Wholesale-Distribution and the Economic Crisis
by Christina Lee on October 11th, 2008
Each day this week, Wall Street investors watched in astonishment as the Dow Jones Industrial Average plummeted at unprecedented rates. Very few, if any segments in the wholesale-distribution industry are safe, experts say — but every day that passes is an opportunity to optimize the market.
“What it comes down to is making the best strategic decision, under any circumstances,” said Chuck Miller, vice-president of marketing communications firm CommCentric Solutions, “and when you have fast-changing conditions that occur with the challenges of today, you have to be able to respond quickly and appropriately.”
The most recommended solution in times like these: collaboration that pushes down barriers of competition. That competition, according to Richard Sherman, refers to manufacturers and retailers, “not necessarily other wholesalers down the street.”
But while initiating these new relationships, wholesale-distributors of all sorts must make sure that they add value to their services and make that value known — starting now.
“They need to wake up,” said Sherman, president of Gold and Domas Research and supply chain management expert. “In fact, I happen to be working with some wholesaler segments — and I won’t say which ones — that don’t need a wake-up call. They need a wake-up two-by-four.”
The Market’s Current State
According to research by the Manufacturers Alliance , manufacturing production growth is expected to decline by 0.5 percent in 2008, following a low 1.7 percent growth last year. Its research institute does expect growth in 2009, but only by 0.2 percent.
The only growth expected this year is in investment in equipment and software — by 0.8 percent in 2008 and 2.3 percent in 2009. In addition, the research institute predicts that the largest percentage gain in capital equipment spending will go toward the high-tech sectors.
“Distributors in the IT industry have an advantage in such circumstances. In tougher times, everyone wants to cut costs and find ways to be more efficient,” Miller said.
But, as the former communications director of Tech Data Corporation — one of the world’s largest technology product distributors — can attest, the advantage that the industry has is no guarantee.
“It is very difficult to see how everything will unfold,” he said. “It is contingent on the actions of the Fed, and how that overall affects the business climate. That obviously affects IT spending and how much stability or how much decline may occur.”
Ben Worthen, a Wall Street Journal blogger, also announced to readers Tuesday that “The Tech Sector Finally Gets Hit.” His entry discussed the loss in revenue by SAP and RightNow Technologies — proof, he says, that “tech companies may have cash, but their customers aren’t so lucky.”
Wholesale-distribution experts expect very little, if any segments of the industry to remain intact.
“The wholesale-distribution industry as a whole is going to be impacted in a very general way as is the economy — which is pretty devastating,” said Jim Olsztynski, editor of plumbing distribution magazine Supply House Times. “We all see what is happening to the stock market, and everything else that is going on. I think we’d be whistling in the dark if you think the wholesale industry is going to prosper.”
Past Sufferings
Wall Street only presents the latest of obstacles the wholesale-distribution industry has had in over the past ten years. More than 20 years ago, manufacturers and retailers began making efforts to distribute goods themselves — a process that cut out wholesale-distributors and, as they thought at the time, reduced both costs and risks.
Beginning in 2000, layoffs in the technology distribution industry came as a result from, as Miller described, “a combination of the dot-com explosion and large-scale build-up for the Y2K conversion.” Dell became renowned for its direct-model approach — the manufacturer’s unique way of adverting the industry’s downturn.
In the end, manufacturers and retailers did not reduce either cost or risk by much, according to Sherman. Still, they saw wholesale-distributors as little more than “middlemen” that had to prove themselves worthy again
“Mr. Wholesaler, you have to begin to articulate the value of those services and value of inventory management, and buffering risk against uncertainty in the last mile of that distribution,” he said, to sum up his advice given in a 2001 Material Handling Management article, “Wholesale Distribution — Back in the Chain Game.”
Part of this redefinition, as wholesaler-distributors found, became the creation of a new relationship with manufacturers and retailers. They began providing extra packaging lines so that they could send out personalized case sizes of material — thus, reducing costs manufacturers had to pay for packaging material, labor, and equipment.
How Crisis Becomes an Opportunity
A reexamination of history — in particular, when distributors were being overlooked ten years ago — could lend solutions for today’s crisis. More than ever, wholesale-distributors need to learn fast how to deal with an increased crunch in and competition for cash flow, credit and capital.
With this, “the bigger businesses are going to get bigger, the smaller businesses are going to get smarter, and the medium-sized businesses got to really look at their strategic intent,” as Sherman said.
One of the first steps wholesale-distributors must take is to evaluate their inventories.
“A lot of capital gets tied up in those inventories,” Sherman said. “Managing inventory in light of tight credit is an opportunity to free up working capital.”
In addition, as they had to do ten years ago, wholesale-distributors must again add value to their services and collaborate with manufacturers and retailers. Experts advise that distributors offer to take care of supplying to regional retailers or to other small to mid-sized clients, so that manufacturers can focus more on their national buyers.
“It’s the wholesaler that has to educate their former supplier or other suppliers of the capabilities they bring to the table,” Sherman said.
As he has already seen in the technology distribution industry, Miller says that reimplementation of two-tiered business — and with that, “solution selling” — in other industries will soon prove to be more cost-effective.
“The solutions that are used by all businesses, large and small, are comprised of multiple products. The single vendor providing direct sales doesn’t have that solution that the all-products-in-one-place has,” he said. “This is a very significant plus that has always been there for distributors and is even more pronounced during tough times.”
Regardless of what steps distributors decide to take, experts agree as well that the current financial situation will surely lend lessons of its own.
“A lot of people don’t realize how interconnected business really is,” Sherman said. “For those people who don’t think that their business is in an ecosystem, and that a little bump here could cause a big bump somewhere else: this should be a real education opportunity.”