Research conducted by MDM on the adoption and use of analytics by wholesale distribution companies revealed several key trends:
- The wholesale distribution industry is transitioning to a more data-driven mindset, but there are widely different views on what that means.
- Many distributors say they don’t have the right analytic tools, technologies and talent needed to stay competitive in quickly shifting markets.
- Survey respondents are generally satisfied with analytics centered on operational efficiencies and financial reporting, but less satisfied with deployment of more strategic tools focused on profitability, sales, marketing and service development.
Distributors are wrestling with data and analytics in 2014, according to research conducted by Modern Distribution Management.
While aware of the broad-based value of analytics (better decision-making, customer relationships, financial performance and execution of strategy), distributors also indicate widespread frustration with how effectively analytics are being deployed within their companies.
MDM conducted this research to benchmark the use of analytics by distribution companies, as well as assess distributors’ current priorities, challenges and success with data and analytics. The findings here represent an online survey conducted at the end of 2013; MDM also interviewed wholesale distribution executives in late 2013 and the beginning of 2014.
The research found that more distributors are exploring the adoption of sophisticated analytics, but roadmaps are either outdated or hard to come by. “We’re not where we want to be,” noted one industrial products distributor, “but analytics is a priority for us in 2014 to identify where and how we can leverage our data better.”
Some distributors are pretty satisfied with their use of traditional analytics, defined by historical reporting of transactional data. Others are pursuing more predictive analytics across a number of business areas, including inventory forecasting, cash flow management and sales/marketing opportunity.
A distinct minority, about 10 percent, is analyzing unstructured data (such as online customer behavior and feedback) to guide sales, marketing and product management decisions.
Evolution of Analytics
Distributors have been on a journey of analytics adoption for decades, since even before management information systems came online in the 1980s. Many white-haired executives remember the likes of Gordon Graham and Buddy Silver, inventory management gurus for a quarter century or more. Their concepts were widely adopted and literally became industry standards as they were programmed into code that drove logic for distribution ERP systems. (Consultant Jon Schreibfeder of Effective Inventory Management has continued to drive and provide distribution inventory management analytics.)
As distribution ERP systems matured in the 1990s, distributors developed additional reporting capability, often through custom programming, to create specific operational and financial metrics for management use. Some of the leading analytics efforts centered on activity-based costing or similar systems to more accurately identify cost-to-serve in efforts to move away from a gross-margin-only metrics mentality. ISO 9000 and other quality initiatives also drove adoption of analytics and process improvement.
In the past five to 10 years, the use of analytics in distribution has continued to mature and extend more deeply throughout individual sectors. MDM has charted this evolution, which has been driven by increased investment in the industry by private equity; the entrance of newer players such as Amazon, Google and others; and generational shifts in management.
Most recently there has been strong growth in the use of pricing, profitability and market analytics. And customer relationship management (CRM) is increasingly part of the discussion to improve data visibility throughout an organization.
Analytics Usage & Benefits
As a result, more traditional ERP systems have integrated analytics into their systems; more third-party
analytics tools are also available, including CRM, business intelligence and data visualization tools.
Within this context, our research indicates a growing adoption of analytics across all spectrums – type of tool, size of company and application. Distributors are most heavily using spreadsheets (89 percent), followed by business reporting/KPIs/dashboards (74 percent) and forecasting (58 percent). The next tier of analytics adoption is for query and analysis, general statistics and Web analytics.
Overwhelmingly, distributors say they are making better decisions by using analytics (89 percent). The next two largest benefits cited were better relationships with customers and business partners (62 percent), and improved financial performance (58 percent). Respondents indicated much lower value to more predictive applications of analytics (new opportunities with existing customers or new market segments, reaction to economic changes, and creation of new product and service revenue streams).
But when asked how much the business strategy relies on analytics, a clear reality gap emerges. Only 12 percent of respondents say they rely on analytics for all of their sales, marketing and operational decisions, from pricing to product to customer selection. And 32 percent say they use analytics as a monthly or quarterly report card to advise management. The answers indicate a majority of distribution companies focused on periodic historical reporting, rather than more proactive trending insight.
