No strangers to disruption and industry shifts, today’s distributors are working their way through a host of challenges in their quest to maintain their positions in the value chain.
If there’s one thing that time has taught us, it’s that distributors play a valuable role in the supply chain. Threatened by everything from disintermediation to e-commerce to economic downturns (to name just a few of the disruptors), winning distributors display the right combination of resilience and persistence in even the most challenging business environments.
For 2020, the disruptors knocking on electrical distributors’ doors look a lot like their 2019 counterparts. Trade wars, tariffs, the Amazon Effect, and the push to fulfill orders faster and cheaper than ever continue to push organizations to their limits. Add the upcoming presidential election and the rumblings about a possible downturn to the mix, and it could turn out to be a very interesting year for distributors across all sectors.
Whatever challenges they’re hit with, the distributors that think beyond the “transaction” and focus on cementing their places in the overall value chain will come out the winners. This isn’t a new strategy, but it is one that electrical distributors may need to dust off and revisit over the next 12 months—and particularly if the 10-year-long national economic boom does begin to retreat.
Four Threats to Watch
As co-leader of Alexander Group, Inc.’s Distribution Practice and principal of the Chicago-based firm, Andrew Horvath monitors trends and develops strategies to help companies stay a step ahead in uncertain markets. In pinpoints the four clear threats that are impacting industrial distribution right now as disintermediation, omnichannel’s push beyond retail, a lack of differentiation among distributors, and investments being funneled into the “wrong places.”
Horvath also says the basic tenets of wholesale distribution—build a large infrastructure and then start quickly delivering a wide selection of products to end customers—simply don’t work anymore. Coming up with leaner ways to work and providing resolutions to end users’ problems—while both important—also don’t carry distributors over the finish line anymore.
“Recent macroeconomic, industry, and technological shifts have disrupted this tried-and-true model,” Horvath points out, noting that savvy distributors are now reevaluating and preemptively adjusting their go-to-customer models to overcome these disruptions:
- “Distributors fought off disintermediation by excelling in parts of the sales process that were too costly or operationally demanding for suppliers to handle,” Horvath says. “However, with margins under pressure, many suppliers have begun investing in the people, processes, and tools to move to a direct sales model for all customer types.” He sees partial disintermediation as the biggest threat because it can “quickly force distributors into a role of fulfillment to a low potential slice of the market and severely limit growth.”
- Omnichannel and multi-channel. Demand for an omnichannel model is quickly moving into the B2B world, where speed, ease, and convenience made it spread like wildfire in the retail space. “Distributors can no longer rely on the legacy sales model based on territory reps and storefronts,” Horvath says. “They must adapt channel coverage models to include inside sales, web-based self-service, and apps that feature secure virtual storefronts. Leaders will figure out ways to cover customer segments with the right blend of people and tools, thus optimizing cost to serve and strengthening relationships with buyers.”
- No differentiation among distributors. Horvath says leading distributors have begun to crack the code on creating value propositions (i.e., the messages that marketing, sales, and service articulate to suppliers and partners to demonstrate a particular value). “Value propositions are built upon voice-of-the-customer research and a revenue segmentation model that identifies the most critical needs (e.g., risk mitigation, large project experience, vertical expertise) for each segment,” says Horvath. “Enabling customer-facing resources to deliver the right messages at the right time demonstrates knowledge of the needs of both suppliers and customers and helps cement the place of the distributor in the value chain.”
- Poor investment decisions. Focused on squeezing maximum productivity out of existing people and infrastructure, distributors need to put a bigger effort into growing existing markets and expanding into new ones. “Revenue leaders with limited resources often have to choose between hiring more sales or support resources, building additional branches, adding productivity tools, or increasing pay to attract a higher level of talent,” Horvath explains. “The right answer lies in understanding supplier and customer needs to be able to adjust levers in a measured way that maximizes return on investment (ROI).”
Tech: The Double-Edged Sword for Distributors
Calling technology the “double-edged sword” in the marketplace right now, Horvath says that while it enables direct communication between distributor and contractor, it also disrupts traditional distribution sales models.
On one hand, distributors are using technology to learn more about their markets than they ever have in the past; identify and create new customer engagement points; and then develop personalized offerings for those customers. “Everything doesn’t have to be field-based anymore,” says Horvath. “Companies can have inside sales teams and also take the digital go-to-market route.”
On the other hand, those distributors that found their “sweet spots” by acting as go-betweens for manufacturers and contractors are facing new challenges in the digital world. “If the distributor was a channel that contractors used to access products,” says Horvath, “technology has put that company at risk in a world where some—but not all—manufacturers are selling through their own online portals.”
If that distributor can’t think beyond its position as a selling conduit for products, he adds, it could soon find itself on the outside of the value chain, looking in. That’s because all it takes is a mouse click or a screen tap for contractors to check prices, review product specs, and check stock across multiple different vendors at once.
“In many cases, contractors already know everything about a product and its capabilities before they even bring a salesperson into the conversation,” says Horvath. “As a result, the distributor can lose a lot of its value by simply not being the ‘single source of truth’ or the expert on that particular product.”
In the second part of this article series, we’ll look closely at what electrical distributors can start doing now to up their value propositions in order to compete more effectively in the shifting marketplace.
Tagged with best practices, supply chain