October 10, 2016 | Written by: Paul St. Germain
Categorized: Supply Networks
This is the second blog in a series of blogs revolving around Facing the Forces of Change®: Navigating the Seas of Disruption, published by the National Association of Wholesaler-Distributors (NAW) — the only major research study analyzing the future of wholesale distribution within multiple lines of trade. Here is the first blog of the series.
In the previous blog, six disruptive forces that are shaping the wholesale distribution marketplace were introduced:
- business disruption
- process disruption
- people disruption
- technology disruption
- mergers and acquisitions disruption
- government regulations disruption
Understanding how these forces may affect wholesale distribution businesses is key to surviving in this age of disruption. Being able to combat these forces and, at times, embrace them is key to thriving in this age and beyond.
Business disruption can come from competitors that are already known or new entrants to the marketplace. A known competitor can expand geographic reach by opening locations in a given area or expand electronically with web commerce. Others can exist in a non-competitive space and expand services and offerings to compete with wholesale distributors. Some well-known business disrupters include Walmart, Amazon, Uber and Airbnb.
Loyal customers are abandoning long-standing relationships for companies they perceive as giving them better value for their money. Some distributors may view the initial offerings from business disrupters as “competition to others, but not us.” However, distributors need to remain vigilant in anticipating the disrupters, understand the value proposition being delivered, and take actions to minimize the effect of the disrupter on their business.
Process disruption occurs when someone from inside or outside the channel changes the way business gets done.
Consider the traditional role of a simple supplier/distributor/customer B2B supply chain for a product that includes no value-added services. The distributor is a buyer from the supplier in the first stage and a seller to the customer in the second stage. At each stage, there are a number of costs incurred by both the buyer and the seller.
The buyer determines what is needed, decides what the solution is (a product), determines a seller, orders the product, receives the product, and eventually pays for the product. Assuming it is an in-stock item, the seller receives the order; verifies the validity of the order (including credit check and authorized buyer); prices the order; picks, packs, and ships the product; provides an invoice; and eventually collects for the product. All of these costs are independent of the cost of the product itself.
Each one of these steps, on both sides of the transaction, incurs costs. Strides have been made to streamline the processes required on each side. A preferred supplier program can cut down on the buyer’s work in choosing a supplier. Electronic data interchange (EDI) and electronic commerce can reduce costs for order placement and receipt. Pricing can be pre-determined through contracts. Technology can be implemented to automate processes to decrease costs. The processes have evolved to provide continuous improvement and lower costs. However, from time to time, there are new processes that revolutionize the cost structure and disrupt the status quo. These disruptive processes can come from current participants in the supply chain or from outside the channel.
A form of process disruption is for a supplier to go direct to the customer, cutting out or disintermediating the distribution channel. Another form is for a distributor to provide a service such as maintaining a production line for a manufacturer. Instead of only providing products and services to maintain equipment on a production line, distributors can provide a service to keep the production line producing, assuming the responsibility for the “up time” of the line, governed by service level agreements. Included with the responsibility is to provide the necessary products and services to maintain the line. The distributor who earns this business would become the disrupter, and other suppliers who wish to provide products and services become the disrupted.
People are at the heart of wholesale distribution, with its emphasis on sales, relationships, and customer service. But the “people” aspect of the equation also can be a disruptive force, as employees grapple with the effects of industry consolidation, changing technology, and shifting demographics and the need to develop new skills to compete in a rapidly changing business climate.
As Baby Boomers retire across the supply channel, longstanding relationships and high levels of tribal knowledge are being removed from the businesses. Millennials, who one distribution executive described not as “tech-savvy” but “tech-dependent,” are taking the place of this personnel, bringing their level of sophistication and comfort using connected devices to the business world. Expectations are changing about how, where, and when business transactions are taking place. In short, buyers want to do business wherever and whenever they choose, with a device of their choosing, with an app that they enjoy using. This is a large part of the reason that the industry focus is shifting from products and services to the customer experience.
Mergers and Acquisitions Disruption
The pace of mergers and acquisitions (M&A) in wholesale distribution has been strong over the last five years. This changes the balance of power in the supply chain, often making it difficult for small and mid-sized distributors to compete—and bringing in new sources of competition as companies expand their capabilities with strategic purchases aimed at developing a new expertise.
M&A activity affects suppliers, customers and distributors. In any of the roles, by growing in size as a result of M&A, they develop more buying power and are in a position to negotiate higher volume deals and demand increased levels of service and price concessions, to be used for their advantage.
Other companies are using M&A activity to acquire specific capabilities to provide differentiation from their competition. In some cases, this acquired capability is no longer sold to other companies, being kept as a competitive advantage and differentiating capability to provide a unique selling proposition and/or cost advantage.
Technology is one of the greatest marketplace disrupters because it is a source of continuous change in all businesses—indeed, in all aspects of life. When we talk about technology disruption, however, it must be looked at in two distinct areas: technological advances in products and materials and hardware and software that has the potential to change entire business models.
Look no further than the automotive industry for a simple example of how technological advances in product materials can disrupt an industry. When car mufflers were made of carbon steel, there was a vibrant muffler replacement business for the retailers and automotive aftermarket distributors who supplied them. Although the price of a stainless steel muffler is higher, it has a lower cost of ownership due to the longevity of the muffler. Aftermarket distributors now carry less muffler inventory and focus on other parts.
Similar changes are occurring in the lubricants for vehicles. Advances in the technology of motors and the lubricant itself are decreasing the need for oil changes. Electric vehicles do not require oil changes. And car engine oil changes themselves are being likened to printers, in which oil changes are approaching a model where you will change the oil by swapping in a new cartridge, similar to the way you would replace the ink cartridge in your printer. This will first affect the retail oil change business by creating a DIY capability for many consumers. It will also present opportunities; most notably in the supply of new products (cartridges) and also in the returns business for spent oil cartridges that will need to be recycled.
Government Regulations Disruption
Governments also cause dramatic change in the marketplace. New legislation and related compliance issues can add layers of work to distributors’ administrative processes. Compliance documents in safety-related fields, electrical, and electronic lines of trade are increasingly adding cost and complexity to customers’ businesses, for instance—but as a disrupter these issues also can work as a positive force for distributors. Viewed through the customer lens, the regulatory environment offers opportunities for wholesaler-distributors to disrupt the marketplace with new services aimed at helping customers navigate the maze of issues affecting their business—now and on the horizon.
Regulations for automakers to achieve gas performance ratings, safety requirements and monitoring for the food industry, restriction of substances such as pesticides, and conservation of resources such as water and energy all open the door for distributors to develop niche services that help them disrupt the status quo while assisting customers with their compliance. The key is understanding the effects of the legislative environment on your customer base and using that knowledge to cement your position as a solutions-based company.
In the upcoming edition of Facing the Forces of Change®: Navigating the Seas of Disruption, published by the National Association of Wholesaler-Distributors (NAW), you will find much more detail on all of these topics, including strategies and examples from leading distributors, along with suggested actions to understand and minimize the effect of disruption on a business, or present the opportunity to become a disrupter.
Stay tuned for upcoming blogs on other topics examined and discussed in the book.
Facing the Forces of Change®: Navigating the Seas of Disruption is available for purchase from NAW at: http://www.naw.org/ftf16, and will be available in November, 2016.