Building a better supply chain is critical for a successful 2016 Distribution Remodel. This article shows why distributors who haven’t focused on improving supply chain functions should begin investing resources now in hopes of remaining competitive and avoiding obsolescence.

As technology development accelerates, customer demand evolves and disruptions from natural disasters to economic crises multiply, moving information and products throughout the business world becomes more challenging.

These forces have created the need for distributors to improve their supply chains, and the companies who have postponed this process must start now to avoid losing market share and eventually going out of business.

“For a lot of distributors, it’s last call – unless they just want to survive until they close shop or retire,” says Howard Coleman, principal, MCA Associates.

But distribution leaders who want their businesses to prosper in 2016 and beyond must prioritize supply chain capabilities – specifically, by investing in technology and talent – something that hasn’t been a traditional hallmark of modern distribution.

“I don’t think supply chain has gotten a lot of attention over the years,” says Matt Onofrio, president and COO, GT Midwest, Wichita, KS. “But having the right inventory and the right amount of the right inventory and avoiding the wrong inventory is a big issue for our industry and for our business.”

Distribution has lagged in supply chain for a variety of reasons, from the industry’s primary attention on sales to fragmentation to the large number of companies serving a niche product line or legacy supplier or customer base. These factors have steered some distributors away from supply chain strategies such as reducing process waste, finding alternative sourcing, speeding up order fulfillment or hiring supply chain personnel.

“So many distributors are still existing on, ‘We have this product or this group of products that people don’t have, but we’re getting by with an inefficient supply chain,’” says George Trudell, partner,Ultra Consultants.

But because technology advancements have lowered the barrier to entry, allowing new players to enter the marketplace and existing distributors to expand into new markets or product lines, the traditional distribution model is facing an imminent threat.

“The niche market guy probably has a little bit longer to last because they sell a product line that nobody else has and there’s only one or two people in the market,” Trudell says. “But for other distributors, someone else is going to come in with an awesome supply chain and they’re going to challenge you.”

“Amazonification”

One of the biggest threats in recent years is Amazon Business, formerly AmazonSupply. Amazon’s supply chain, with its wide assortment of suppliers and expansive distribution center footprint, offers a broad product selection at a good price – with quick delivery too.

Business buyers now demand faster service because that’s what they’re used to at home. If a selfie stick or sand wedge ordered on Amazon can arrive at a buyer’s home the next day, customers expect that same precision for an HVAC unit or embedded electronic device being shipped to a business, according to Wade McDaniel, vice president of supply chain solutions, Avnet Inc., Phoenix, AZ.

McDaniel calls it the “Amazonification” of the supply chain, in which customers, even in the B2B realm, demand immediate notification of order placement, shipment, delivery and any delays that might have occurred throughout the process on top of quick delivery.

“Expectations are at a higher level than ever,” McDaniel says. And when those expectations aren’t met, likely because a company’s supply chain has a kink somewhere, the customer will look elsewhere, he says. “The customers get what they want in the end.”

Those expectations have migrated from B2C to B2B and now inhabit all distribution verticals and all regions, according to Mark Bray, supply chain director, ACR Supply, Durham, NC. Customers are now thinking, “’If Amazon can do it, why can’t ACR Supply do it?’” he says.

“We’re getting increased pressure on the warehousing and order fulfillment side of the business, to always have the right product on the shelf,” Bray says. “If you don’t, you better get it there very, very quickly. Amazon leads the way and shapes people’s expectations and perceptions of what warehousing can do.”

Amazon Business’ third-party marketplace feature also has brought a new issue to light for distributors, according to Ultra Consultants’ Trudell. “Not only do I need to beat Amazon,” he says, “but I need to sell on Amazon.”

Benefits of a better supply chain

Amazon’s disruption, including a handful of distributors selling on its marketplace, 

has raised the stakes for distributor supply chains, according to Karin Bursa, vice president of marketing for Logility.

