For decades, distribution has been a relatively late adopter of technology compared with retail. One reason is that distribution wasn’t disrupted by enormous online marketplaces. Sure, many distributors lost some share to Amazon Business and other digital sellers, but there’s been no corollary to the “retailpocalypse” that shuttered chain stores and malls.
But why was distribution spared from this disruption in the first place? Despite popular belief, it wasn’t because no one was paying attention to the sector. You can’t hide a multitrillion-dollar industry that makes up a quarter of the U.S. economy. The issue is that distribution is a lot more complex and difficult than people think.
The business sounds simple enough – and similar to retail: Buy products from manufacturers, hold them in warehouses, take orders and ship them to customers. But get into the nuances and you begin to wonder if you’d be better off tackling the mysteries of quantum gravity than running a successful distribution firm.
The Complexities of Distribution
Distributors must build value propositions that are complicated and yet reliable to meet a wide variety of customer needs. Consider these areas where providing solutions requires a great deal of expertise as well as advanced process and project management:
Value-added services. At Distribution Strategy Group, we have documented hundreds of services provided by distributors, ranging from assembling circuit breaker boxes to commissioning production equipment to refurbishing industrial pumps. Compare that to retailers whose service complexity typically ends at courtesies like gift-wrapping presents at Christmas.
Complex transactions. Most distributors selling into the construction market provide deeply specialized services around preparing bid submittals, assisting customers with meeting OSHA requirements and getting products to the right person on large jobsites where there are no fixed delivery locations. Distributors selling into manufacturing environments may have to meet JIT / Kanban requirements or respond to orders originating from bins or vending machines. And there’s so much more, like blanket POs, supplier direct shipments, mechanics liens and so on. This is not like walking into Walmart or buying on Amazon.
Complex relationships. To Target, a “customer” equals one email address, one physical address, and one or two credit card numbers. Try selling to Boeing Corporation where there are thousands of buyers, many channels to order and deliver products, dozens of custom price agreements, eprocurement arrangements, special billing provisions, custom financing and returns processes, hundreds of delivery locations, 24-hour emergency service requirements and more. Even a “small” customer may require the distributor to establish relationships across multiple functions, usually including purchasing and operations. Hint: The customers in those two departments often have conflicting objectives, even though they work in the same company. Good luck keeping them both happy!
Custom/configured products. Most distributors carry tens or hundreds of thousands of SKUs, but whatever number they have, it’s never enough. Every day, customers ask for something special – a variation on an existing product, a non-stock item or perhaps something that’s new to the world that the distributor will have to develop in collaboration with a supplier. Even stock products often have dozens or hundreds of possible configurations and distributors must be able to answer questions or offer special services to make sure these SKUs are properly set up to meet customer requirements.
Distributors Are Not Luddites
Even a brief summary of the requirements distributors must meet reveals that the wholesale business model is vastly more complex than retail. Distributors have been technology laggards not because industry leaders don’t understand the benefits of software and automation. The problem has always been that it’s much more difficult to build solutions to meet the complex needs of distributors than it is to solve the relatively straightforward challenges of retailers.
Even websites for distributors are much more challenging to build vs. retail – from more complex products to complicated account hierarchies to multiple billing and payment methods and more.
How AI Can Help
While there are technologically sophisticated distributors, most of them have value propositions that are so complex that only parts of them can be automated. This is why AI can be a real boon to distributors: Its capabilities are so vast that it will, over time, allow distributors to benefit from technology solutions that up until now were simply impossible to build.
Demand generation, CRM, warehouse management, inventory forecasting, working capital optimization, order management, returns management – applications for these areas and many others are rapidly entering the market. AI is enabling new possibilities for distributors at a record rate.
What You Should Do
The challenge for many distributors is that they haven’t built strong muscles when it comes to rapidly evaluating and adopting new technologies, simply because it hasn’t been an option for them. Now that real solutions are becoming available, distributors need the competencies to gain competitive advantage quickly:
- Make sure you have the right people on your team. That means the right technical experts but also leaders that are hungry to learn and adopt new technologies.
- Build processes for identifying opportunities to use technology to improve sales, productivity, accuracy and customer relationships.
- Constantly scan the environment to identify new and emerging AI systems that are available for distributors. This includes spending time with your current technology providers, probably all of whom are incorporating AI and would be happy to demo their new tools.
You can supercharge your strategy and knowledge about AI by attending our upcoming conference, Applied AI for Distributors on June 4-6, 2024, in Chicago. We already have 15 technology companies signed up to demonstrate their distributor-specific capabilities and we expect to have more than twice that many soon.
Additionally, we have a great lineup of general sessions planned, including how to manage cybersecurity in the age of AI, what investors expect distributors to do about AI, how to get your organization ready to adopt this technology and much more.
Many leading distributors sent multiple attendees last year. Just about every distributor should send someone to learn about these new technologies and how you can apply them in your company. No technology has ever held has much promise or peril as AI – nor has any technology evolved this quickly. Don’t fall behind.
Ian Heller is the Founder and Chief Strategist for Distribution Strategy Group. He has more than 30 years of experience executing marketing and e-business strategy in the wholesale distribution industry, starting as a truck unloader at a Grainger branch while in college. He’s since held executive roles at GE Capital, Corporate Express, Newark Electronics and HD Supply. Ian has written and spoken extensively on the impact of digital disruption on distributors, and would love to start that conversation with you, your team or group. Reach out today at firstname.lastname@example.org.