Major distribution chains have closed a lot of branches over the last couple of years. Having worked at four large distribution companies, I can confidently speculate that they’re following financial models that make it very easy to evaluate the benefits of improving working capital performance and lower operating costs. However, I fear they may be ignoring the voice of the customer and foregoing a great opportunity to differentiate vs. digital competitors.
Working Capital vs. Customer Satisfaction
Branch managers in distribution are often stuck between the proverbial rock and a hard place. Sales people, who are persuasive and represent customers, like to say, “You can’t sell out of an empty wagon.” Customers express their frustration and disappointment when you’re out of stock. But everyone in the branch manager’s line of supervision is watching working capital performance and admonishing her not to bring in too much inventory.
On the other hand, the manager’s branch employees are the ones who have to tell customers that the products they want aren’t on hand and this “lost demand” is famously difficult to measure. I’ve never seen it factored into an inventory forecast or a strategic decision – distributors treat this important customer impact like it doesn’t exist.
That’s tough on the branch team. It’s hard to disappoint customers when your job is to serve them. And when the branch’s net promoter score comes in, it’s the local team that takes the hit for a disappointing number, even if lack of on-hand inventory was the problem. Often, the branch team has little control over inventory levels, so they feel they are being punished for decisions someone else made.
Executives responsible for optimizing working-capital performance strive for inventory nirvana, wherein a replenishment SKU gets checked into stock at the exact moment the last on-hand SKU is sold. That’s not realistic, but distributors have put into place a variety of mechanisms to get closer.
The easiest way to improve inventory performance is to aggregate demand. In other words, if you serve a larger number of customers out of a single distribution center, a whole bunch of SKUs that would be C’s and D’s in a branch become A’s and B’s because sales frequency increases and gets easier to forecast. That’s one of the reasons large distribution chains have built big DCs and closed local branches.
This reality has threatened the existence of local branches for some companies. Since strategic decisions are more often driven by financial analysis (easy to do) than measuring how many customers local branches disappoint with out-of-stocks (hard to do), distributors keep rolling up inventory into DCs to get better working capital performance. The branches are becoming emptier wagons all the time. Instead of finding a new mission for the branches, distributors simply strip cost out of them, sending them on a death spiral towards closure.
Retailpocalypse: a (Sub)urban Legend
Retail is allegedly going through the same evolution (“retailpocalypse”). You wouldn’t be surprised to learn that the number of retail stores is rapidly declining.
Except that’s not what’s happening. Research and advisory company IHL Group predicts that chains with 50 or more locations will open a net new number of 3,835 stores in 2018 (12,663 opens minus 8,828 closures). What’s changing is the mix of retail stores – department stores, specialty softgoods stores and drug stores are closing while supermarkets, superstores, specialty hardgoods stores, convenience stores and restaurants are growing fast.
I think it’s interesting that the growers have one of three characteristics: a huge assortment (superstores), a high degree of “same day” utility (convenience stores and restaurants) or a true niche (specialty hardgoods). I’d argue that in all three cases, on-hand inventory is critical but accomplished in different ways. The superstores have breathtaking selection, of course. In the case of the other stores, selection is limited -- but they have what you expect them to have. So even if the assortment isn’t huge, you’re rarely disappointed because they can meet customer expectations with what they stock. When’s the last time you went into a convenience store and found they were out of Diet Coke or milk? You didn’t expect the place to have handmade candles, right? Ergo, you weren’t disappointed because you understood the value proposition and the store met your expectations.
The Future of the Distributor Branch
Local branches are a great way for distributors to differentiate from online sellers. The problem is that branches can’t operate as mini-DC’s; they’ll never have enough on-hand inventory. Branches require their own value proposition, which must be driven by customer needs and communicated effectively through sales and marketing.
Sure, B2B is different than retail; we aren’t going to sell meals and apparel. But by carefully analyzing customer needs and building inventory and services to meet them, local branches can become a valuable part of your customers’ supply base.
Some distributors do a great job ensuring local branches add value while other companies haven’t even tried. If your executive team is in the field regularly, working at branches, making sales calls and talking to customers, they will be in a much better position to make the right decision. Add in some strong research and competitive analysis and you may be able to find that branches aren’t an old-school idea you should move beyond. Instead, they might be a way to differentiate and grow.
The Friendly, Lethal Confines of Headquarters
Very few breakthrough ideas in distribution emerge from conference rooms, or, for that matter, from headquarters. Almost all of them originate in front a customer. If your leadership team isn’t talking to customers, they’re probably making decisions with analytics that report history. That’s very different than understanding your company where it interacts with customers, which is absolutely required in order to generate great new ideas.
Get out of the office. Get in the field. Get a complete picture before you make important strategic decisions. Branches aren’t necessarily a liability to your strategy. They may be the thing that makes you better for some customers than your competitors. But you’ll never know if you aren’t in them on a regular basis.
As always, I’d love to get your feedback. Please leave a comment below or email me at [email protected].