For most distributors, high-volume everyday products typically have razor-thin margins, while strategic product lines may have healthier margins. Project businesses may have a different profile altogether. Throw in vendor programs, rebates, incentives, and high-touch customers across tens of thousands of SKUs, and profitability is hard to manage effectively across the business.
Margins are a balancing act. But I’ve found that successful distributors can protect margins by leaning on a department that historically has had very little to do with the business side of things: IT.
Focusing on the Right Things
With margins as sensitive as they are, small decisions can have big consequences. The biggest threat to profitability isn't usually a major pricing mistake. It's dozens of small margin leaks occurring every day across pricing, freight, inventory, rebates, and customer service activities.
After all, growing revenue is not the same as growing profit, and not every dollar of revenue contributes equally to profit. That mix of commodities, strategic products, projects, and vendor programs comes with a mix of outcomes, some of which can easily get lost in the shuffle.
Two customers with the exact same sales volume could be delivering drastically different profit outcomes. One customer places large, predictable orders, accepts standard delivery schedules, and rarely requires special attention. Another places frequent small orders, requests expedited shipments, demands custom reporting, and regularly negotiates pricing exceptions. Revenue may look identical on a dashboard, but profitability can be worlds apart.
Unfortunately, while most distributors have an eagle eye fixed on sales volume figures, far fewer have useful visibility of what affects profit, especially on a granular, real-time level. Those crucial profitability factors may be hiding just beneath the surface-level financial reports that aggregate revenue once a month.
That’s where the IT department comes in.
The difference isn't who spends more on technology; it's who uses technology to make better decisions about pricing, margins, customers and operations. In the past, IT’s role essentially boiled down to “just keeping the lights on.” Historically, IT was evaluated on uptime, security and cost control. If systems stayed running and major outages were avoided, the department was considered successful.
Today, that's no longer enough.
Distributors can’t afford to treat IT as nothing more than a utility, only noticed when it fails. It’s not enough to keep the lights on and the costs low; you have to invest in technology that drives profitability.
Technology is now at a point in its lifecycle that it can provide order-level visibility. But for a distributor to recognize that capability and discover the right solutions, it needs technology leaders who also understand the economic side of the business. Those leaders should be included in business discussions. And everyone in the department, from leadership on down, should have their success measured by their contribution to achieving those business goals, not just technical goals, and should be incentivized accordingly.
One national restaurant chain began measuring technology initiatives against EBITDA impact rather than traditional IT metrics. The result was a series of internally developed tools that improved franchise performance while creating measurable enterprise value.
I’ve also been impressed with one large foodservice distributor’s program of cycling technology leaders and business leaders across departments, giving each side a stronger perspective on the other side’s purpose. Now, they’ve got a former business analyst serving as CIO. By aligning business priorities and tech investments, they’ve been able to strengthen their practices around profitability and deliver major improvements.
Three Questions Every Distributor Should Ask
- Does our technology team understand how the company makes money?
- Are we measuring IT success by business outcomes or technical metrics?
- Can our systems identify where margin is leaking?
As important as ERP platforms and other infrastructure will always be, your systems can no longer be limited to processing and recording transactions. As with any industry that may experience thin margins, every dollar matters, and the distributors that connect technology to that mission will have a significant competitive advantage.
The distributors that thrive over the next decade won't necessarily be the ones with the biggest sales teams or the largest footprints. They'll be the ones that can see profitability more clearly and act on it faster.
That requires technology leaders who understand the business, business leaders who embrace technology, and systems designed to uncover opportunities beneath the surface. Technology's job is no longer just to keep the business running. Its job is to help the business make better decisions.
Jesse Clem is chief revenue officer and general manager, Microsoft Solutions at Cavallo.
