Dr. Al Bates is principal of the Distribution Performance Project and spends his time researching, writing about and delivering presentations on topics related to distributor profitability.
We talked to Bates about how distributors should think about profitability in today’s market.
Distribution Strategy Group: What do you consider to be some of the myths around profitability in distribution?
Al Bates: One myth is that sales solves all problems, because you really have to consider how much expense you incur to generate those sales.
The other myth is, and this has been going around quite a while in distribution, “We’ve got to get the inventory level down for cash flow purposes.” And my argument is, you get the inventory down, you don’t have any sales. There are other ways to drive cash flow than simply trying to reduce inventory or accounts receivable.
Distribution Strategy Group: Why do you think these myths have held on for so long when, like you said, the results aren’t necessarily what people think they are?
Bates: I think there is a little bit of, “We’ve always done it this way.” And that’s true in every business, including mine. Also, sales is the easiest factor to measure, and every year it’s, “How much did you grow your sales? What was the increase vs. competition?” And so, sales has this kind of mythological factor, if you will. It drives a lot of our decision-making when we really should be focusing on profitability.
Distribution Strategy Group: Another myth you’ll be discussing at the Profit & Productivity Summit centers around technology, like that AI will lower payroll costs. What is your take on that?
Bates: I’m older than everybody else in the room, so I’ve seen a lot of great technological developments that were going to increase profitability, and none of them ever have. That doesn’t mean that AI is not going to suddenly break out of this mold and help us be more profitable.
I’ll give you one little vignette. I was in the grocery industry when barcoding came in. That was a long time ago, and that was going to just change everything, and it ended up changing nothing because everybody barcoded at the same time. Everybody had the same technology.
So, it’s my view that you have to take technology and do something beyond it, something that your competitors are not doing, and that’s awfully difficult to do. AI is different enough that it may hold some potential. I’m still pessimistic.
Distribution Strategy Group: It’s not that people shouldn’t necessarily use it or leverage these tools, it’s that you’ve got to go beyond the technology to really have an impact.
Bates: It’s a double-edged sword. If I don’t use technology and everybody else is, then I’m way behind the power curve. There’s an old professorial term: “necessary and sufficient.” Using technology is necessary to stay in the race, but I don’t think it’s sufficient to help me be more profitable.
Distribution Strategy Group: Do you think there’s a need for distributors to really get the basics down pat and not just depend on technology to solve all these problems?
Bates: There is. I’ve been doing productivity and profitability sessions for a hundred years, give or take. And every time I do it, people say, “Well, gee, those really are the basics.” But we’ve gotten away from the basics. We’ve focused on nifty things that we could do.
We could have the world’s best website, and we could use AI technology, and we could do all this stuff, but somehow in doing that, we’ve kind of walked away from what really drives profitability, and there’s a need to get back to that.
Distribution Strategy Group: If people take one thing away from your session at the Profit & Productivity Summit, what would you want it to be?
Bates: That one thing would be that you’re going to have to look at what it costs you to do all the functions you do. You can get too focused on sales and lose sight of the fact that sales cost you money to generate, and some ways you get sales are really expensive while other ways are less expensive. You may want to look at the ways that are less expensive and focus on them more than the ways that are glamorous, like opening new branches and buying competitors. Managing the existing business better is a lot less glamorous, but a bigger profit payout.
