Staying competitive as a distributor is no easy feat in today’s industry environment. Distributors face challenges from all sides:

  • Shrinking profit margins due to intense competition
  • Supply chain uncertainty and delays, particularly in the aftermath of the global pandemic
  • The sharp rise of ecommerce activity
  • The impact of natural disasters and war

When the challenges coming at you are difficult to predict and control, it’s critical to look inward: How can you optimize and improve to be more efficient, improve margins and stay strong on the playing field?

Two practical and effective areas to address are operational challenges and supplier development and management.

Operational challenges

Given today’s industry conditions, operational challenges tend to fall into three categories: Inventory optimization, ecommerce and digitization of distribution business, and growing customer expectations and competition.

1. Inventory optimization

Inventory is your largest asset and a perfect target for optimization. There are two effective ways to optimize inventory: inventory stratification and network optimization.

Inventory stratification addresses inventory challenges at the individual process level. It involves segmenting inventory into categories according to multiple criteria, so you can make strategic decisions about what to stock and how much. For a comprehensive and effective approach, you can use the inventory stratification method developed by Texas A&M University’s Global Supply Chain Laboratory.

From there, you can use data to forecast demand, determine the best re-order points and create an optimal replenishment strategy.

Network optimization addresses inventory challenges at the system level with the aim of improving overall operations. You look beyond inventory to the overall cost of operations, considering conditions such as transportation cost, customer demand, supplier locations, cost of warehousing, etc. With this, you can determine the most appropriate inventory type and quantity for each location.

Additionally, distributors can use key performance indicators (KPIs) in areas such as operations, customer service and finance to benchmark their performance and operations against other companies.

When you optimize inventory in this way, you can work toward carrying your most profitable items, stocking inventory that brings the most value to your customers and minimizing the cost of overall operations.

2. eCommerce and digitization

eCommerce and the digitization of the sales process have greatly accelerated since the start of the pandemic in 2020. Distributors are asking themselves how to address this, how much technology to adopt, and how they can sell products digitally and provide the same level of customer experience.

When it comes to this challenge, distributors shouldn’t seek to overcome – they should seek to embrace. They should adapt using technology to enable great customer experiences digitally, as with ecommerce, video conferencing, virtual reality (VR) tools and augmented reality (AR) tools.

The value of getting on board is that you don’t get left behind – and lose your customers to competition that does go digital. You will also gain capabilities that allow you to be more efficient and profitable overall.

It’s more important than ever to achieve channel alignment and partner with strong brands and reliable suppliers. Supplier selection, development and management should be handled strategically.

3. Growing customer expectations and competition

Customers are leaning into digital experiences, driving the need for distributors to adapt and meet them in the middle. On the other hand, competition in the ecommerce space is constantly seeking ways to edge into distributors’ territory. For instance, ecommerce players are building their own brick-and-mortar facilities. This is raising the stakes for performance in both arenas, and distributors must find ways to differentiate and compete. Distributors should offer online selling options while offering the same customer experience in other services, such as fast and reliable shipping options, credit and inventory management services, and customized technical solutions to customer needs. If distributors don’t work to meet customers where they are, their competitors will.

Facing these three operational challenges with a strategy to optimize will help you to become more profitable and provide excellent customer service. You’ll have a more appropriate inventory, provide the experiences customers prefer and have a grasp on your KPIs to better manage operations across the board.

Supplier development and management

Today, your supply chain plays a major role in your performance and competitiveness. It’s more important than ever to achieve channel alignment and partner with strong brands and reliable suppliers. Supplier selection, development and management should be handled strategically.

To start, apply a supplier stratification methodology, such as that developed by the Global Supply Chain Laboratory researchers at Texas A&M University. With supplier stratification, you segment suppliers into categories based on specific criteria, such as profitability, supplier performance scorecard rating, loyalty, brand image and support services. This will provide clarity around which are core suppliers, which have potential to become core suppliers with supplier development and which are actually a drain on your resources.

Next, consider how ways to further diversify your suppliers. A lean approach to the supply chain is not sustainable today. It creates more vulnerability and risk. Given the volatility and disruptive nature of the supply chain, supplier diversification is more secure and competitive. It:

  • Reduces the risk of single-point failure in the supply chain
  • Allows for the business to scale with growth
  • Allows distributors to diversify inventory options
  • Can reduce lead times and shipping costs depending on the location of suppliers
  • Contribute to improved negotiations around pricing and support services with suppliers

There are multiple strategies for diversifying your supply base, including:

  • Sourcing from multiple suppliers, which could vary by location, account, etc.
  • Taking a multi-echelon approach with multi-channel diversification, creating options not only for inventory but also for other supply chain services such as transportation.
  • Identifying and building relationships with backup suppliers to reduce the impact of disruption caused by failure of primary suppliers.

Before you execute a strategy, it helps to have criteria by which to evaluate and select suppliers. Here, you can evaluate based on cost, cost of doing business, types of services they provide, their tenure in the industry, their level of commitment, etc.

A note about criteria for evaluating optimization opportunities

The appropriate criteria and acceptable costs for evaluating operations and suppliers will vary from one unique business and industry to another. For instance, logistics in building materials are often more complex and expensive than in electronics. Further, certain industries must comply with strict regulations and must take those into consideration. You don’t want to change suppliers or reduce inventory in such a way that ends up compromising operations.

Research from Texas A&M University’s Global Supply Chain Lab has shown that best practice implementation in inventory optimization and supplier management can help realize improvements to EBITDA by as much as 4% and double Return on Net Assets (RONA).