It’s easy to overlook the role of distributors in both commerce and the overall economy. Our industry is massive, generating more than $6 trillion in annual revenue and accounting for 28% of our gross domestic product (GDP). With an estimated 6 million employees working for approximately 300,000 companies, distributors are a major driving force in our economy.
In short, distributors enable the flow of goods between manufacturers and retailers, allowing manufacturers to focus on what they do best – designing and building great products.
Despite their importance, most distribution businesses operate on razor-thin profit margins. While revenue can flow in high volumes, profits can easily sneak out. This is a byproduct of managing thousands of products and a complex order system. For distributors, the key question isn’t just how to run the business—but how to ensure it stays profitable through effective profit maximization.
Profit Leaks and Distribution
In today’s dynamic business environment, distributors face a range of issues that limit profit maximization. From inefficiencies to customer dissatisfaction, there’s a host of issues that can turn any operation into a vulnerable one, including:
- Pricing and Margin Control Challenges: Inconsistent pricing across customers or products is a common issue. Additionally, sales teams often offer steep discounts without authorization, which can lead to profit leaks.
- Rising Costs Without Adjustments: Most distributors face increasing costs across the board. Many are not accounted for, including freight costs, logistics, tariffs, and higher vendor pricing.
- Operational Inefficiencies: Manual processes within inventory, fulfillment, and order management lead to delays and increased handling costs.
- Customer Management Challenges: Distributors often serve unprofitable customers unknowingly or extend overly generous payment terms to gain customer loyalty. High return rates and warranty claims also erode margins.
- Data and Technology Gaps: Many enterprise resource planning (ERP) and order management tools lack order-level visibility or analytics that identify which orders, processes, or relationships are draining profits.
Technology Levels the Playing Field
Thankfully, distributors have access to a growing number of new technologies that enable them to work more efficiently and better understand their customers, creating a clear path to profit maximization. Many are utilizing real-time AI tools to identify and address profit-eroding leaks before they occur. For example, distributors using advanced analytics can now pinpoint how certain “high-volume deals” were cutting into margins due to unchecked discounts. By focusing on margin analysis, this organization caught issues before processing orders.
Additionally, predictive analytics enables a shift from a reactive to a proactive approach by identifying factors that harm profits, such as customer churn. With actionable order insights, it’s now possible to implement personalized customer engagement strategies that matter. By analyzing ordering patterns, distributors gain insights into customer behavior, including what customers buy, how often and in what combinations. Now, targeted upselling and cross-selling opportunities are exact and personalized. The result is having a deep understanding of customer needs to strengthen loyalty and foster happier customers.
Using order intelligence to work smarter enhances operational efficiency. Key areas of improvement include streamlined workflows and the ability to identify common order combinations or frequent small orders. With powerful customer behavior insights, distributors are optimizing picking, packing, and shipping processes to reduce costs and improve productivity. Workflow improvements are also realized, freeing teams to focus on higher-value activities and transforming traditional order management into a strategic initiative to boost customer satisfaction and profitability.
Where to Start?
Before adopting new intelligent solutions for profit maximization, it’s important to set a baseline of operational understanding. I suggest you start with low-hanging fruit by answering the following questions:
- How clear is my visibility into margins, and where are the margin pressures stemming from?
- Are we maximizing customer value, identifying the customers worth nurturing, and deprioritizing accounts that generate little return?
- What inefficiencies exist in the order processing process, and can we identify patterns that indicate unnecessary handling costs or fulfillment delays?
- How proactive are we in protecting margins? Do our sales teams have the ability to balance competitive pricing with profit considerations?
- How do we prepare and manage churn? Can we assess customer retention risks to take preventative action?
Start small and, over time, adopt technology that reduces complexity and enables a more proactive growth plan.
The Future of Distribution is Bright
While wholesale distribution is the invisible economic engine, the days of “high-revenue, low-margin” are fading. On the upside, a new generation of tools is available to improve visibility and efficiency; embracing data-driven decision-making will define the most successful companies. You should ask tough questions and research how new artificial intelligence (AI)-driven tools can build a stronger and more resilient distribution business focused on profit maximization.
Gayle deDie is senior vice president of marketing at Cavallo