

This post previews some of the key findings in the first report based on our research for the National Association of Wholesaler-Distributors into how distributors can take strategic action in response to disruption. Download the report now.

A lot has changed in the distribution industry in 25 years. Today’s customers:

  • Don’t need to speak with a distributor’s employees at all. Everything from availability to technical support to pricing to order processing, billing, settlement and even returns are processed seamlessly and via self-service.
  • Expect most products to be available – as in, delivered to their premises – in 24 hours. This timeframe keeps compressing as powerhouse disrupters like Amazon develop increasingly vaster fulfillment networks and delivery capabilities.
  • Can easily find almost any product, compare prices from different suppliers, place the order himself in minutes and receive it next day with free delivery.

This isn’t your grandfather’s distribution industry.

So, what do you do when your value proposition gets commoditized?

The internet, which at first looked like a new channel to replace printed catalogs and customer service personnel, has spawned new capabilities and competition that have seriously undermined the core value of what distributors offer customers. In many cases, for many customers:

  • Distributors no longer enjoy exclusive access to most products. Customers can buy almost anything from many different suppliers.
  • Distributors earn much less business through special sourcing operations adept at securing hard-to-find products. There are fewer and fewer hard-to-find products.
  • Distributors no longer offer the fastest way to get orders fulfilled. Today’s digital technology and incredible logistics networks enable competitors to deliver common products more quickly.

Many industries have seen technology-driven disruption over the last few decades. Typically, incumbents are caught off guard by changes that seem revolutionary to them but were actually evolving over a number of years. Our mission in our 2020 research series was to make the case that the wholesale distribution industry was facing disruption. Our mission in 2021 is to help you develop countermeasures that protect your business and help you fight back. To do that, we need a framework on which to compare and contrast the positions, capabilities, strengths and weaknesses of incumbents and the disruptors.

A Framework for Disruption

Product transformation is an important concept in understanding the difference between what most distributors do — or could do if they chose — and what most disruptors offer customers. Disruptors prefer to offer and sell “untransformed products” — that is, items that are standardized in unit and measure and need no modification of any kind to interrupt a smooth and automated picking, packing and shipping operation. By contrast, distributors often add value by transforming products in many ways. Common examples include:

  • Kitting
  • Drive belt services
  • Color mixing
  • Labeling
  • Chain cutting/assembly

The information “flows” from distributors also tend to be more robust than what disruptors offer. This often adds a great deal of value for customers and helps them keep core operations running smoothly. Here are a few examples:

  • Product configurators
  • Parts design
  • Electrical usage analysis
  • Drive selection assistance
  • Safety risk assessments

Logistics capabilities are another important distinction between what disruptors and distributors offer customers. When it comes to moving small, packaged goods through common carrier networks, no one in the world is better than Amazon. However, consider all of the logistics capabilities distributors offer that Amazon does not — it is an impressive list. Here’s a sample:

  • Vending
  • Jobsite delivery
  • Asset tracking
  • Consignment inventory
  • Lamp and ballast recycling

Financial services, such as job financing, rentals, extended warranties, special payment terms and many more are also important benefits distributors offer. In contrast, most of the disruptors attacking the industry don’t even offer open account terms. That means financing services are a competitive weapon if distributors use them effectively. If not, they are just an added cost that distributors bear, and disruptors do not.

With these lists of capabilities and services in mind, we’ve constructed a model to understand how to think about the positions of distributors and disruptors in a time of disruption.

The Distributor Relative Value Model

One of the key differences between consumer markets and business markets is that the latter contain complex requirements that vary from customer to customer. Providing the right digital solutions is vastly more challenging in B2B than in B2C. This is one of the main reasons that distributors have been slow to adopt ecommerce. The disruptors entering distribution with ecommerce offerings have built platforms primarily suitable for non-complex transactions.

Given the nature of business customer requirements, that leaves a lot of “white space” where distributors can add value in ways many new entrants cannot. Our model demonstrates the relative value provided by distributors and disruptors in servicing B2B buyers. This is in some ways similar to a concept in investment finance called “relative valuation.”

Unlike absolute valuation models such as discount cash flows, relative valuation compares firms to cohorts. The notion is that the context of a company’s performance matters. How is it doing versus competitors? Our model changes the unit of measure to customer requirements instead of sales and earnings. In this way, we can compare the relative value contributions of companies based on the sum of the benefits they offer customers.

Read more about the Distributor Relative Value Model and how you can use it to evaluate your own business in our Research Report for the National Association of Wholesaler-Distributors, Forces for Disruption and Strategic Responses. Download the free report now.

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