The distribution industry consists of unique segments such as food, chemicals, construction materials, office supplies, and home goods. Although the end products at the roughly 400,000 distribution companies in the U.S. may be vastly different, the challenges and opportunities are fairly consistent across these verticals. Through ongoing conversations with our clients in the distribution industry, we have noticed a number of challenges and opportunities currently impacting the industry.
Challenge No. 1 –Increasing Competition
For most distributors, demand is closely linked to local economic activity. However, enhanced technology has added a layer of competition as manufacturers and large retailers begin to bypass the local distributor. The Internet has made buying from distant distributors easier and prices continue to tighten as a result of competition. It is important to continually take a fresh look at your competitive landscape because the pool of competitors may be wider than ever before.
Challenge No. 2 – Ensuring Product and Customer Profitability
Every product in your portfolio must be a contributor to the company, and ensuring product diversity and quality must be at the forefront of your company’s strategic initiatives. Don’t automatically assume you have an accurate understanding of product or customer profitability. This requires rolling up your sleeves to investigate how each product is performing. It’s relatively common for companies to be distracted by products or customers that do not significantly contribute to overall performance.
Challenge No. 3 – Product Lifecycle Management
Every product has a lifecycle that spans growth, plateau, and eventually, decline. It is important to assess where each of your products currently sits in the cycle, and how you can rejuvenate any products in decline to ensure they survive. Although product lives vary based on consumer demand, it is relatively certain that historical product offerings will need to be innovated in the near future.
Opportunity No. 1 – Information Technology Advancements
Technological advancements in inventory tracking and management can offer a meaningful boost to your company’s bottom line. For example, a warehouse management system (WMS) can be used to automatically track the physical location of inventory throughout the warehouse by scanning bar codes. It may include using automated materials handling systems to convey inventory and automatically place it in bins for later retrieval. WMS systems also schedule dock personnel for loading and unloading according to anticipated traffic volumes.
Opportunity No. 2 – Enhanced Order Management Systems
Online interfaces enable customers to place orders online, receive confirmations and shipping information, and track shipments. As customer orders are received and fulfilled, orders are automatically generated to suppliers so that inventory can be replenished. Financial systems capture order information and automatically generate accounts receivable and payable entries.
Opportunity No. 3 – Shifting Financing Arrangements
Most distributors have a large investment in their inventory, which may be financed through a working capital line of credit with a financial institution. While interest rates have been at record lows in recent years, interest rate risk is beginning to attract more attention. Companies are weighing options to mitigate interest rate risk by securing longer term debt for permanent working capital needs.
Looking through the lens of these challenges and opportunities on a regular basis is a smart approach to assessing company performance beyond the present day snapshot. It provides companies with a better view of where they’re headed, and how they can succeed into the future.
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