One quarter through 2023, the pricing pendulum appears to be reversing — with volume moderating across most distribution sectors.
In the latest MDM Quicktake Podcast, Dorn Group’s James Dorn and MDM CEO Tom Gale discuss sell-side, buy-side and program improvements distributors can make in this year’s environment of contraction to protect and improve profit.
The conversation comes just a few months before MDM and the Dorn Group are scheduled to co-host the free 2023 Virtual Profitability Summit on July 19. Read more about the event and register at that link.
Discussions about pricing and profitability have become ever-vital for industrial distributors and manufacturers over the past year. Many companies already appear to be prepping for a possible economic downturn, but a lot of uncertainty still remains, Dorn told Gale.
“As the supply chain starts to correct itself, what are we going to see from a pricing standpoint?” he said. “And you have other factors, like the market slowing and demand, that’s also creating some uncertainty around really where pricing is going and how that’s going to impact overall product profitability for distributors.”
One piece of advice to companies who are looking to secure and improve profit: Take a holistic approach to profitability, Dorn said. Companies should look at across all levels of business in an attempt to formalize profitability. During that refocusing, there are three dimensions where companies can maintain and improve profit, he said.
“Our sell-side is the No. 1,” Dorn said. “Look at this as a distributor — how you can protect and how you can increase your margins when you’re selling your products to your customers? And this is where it comes down to — basically getting paid more for what you sell, increasing that gross margin. This is a both a science and an art, because you want to be able to do this without curtailing your top-line sales growth. And that’s where there’s a lot of finesse that comes into this.”
Within the sell-side dimension, Dorn also advised distributors to look at their product categories — high-moving items versus low-moving items — to “focus aggressively on A’s and B’s and try and ensure that you’ve got the right pricing strategies at across your product categories,” he added.
The second dimension companies should focus on is the cost side (a.k.a. buy side), Dorn said. Distributors have historically focused a lot of attention on the cost/buy side, but it has been a more disparate and fragmented approach, he said. Succeeding in this dimension includes working with a supplier base to understand if distributors are partnering to a point to where they are on the top of a supplier’s list, or if they need to prioritize strategic suppliers over preferred ones.
“If you ask nine out of 10 distributors, it’s ‘We have buyers, but we don’t have a purchasing department per se,'” Dorn said. “It’s individuals who are really good at working with key suppliers. And it might even be at a branch level, or it might be at a corporate level. So, there’s a lot of room in this dimension of cost side to really formalize how a distributor can improve their profitability.”
The third area where companies can protect and improve profitability is program improvements, which includes learning to work with suppliers in more sophisticated ways, Dorn said. This could be realized by distributors and suppliers coming together to do joint planning, using data & analytics, or leveraging company histories to figure out paths for sending more volume to customers.
“Here’s how we can go after market demand and market development in a more concerted fashion,” Dorn said. “So, it really comes down to trying to work with your supplier base in a more strategic way. And this is looking across all aspects of the business. So, within these three dimensions, this is where we’ll be diving a lot into at the event.”