Editor's Note: This is Part 2 of a 3-part series. See Part 1, "How Distributors Can Generate Growth in the New Normal," here.
When it comes to developing a growth strategy, distributors must be mindful of their actual capabilities in each of the seven essential process groups regardless of current market conditions. Together, these are known as 7S. Individually, they are Source, Stock, Store, Sell, Ship, Supply chain planning and Support services.
Having mature capabilities that support your efforts to generate and sustain growth will keep them from falling short of expectations – or failing altogether. Your plan to nourish pertinent capabilities is your growth management strategy.
The issue for distributors today is that many of these core processes have changed drastically. Due to the pandemic, distributors had to adjust operations to accommodate social distancing while maintaining business as best they could throughout 2020. Two process groups that underwent some of the most significant changes were Sell and Stock.
Since these processes have changed, your capabilities might need to change as well. This means either maturing existing capabilities or adopting entirely new ones, like a new technology or method. However, it can be hard to determine where to devote your energy to attain your growth goals.
Fortunately, we have extensive and current experience in the industry, and we’ve identified ideal capabilities for distributors to target for their growth management strategy.
1. Inventory management
For many distributors, growth planning for 2021 will involve some innovation. They might branch into a new vertical or revamp their value proposition, and they’re likely to get involved with e-commerce. However, no matter how distributors adjust to stay relevant, inventory will always be central to their business models. And inventory management is a foundational capability.
The introduction or maturation of eCommerce and other digital channels impacts inventory management in many ways. First, inventory and product availability become an even more pivotal component of the value proposition. Second, varying profitability levels between eCommerce channels and traditional channels force distributors to reassess their stocking strategies.
We worked with an HVAC distributor with 27 locations to quickly segment surge (sales increasing more than 10 percent) and slump items (sales decreasing more than 10 percent) and identify 19 corresponding suppliers. They agreed to share weekly demand information by location with those suppliers and updated their system with more realistic lead times every week. This tactic helped the distributor meet core customer needs on surge items and avoid unnecessary build-up of slump items. This quick pivot in working capital deployment also earned the distributor better payment terms since none of their regional competitors approached suppliers systematically.
Ensure your inventory management capabilities are formatted to support and manage your growth strategy before implementing any plan to innovate or adapt.
2. Pricing optimization
Pricing optimization is a foundational capability that distributors should strengthen to manage growth properly in 2021. When considering the different profitability levels between eCommerce channels and traditional channels, there’s a clear need for distributors to assess their pricing strategies and optimize for changed processes. Without optimized pricing capabilities that fit this new omnichannel environment for distributors, it will be difficult for them to capture their stock’s appropriate value.
You cannot win big if you lose sight of your core business. An industrial distributor should apply the 80-20 rule to separate the value from the noise and stabilize pricing in the core business. Establish a consistent process for prioritizing strategic customers, critical products and preferred suppliers. Bringing together the results from three key analytics (customer, item and supplier stratification) can help distributors identify core customers, items and products in a quantitative manner using sales and purchasing transactional data.
Some distributors didn’t optimize pricing before the pandemic, so they will have a long way to climb. But without this capability, it will be difficult to achieve and sustain growth in the new normal. Again, before you pursue growth this year, be sure your pricing strategy is mature enough to support your objectives.
3. E-commerce maturation
E-commerce is an emerging capability that is certain to have staying power in the distribution industry, and it’s significantly impacting the Sell process group. You might already have an e-commerce channel in place, or you might be planning to develop one. Across the industry, maturity in this digital capability has varied. Today, it’s essential to doing business and generating sales. To manage growth, you must have mature eCommerce capabilities.
There are many ways to get started, ranging from participating in the broader marketplace to developing it organically. The key is to think about the overall value proposition and how it aligns with e-commerce services. We worked with a food services distributor who offered their customers three value propositions: 1) a traditional full-service branch model (tech support, full breadth of products, dedicated sales consultant, 45-day credit, next-day delivery, emergency deliveries, etc. at a premium price), 2) cash-and-carry stores (bulk buying, high product availability, narrow range of products, cash-only, etc. at moderate prices); and 3) a pure eCommerce site (broader product line, minimum purchase for free delivery, limited credit and no tech support at lower prices). Each channel had its own P&L though they shared the inventory synergies, leading to better working capital utilization. The customers were able to see the trade-offs clearly.
4. Sales transformation
The final capability that distributors need to manage growth in 2021 is sales transformation. Your sales teams are critical drivers of your growth strategy, and you want to be sure to arm them with the tools and training they need to be successful. Moreover, you need to consider how their roles might’ve changed permanently and how you can better structure sales overall. How can you reallocate your outside sales teams? And how will you seamlessly merge the incoming generation of sales professionals?
Shoring up this “capability,” which is mostly about equipping and training your salespeople for success in a changing sales environment, goes beyond training and tools. It also involves process and culture.
The final word
Improving and optimizing these capabilities will set you up for successful growth management as eCommerce and remote selling continue to trend. With these critical elements in place, you’ll have a greater chance of sustaining growth for years to come.
Senthil Gunasekaran is co-founder of ActVantage, which helps distributors drive profitable growth through analytics and talent development. He has more than 18 years of experience helping hundreds of distributors and manufacturers, while co-authoring seven books for the NAW. He also delivers executive education and speaks at industry forums, and he recently compiled a guide to revenue recovery for distributors to use in navigating through the coronavirus pandemic. Prior to ActVantage, Senthil led research and industry projects at Texas A&M’s ID program. Contact Senthil at email@example.com or visit actvantage.com.