By nature, distributors must be among the most flexible and responsive participants in the value chain. The most effective distributors provide the most creative and responsive capabilities to satisfy both customers and suppliers, while generating reasonable levels of profitability. Although the role is challenging, the most successful distributors also recognize that “breaking the rules” is often a very critical and insightful strategy.
For these leaders, change and improvement come when rules are broken. In this context, we are not describing legal or safety rules, but rather the actions in response to knowing when it’s beneficial to make an exception, not blindly accepting the routine answer, or challenging the mindset of “everybody does it.” Leaders often excel because they were the ones who saw the situation differently and were willing to take the risk and develop the initiative to break with the standard and accepted logic.
Take, for example, the following very popular rules that almost always should be broken:
- “The customer is always right” and “All customers are created equal.”
It is absolutely critical to understand the needs of every customer, as well as the conditions of each transaction. Nonetheless, there is a huge difference between responding to every minor (and potentially impossible) request and every customer whatsoever, and responsively solving almost every customer’s needs in a timely and thorough way. Knowing and understanding each customer’s purchasing attitude, consistency and clarity of communication is the critical second direction on the relationship two-way street.
- “Supply chain is not strategic.” “Manage to minimize cost rather than maximize profit” and “No matter what, reduce costs!”
Our customers may view us through an operations lens, but their criteria demand our strategic capabilities, which include understanding customer and SKU requirements, priorities, evolution, design, availability, sources and access, support requirements and pricing outlook. Our ability to forecast, understand and respond to these issues is critical to our successful customer relationships.
- “Ship every order out as rapidly as possible.”
I worked with a client who was exceptionally proud of the fact that every order was shipped the day it was entered. The problem was that many of those orders were shipped via LTL carriers and were consolidated with other shipments along the way. The bottom line was it created inconsistent and unpredictable shipments, whereas consolidating those shipments instead would greatly reduce the shipping time, as well as the cost.
- “We have a ‘toss it over the wall’ relationship with marketing and sales.”
From high school on, the education, personality and approach are radically different for operations and sales people. It’s much the same (only more exaggerated) for those two groups in virtually every company. As a result, their relationship is often a non-relationship, causing inconsistent communications, commitments, priorities, results and attitudes, to say nothing of potential disruptions.
Some Rules Need Skepticism and Flexibility
- “Optimum location and inventory” and “Don’t lock into rigid cost/benefit analyses.”
Many distributors have located their facilities and inventories based on sophisticated optimization models. Although they greatly help them to arrive at a solid decision, they often fall short because of critical issues: they routinely depend on multi-year detailed historical and forecasted demand patterns, actual shipments, customer locations and product mix. Rarely are they sensitive to what is likely to be happening over those multi-years (new products, new competition, new customers, weather patterns, economic changes and forecasting volatility). For these reasons, it is critically important to build in flexibility in locations, inventory sites, supplier locations, product sources/availability, backup alternatives and flexible operations processes.
- “Don’t worry about seasonal products.”
Demand often depends on seasonality, which consistently varies by geography. For example, in the winter, the air-conditioner market in Chicago is dramatically different than it is in Miami, but during the summer they are the same. Similar variations of geography and season occur for clothing, food, construction and many other markets. The most successful distributors are those that recognize the cycles in advance and shift their capabilities to purchase excess available resources and to market peak demand products in the seasons that are appropriate. Strategic seasonal management often differentiates the leading distributors from the also-rans.
- “Always have open competition for software selection.”
Software decisions depend on many factors, although software suppliers generally promote only a few of them. The most successful distributors invest significant time in determining the appropriate capabilities, focus, interfaces, product and industry standards, as well as track record, pricing and service reputation and history. Additionally, it is critically important to match the capabilities that your distributorship and marketplace require, without paying for capabilities that are not necessary or will not be used within the next year or two. Because of the rapid changing market and technology, purchasing software for long-term applications is rarely effective.
- “The squeaky wheel gets the most attention.”
As one of my clients advised, “It really depends on which wheel is squeaking.” He made an excellent point. If your organization is similar to most distributors, most of its profits depend on the top 15%-20% of its customers. When one of their wheels squeaks, it’s critical to fix it! Additionally, similar attention should be targeted on a restricted basis to those customers that have a chance of entering that top group. That recommendation is not intended to suggest poor service to the other customers, but rather to assure that perfect or nearly perfect service should be assured for the critical/highest total profit contribution customers.
Finally, Many Other Rules Need to be Reviewed and Challenged on a Regular Basis
- Free shipping or other support strategies.
Often a distributor will follow a costly strategy that was developed in response to a competitor’s promotion. Perhaps the time has changed or the market has transitioned. As a result, it is important to monitor such activities and act appropriately if necessary.
- Emphasize cost reduction rather than revenue growth.
In the short term, as well as on a practical basis, cost reduction is an important and continuing focus. On the other hand, it is critical to recognize that bottom line growth must remain the continuing objective of any distributor. For that reason, it is critically important to monitor the effect of cost reduction programs on customer satisfaction, especially focusing on the primary customer profit contributors.
- Do whatever is necessary to build a relationship with an “800-pound gorilla.”
It’s a matter of pride and a measure of success to capture a recognized, leading target customer. Unfortunately, though, sometimes the pride outdoes the bottom-line value. One of my clients, a distributor of imports and home goods, was offered the opportunity to provide outsource capabilities for a leading mega-distributor and retailer. Winning the account was a dramatic victory, and the order volume was substantial. Unfortunately, regardless of the large volume of orders that were processed, the distributor’s new business venture never generated a profit.
- “Find the leading competitor and follow their techniques and capabilities,” and “Don’t fear to differentiate.”
There are reasons that the leading competitor is the leader, but most of those reasons are uniquely appropriate for them. Nonetheless, there are many lessons to learn from observations, publications, friendly relationships, and customer and supplier perceptions. All of these provide prospective for your own decision process and response, and it’s your process in response that makes your effort significant.
Hopefully, these observations, based on my experience as well as my colleagues’, are worth sharing. After all, distribution is a unique, demanding and creative industry. Its professionals are among the most fascinating individuals in the business community, and their ability to understand, challenge, attack and solve multi-industry, multi-product line, multi-competitor, multi- customer, multi-complexity issues keeps them at the edge of product, technology and customer development.
Your questions, comments, and observations are greatly appreciated. Reach Robert Sabath; Transportation and Logistics Advisors, LLC, at rsabath@TandLA.net.