Analytics Adoption Gap
The right tools, talent and techniques are all major hurdles for adoption of analytics with distribution companies. The largest impediments cited were a weak technology infrastructure and the “correct talent to use our data.” Not far behind was being inefficient at capturing and analyzing data. And 37 percent of respondents say that either their executives don’t understand or support the use of analytics, or that they don’t know where to begin. While there is increasing awareness of the value of analytics, this research indicates a majority of respondents are far from satisfied with their current analytics capability.
Status of Analytics by Function
Distributors are happiest with their use of analytics into traditional corporate functional areas, with more than 80 percent very or somewhat satisfied with applications to finance, followed by operations/supply chain management, customer service/support and IT/management. At the bottom of the list, the least satisfaction expressed was for service/product development, followed by human resources and marketing.
With the rapid development of multichannel strategies, particularly by broad-line competitors, it will be interesting to track the trend in future MDM surveys. One would expect broader adoption of marketing automation and analytics to guide specific new product or service development into niche customer segments.
Level of Analytics Maturity
Nearly 55 percent of survey respondents indicate the use of only rudimentary or simple reporting/spreadsheet tools in their company. A quarter of respondents say that reporting and more predictive tools are available. Only about 20 percent of respondents are using automated alerts to employees as part of their analytics. And only 10 percent are deploying tools to analyze unstructured data (unstructured data is often defined as qualitative and text-heavy, including customer feedback increasingly available through Web, email and social media).
Overall, larger companies surveyed are deploying deeper levels of analytic tools, but there were some notable exceptions, where small companies are using technology and analytics to gain competitive advantage.
A growing area of analytics is in net profitability, but the level of detail distributors measure varies widely. Less than 20 percent of distributors measure profitability at the line-item level, the deepest. Surprisingly, the next largest level of detail is at the order or transaction level (12 percent) and then the customer level (11 percent).
Comments on the value of measuring profitability were focused:
“Our analytics use order size, frequency of orders, shipping costs to determine our most profitable customers, and identify those customers that offer us the opportunity for profitable growth. That information determines how we allocate our sales personnel focus.”
“We measure profitability at the line item and class of product level to confirm we are achieving optimum margin against competition strategies.”
“DSRs can see and manage profitability of items and orders better.”
Interestingly, 41 percent of respondents indicated they were not measuring profitability at the customer, transaction or line-item level; however, there was an overwhelming indication by respondents that this capability would be very to extremely useful.
Customer & Market Size Analytics
Another emerging area for analytics is in wallet and market share measurement. Some distributors conduct broad-based competitive market intelligence, using third-party data resources as well as tracking competitor news and earnings reports, and careful analysis of Web and social media activity. Others have created proprietary systems using historical transaction data, in combination with third-party benchmarking data, to create more predictive demand models. “We benchmark usage at existing accounts where we have significant share, and translate that into market opportunity data for target accounts in their space, i.e. refineries,” said one mid-market electrical distributor. “We also use market size data developed by suppliers and our internal market research.”
Opportunity for Differentiation
The use of analytics is indeed maturing, and its adoption is accelerating across wholesale distribution sectors. But there is wide disparity in how distribution companies are deploying analytics and sharing data in 2014.
While distributors are largely happy with their traditional analytics capabilities, many are aware they could be doing more, citing a variety of internal and external limitations. There is widespread recognition that “we have not leveraged our data in the past, and it is now a priority.”
Leading analytics adopters have made analytics a strategic priority, taking many forms. Some are taking a research and development approach, creating dedicated departments, job functions and budgets to support increased analytics education and tool selection.
At a deeper level, the drive by industry-leading adopters is to migrate analytics capability, traditionally under the control of the IT department, across the organization, to shift from a more traditional intuition-based decision-making process to one where data is at the heart of nearly every important decision. For companies that prioritize continuous improvement in analytics, there is clearly an opportunity for competitive advantage across every level of an organization.
Thomas P. Gale is the president of Industrial Market Information (www.imidata.com), and publisher of Modern Distribution Management.