If distributors relegate their supply chain capabilities to the buying, sourcing or performing of simple inventory management tasks by what she calls a “spreadsheet jockey,” they risk obsolescence.

“Whatever you want to call it – the Amazon effect, where I can get it the next day or disintermediation – I think that those factors put more pressure on a wholesale distributor to know what’s available to them in their network, to know where they can source from in short order and to have a keen focus on service and really know what their current service level is,” she says.

Fear of Amazon might drive some distributors to build a better supply chain, but growing market share and improving profitability should be the primary motivator, and it is a cornerstone of the 2016 Distribution Remodel.

Distributors that aren’t merely lifestyle businesses want their companies to endure beyond the current ownership or leadership, and focusing time and money on supply chain improvements can ensure success now and for future generations.

“Margin pressure out there in the industry is as strong as it’s ever been and so efficiency and having a strong, effective supply chain is becoming more and more important to us maintaining competitiveness out there in the marketplace,” says GT Midwest’s Onofrio.

An effective supply chain enables a company to compete on service, sourcing and even cost, an important consideration for small and mid-sized distributors, says Jeremy McAsey, corporate supply chain manager, GT Midwest. “Because we’re running into big national companies and these companies have buying power over us, if we don’t come up with creative ways to manage our costs – both our internal costs as well as our material costs – we’re not going to compete,” he says.

Invest in right processes, technology

Most companies perform well in supply chain “areas such as demand forecasting, labor flexibility, and the optimal placement of inventory across distribution networks,” according to a report from McKinsey & Co. “Fewer had mastered capabilities such as modularization and postponement, which require standardized manufacturing and process inputs so that companies can respond more fluidly to fluctuations in demand and to lower stock levels.”

Creating an “agile” supply chain – one that applies different processes for different needs, all with the goal of reducing costs and optimizing inventory – is imperative for success in today’s business climate, the report says. This is a twist on the longstanding notion of implementing lean concepts up and down the supply chain to remove waste and cut costs.

Whatever word is associated with it – lean or agile – a supply chain’s goal is to “achieve a synchronous flow of products … and least cost of ownership,” says MCA Associates’ Coleman, who outlined three drivers to achieve that.

The first, he says, is improving lead time: “We’ve got to be focusing in a lean-thinking way about taking waste out of our supply chain. That has to do with making sure the parameters we set for lead times are realistic ones. Too often lead times are inflated to make sure we have more inventory.”

Next is safety stock. “Too many distributors don’t understand how safety stock is developed within an ERP system,” Coleman says. “If we can increase forecast accuracy by measuring forecast error, then we have an opportunity to reduce safety stock, which can be 50 percent of the inventory.”

And the third driver is order quantities, says Coleman, who, while understanding the need for distributors to “contend with the minimums and specific requirements placed on wholesalers by the suppliers in terms of meeting certain dollar amounts or quantities for prepaid freight,” also knows that even today’s ERP systems are using fairly old concepts in how they construct an order quantity.

The goal, Coleman says, is to “increase the velocity of the supply chain. Order more frequently and have a continuous flow of product coming in as opposed to lumps that get ordered and these long periods where all we’re doing at that point is receiving a product and selling it down to the point where the next lump gets ordered.”

Processes are critical and so is the technology used to accomplish them. But distributors must be able to harness the capabilities of those robust systems, to understand all the features they offer, from demand forecasting on down. ACR Supply, for example, uses a feature in its ERP system to flag certain items as seasonal – heating products for specific times of the year, AC products for others. When seasons change, the system automatically lowers or raises inventory levels.

“Now the computer is able to better predict that stuff and we drop fewer balls,” Bray says. “We invest dollars when they’re needed and where they’re needed in the time of year they’re needed.”

Hire supply chain talent

Understanding how to maximize the supply chain functions of an ERP or other system requires the right talent. And many distributors are appointing supply chain directors, a sign the industry

is starting to realize the value of the streamlined movement of information and product.

