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Small Distributors Need Bigger Software

Fri, 02/22/2013 - 1:03pm
Bruce Crozier, Senior Business Software Analyst, BCR Software

To borrow from Mr. Twain, reports of the death of the small distributor have been greatly exaggerated. People have been predicting the demise of the small supply house for decades, yet they continue to thrive. In fact, the vast majority of distributors are small. According to U.S. Census figures the average industrial supply house has fifteen employees. That average has been the same for at least twenty years. In spite of the competition of much larger companies, small distributors have found specialty products, value adding services, or underserved locales that have given them the market share they need to survive.

This is not to say that small distributors have it easy. Very large wholesalers have gotten much better at using their big fancy computers to manage their inventories and pricing so that they can quickly locate products in other branches or recognize a price point opportunity. The days when ocean liner sized companies took forever to change course are in the past. And now there's the internet, making companies thousands of miles away next door competitors. The challenges for the small distributors to compete are just as great today as ever.

What most small supply houses do not appreciate is the importance their own computers and internet presence to their survival. That lack of appreciation could be fatal. Distributors are losing sales and profits to competitors, large and small, and many times don't even know it. An order that might have been theirs, because in years past the first competitor the customer called couldn't locate the item in stock, now never gets to them because the first competitor instantly finds it in another branch and has it to a customer overnight. Prices that were competitive because they came from the only source in town, no longer compete when customers can price shop every item on the web. Potential customers never get to that big ad in the yellow pages anymore because it's Google™ or nothing. 

But small distributors continue to believe that they don't need the kind of computer software or B2B websites their larger competitors use. Their reasoning is that

 1.) they have simple little operations so they don’t need big complicated software and

 2.) they can’t afford big software and sophisticated websites anyway.

So they settle for lightweight generic business software that keeps the books, and little more, and a website that is their yellow page ad in pixels. But neither of their reasons is valid. The benefits of better distribution specific software are just as great—sometimes more so—to the small operation as they are to the big, and the higher cost is easily justified.

Here's why:

First, small companies are much more sensitive to their net profit ups and downs. What causes a board meeting in a large company likely has much more personal consequences to the owner of a small one. College tuition? Luxury vacation? Better pricing, smarter inventory management, and more sales volume can make more than a little difference in the lives of small business owners.  Distribution specific software can make those differences because that’s what it’s designed to do.

Second, small companies have fewer employees with more diverse responsibilities. The addition or subtraction of a single employee has a dramatic impact on the ability of the staff to get the day’s business done and done well. Small distributors need more efficient order handling, automated pricing and costing, suggested purchase orders, ad hoc reporting tools, and anything else that will maximize their employee productivity. Software designed for distribution can help a small staff get more done.

Third, a powerful B2B website makes a small company just as big as any competitor. It’s a great equalizer. Ten years ago small distributors could get away with little or no internet presence. Those days are gone. But there’s no reason today that a small company can’t have just as powerful and impressive a website as the largest.

Certainly the cost of distribution specific software can seem high compared to the cost of something shrink wrapped off the shelf at the office supply store. If the bar is set low enough—just print invoices and generate a balance sheet—it doesn't cost much to jump it.  But the ROI created by a single added percent to the gross margin, a couple added turns to the inventory, or the opening of new markets across cyberspace should be the goal and shrink-wrapped business software won’t reach it.

Even with a good case for the ROI of a better computer or website, many distributors still find the extra cost hard to buy. But another perspective is the relative investment per employee. Total up the onetime cost of the better system and divide that by the number of employees. Amortize that over the number of years the system the system will be used. (There’s no fixed figure for this but most companies stick with their system at least ten years.) Then add the annual charge for maintenance of the hardware and software per employee. This is the investment per year per employee in a system and it’s typically a very small fraction of the amount spent on wages, benefits and overhead per employee. How much is that employee’s contribution to profitability? What percentage of their total cost should be spent on maximizing their efficiency, accuracy and productivity?

It should also be remembered that years ago the cost of better systems was much higher. These days hardware is cheap, and cheaper to maintain. Training is much more cost effective today because trainers don’t have to travel (and sit in an office waiting for a harried owner/manager to make time for them) to do training. Instead they do webcasts at everyone’s convenience and at much less expense. Plus training is less costly because today’s systems are much easier to operate. And internet solutions are no longer an adventure in website development at the small company’s expense. While price is certainly important, the cost of good systems isn’t what it once was. An added point to the net could pay for a system in just one year. And the next. And the next and…

The bottom line is big distributors have big fancy computer systems for one reason: To make more money. Small distributors need their own “big” systems to insure they survive and grow their own bottom lines.

 

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