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NAW/McGladrey Report: Despite Uncertainty, Most Distributors Are Seeing Steady Growth

September 13, 2012
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Middle-market distributors are growing, but that growth and the optimism that accompanies it is tempered by a number of factors including weakness in Europe, rising commodity prices, continued housing crisis, and uncertainties connected with the upcoming election and policy issues, including health care.

These are the findings from a newly released Distribution Monitor report, sponsored by the NAW Institute for Distribution Excellence and McGladrey, a provider of assurance, tax and consulting services. The NAW Institute is the research arm of the National Association of Wholesaler-Distributors.

“Despite their concerns, distributors are generally optimistic about their own business prospects in the next 12 months, with 95 percent reporting that their organizations are thriving or holding steady,” said Karen Kurek, distribution lead for McGladrey. “Distributor sales generally are growing (81 percent increased sales over the past 12 months), although they are expected to grow at a much slower rate in the coming year.”

Most distributors expect costs in many categories to increase in the next 12 months, particularly in areas such as transportation and fuel costs, equipment and machinery, and energy. Some expect transportation and fuel costs to increase by more than 10 percent. To combat those rising costs, distributors are implementing a number of tactics, with a focus on improving operational efficiencies (81 percent) and improving processes within their supply chains.

Other key findings include:

Employment – A majority of distributors are planning to increase employment in the next 12 months. Finding new hires though, could pose issues for some distributors. About one-third report that they find the skilled talent they require only some of the time or rarely. Many are launching their own training and development programs to address skills gaps. Nearly half will focus on adding personnel to customer service/support functions. With a growing workforce, of course, comes an expected rise in costs for wages, benefits and other variable compensation.

Process Improvements – Distributors will increase investments in process improvements this year compared to last. Thriving organizations are more likely to increase these investments than firms that are holding steady or declining. Thriving firms also are more likely to have increased productivity in the past year. The primary objectives cited for improvement initiatives are to reduce costs as well as to improve quality, customer satisfaction and speed.

Customer Satisfaction – Customer satisfaction is a primary objective of process improvement, with 83 percent of respondents ranking it at the top of the list. Cost reduction, quality improvement, enhanced speed/timeliness, and other objectives were mentioned, as well. Customer service will be an area of focus for improvement initiatives over the next 12 months, as distribution is a customer-focused industry, and distributors are looking to improve activities that affect those functions.

Inventories – Inventories will increase at nearly one-half of distributors, with 7 percent expecting inventories increase by more than 10 percent. Yet despite these cost pressures and more inventory, the overall health of the industry is reflected in plans by most distributors to increase capital equipment spending in the next 12 months. That is being influenced by low costs of capital and respectable bottom lines at many companies.

Information Technology – IT is critical as distributors grow their organizations and broaden their supply chains. Two-thirds of distributors report at least moderate use of business analytics company-wide and/or among senior leadership. Business analytics is most likely to be used to forecast customer demand and identify market opportunities. More than half of distributors use social media, and slightly less than half use cloud computing. And while these and other IT applications can pose new security concerns, surprisingly few distributors believe their information or data is at risk.

Value-Added Services – Virtually all distributors now offer value-added services to customers, but the industry as a whole is still focused on products for driving revenues – almost half of distributors report that new products/product lines are extremely important or important to company growth.

In addition to the findings outlined above, results from the 2012 Distribution Monitor provide more data on middle market distributors, including predictions on sales increases for the coming year, projected increases for transportation, energy, inventory, and other costs, and additional data on hiring plans for the next 12 months. The Monitor surveys industry leaders of distribution organizations to assess the current state of the industry and to determine what steps CEOs, CFOs and other executives are taking to grow their businesses and stay competitive. All data is collected online in response to invitations from McGladrey and the NAW Institute and from partnering associations and chambers of commerce across the U.S.

A copy of the complete Distribution Monitor report is here.

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