When GT Midwest’s Onofrio saw how the company’s four divisions had their own supply chain functions – four buyers calling the same suppliers while too many small purchase orders were made without enough thought put into how the company was managing its inventory – he knew it was time to unite the supply chains of those divisions under a single manager.

Without existing staff members possessing a supply chain management background – understandable considering the supply chain functions were often mixed in with commodity functions and vendor relationship managers and sales functions – GT Midwest looked outside the company, hiring McAsey last year.

Avnet’s McDaniel agrees that looking outside the company – or even outside the industry – is a good place to start filling a supply chain department’s roster.

“The talent it takes to run supply chain now is quite different than it was 15 years ago,” he says. “It’s all about attracting the best educated. Sometimes distribution struggles with image, and even the big guys have trouble attracting and retaining talent.”

While distributors have historically moved capable buyers into a lead purchasing role, a true supply chain director does more than manage vendor relationships and inventory, according to Coleman, who says it’s time for distributors “to promote/recruit individuals who understand and can operationally execute the supply chain management challenges. Bringing in people from other industries is super important. It’s a whole different perspective that you bring into the organization. It allows you to look outside the four walls of your building.”

Turn ‘cost center’ into ‘profit center’

The warehouse is another area where a distributor can streamline its supply chain, which is especially critical for smaller distributors that don’t have millions of dollars to build the latest technologically advanced facility.

Talent can play a critical role here, as well, according to ACR Supply’s Bray. A warehouse today is no longer a static building staffed with minimum wage positions but instead requires skilled workers to operate the latest technologies needed to move product in and out quickly – and accurately.

Eliminating waste in the distribution center, whether it’s too many employees or unqualified workers, or an abundance of racks and shelves without conveyor belts moving goods between them, is another good target, according to Coleman.

“A lot of distributors have nice ERP systems but they never thought about the back end. Let’s buy an ERP system so we have a way of receiving an order, pricing it out, printing a picking ticket and then invoicing it,” Coleman says. “There’s a big hole in the middle – how do I fulfill the order and how cheaply can I do it? There’s a lot of opportunity as part of the supply chain conversation as far as enhancing processes to increase velocity of product through the warehouse.”

The dilemma for most distributors when it comes to investing in new warehouse technology or talent, or really any supply chain capability, is that with margins as thin as they are, distributors are hesitant to invest, but saving money in the warehouse, “whether it’s pennies or dollars on those transactions,” Coleman says, “goes to the bottom line.”

Avoid disruptions

While a warehouse’s inefficiencies aren’t always top of mind for a distributor, neither are supply chain logistics. But a rash of disruptions that include the West Coast port slowdowns, natural disasters and a national truck driver shortage have distributors also considering how their technologies, talent and processes must respond to these outside forces.

“What everybody is struggling with is how do you find that right balance, based on what’s predictable – and things are becoming more and more predictable through analytics – and how can you adjust your supply chain in advance,” says Avnet’s McDaniel. “That’s what’s been coming together in the last year and will be more so in the next couple of years.”

Supply chain disruptions, of course, go beyond labor strikes and earthquakes. They can include factory fires destroying inventories, suppliers going bankrupt, manufacturers recalling products, even containers falling off cargo ships into the ocean.

No matter the cause for a delayed shipment and no matter where along the supply chain it happens, a prepared distributor can mitigate those losses and, in turn, gain market share and improve profitability.

Logility’s Bursa hopes that message will resonate across the industry. But only distributors with a culture centered on growth and excellence will focus efforts on building a better supply chain and reaping the resultant benefits. Those that don’t should reflect on their cultures and enact deep organizational change.

“It becomes a different philosophy of how we’re going to run the company,” Bursa says. “When we look at the ones that do it well, they are more profitable, they offer better, more consistent service to their customers and they’re the ones that are growing in the marketplace.”