While new products and technology designed to assist and enhance the wholesale distribution industry have continued to evolve in the last couple of years, wholesalers report their top challenges remain the same. The short-term problem they most expect to face in 2019 is the increasing volatility of demand due to new competition, new customers and digital e-commerce (79%), according to supply chain solution company Blue Ridge.
For the second year in a row, Blue Ridge surveyed its customers as well as readers of NAW SmartBrief to understand the business challenges they face in its State of the Wholesale Supply Chain Industry report. Increasing demand volatility also led the 2018 survey as the top concern, at 75%.
“One of the first things I noticed was the top challenges mirrored the previous year within a few percentage points,” says Rod Daugherty, vice president of product strategy at Blue Ridge. “In particular, I think the respondents to the survey are realizing that increasing demand volatility and complex patterns of customer demands are two biggest concerns by quite a significant margin. That seems to be very top of their mind.”
Other top challenges wholesalers expect to face in the short-term this year, according to the report, include:
- Complex patterns of customer demand (75%)
- Increasing supplier collaboration needs (42%)
- Managing new product introductions (41%)
- Long lead times (40%)
- Lack of internal processes and tools (35%)
- Handling event/promotional activities (21%)
A natural reaction to the top two concerns — increasing demand volatility and complexity of customer demand — is to want to stock up on inventory so that whatever the customer may need is readily available when they need it. The problem with this approach, says Daugherty, is it won’t address the underlying issue of their inventory investment being out of balance. This is because items that sell well will continue to sell well. And those that don’t, wont.
“They understand there’s a problem, but the knee-jerk reaction is to spend more money on inventory,” he says. “However, quite often they’re buying too much of the wrong products, excess inventory of the items that don’t sell well.”
This unbalanced stock issue can be avoided through better demand forecasting and planning, says Daugherty, but distributors are often distrustful of new technology. They’d rather go with their gut, he says. “It’s very difficult to get customers to trust the artificial intelligence,” Daugherty adds.
Machine learning will look at environmental factors, international trends, events and more to generate a demand forecast based on observation and a continual feedback loop that learns from attributes associated with products and how they sell. “It creates a new algorithm. Rather than a person saying, ‘OK, I want the solution to do this.’ The solution says, ‘This is what we need to do based on how this item sells based on external inputs and data that we’ve learned and observed,’” says Daugherty.
Even though many respondents to the Blue Ridge survey stated long lead times and lack of internal processes as big pain points, they’re still hesitant to bring in technology that will analyze their hard data to make improvements, Daugherty says. “This industry continues to lag behind other industries in adopting new approaches to managing that problem,” he says.
The percentage of companies using machine learning techniques for forecasting rose slightly from 2018 to 2019, from 25% to 27%, but while only 10% said they weren’t sure of its value-add last year, 15% reported such uncertainty in this year’s survey.
Growing Costs and Concern
Looking at supply chain business trends, higher costs and increased lead times are top considerations for wholesalers in 2019, the survey found. “Increase in transportation costs is a big deal,” says Daugherty.
Nearly seven in 10 respondents (69%) report a higher increase in transportation/labor cost compared to recent year-over-year increases as the top trend. At the same time, 63% of wholesalers say they keep more than 60 days’ supply on hand.
Customers who report the highest percentages of carrying inventory 60 days or more (between 64% and 68%) are most concerned about these four areas:
- Increasing volatility of demand;
- Complex patterns of customer demand;
- Lack of internal processes and tools;
- Managing new product introductions.
The percentage of demand that couldn’t be filled by inventory grew between 2018 and 2019, with the greatest rise in the top category: more than 4%. The percent of respondents reporting more than 4 percent of demand could not be filled rose from 19% in 2018 to 26% this year.
“Human nature wants you to react to risk due to volatility in demand by carrying more inventory, but the problem that we see in reality, if they don’t have a more evolved and optimized demand planning and inventory optimization solution, is that, despite them carrying more inventory, their service is still a problem,” says Daugherty. “So they’re not achieving the overall service goals they have in terms of stock for their customers. That also hurts their turns.”
Other trends wholesalers predict for the year in the Blue Ridge survey include:
- A higher increase in item cost compared to recent year-over-year increases (63%)
- Increased lead time due to transportation capacity challenges (62%)
- Higher lead time variability (56%)
- Pricing power to pass on increased costs to customers (32%)
Distributors are responding to customer concerns and increased demand on staff in a variety of…
Wholesale revenues, inventories and ratios from March 2020.
Wholesale revenues, inventories and ratios from December 2019.