Have questions? Please contact us.
How Wholesale Distributors Beat the Innovation Tax with Modular Deployment Options
(6 minute read)
I recently spoke with SAP’s Magnus Meier about the challenges wholesale distributors face when considering a digital transformation. We agreed that many distributors see a need to improve the efficiencies of their operation and attract the right talent, but they also contend with some obstacles that often translate into a kind of innovation tax for their industry. Looking at this, Magnus and I came up with a few insights that I wanted to share.
First, let’s look at the top three industry challenges
As increased competition from new market disruptors and marketplaces take a chunk out of the traditional addressable market in the U.S., distributors have struggled to differentiate themselves in e-commerce channels. Even two years ago, research firms like McKinsey & Company found that not only were distributors being cut out of the supply chain in some cases but also their customers expected to make 30-percent more of their purchases via online tools. That research also found that the distributors that had invested in digital and e-commerce strategies managed to accelerate sales growth and improve customer retention and loyalty. Problem solved, right?
Not really. Here we are two years later and Forbes is reporting that ongoing supply chain problems are the result of a stale distribution model that could be greatly improved by using AI to facilitate hyper-personalization in the planning and allocation of products. So it would seem that personalization is not only necessary for distributors to differentiate themselves, but you might be behind if you haven’t invested in this technology already.
Beyond that, global dynamics continue to impact supply chains be it shifts caused by market conditions, the pandemic or changing consumer demand. Distributors are constantly forced to adjust to local geographic dependencies and take international regulatory restrictions into consideration for imports and exports. This means that a steady supply between all industries is something that cannot be assumed. To proactively manage this trend, you are better off acting as a network orchestrator for your entire supply chain so that you can gain more insights and control over your ability to keep things moving.
Finally, changes introduced through social media have created a real talent crunch. We see a new attraction to companies and brands with deep pockets and a social purpose. Both are areas where wholesale distributors are not that strong, causing them to struggle to attract new talent, particularly in the technology space. As a result, distributors need to rebrand themselves in the eyes of both their customers and their prospective employees.
What does that mean for the future?
I think it’s important to note that while the world of wholesale distribution has changed dramatically, we need to recognize that the classic model of buy-hold-sell is still demanded daily across all distribution verticals.
Moving forward, it’s about new business models, solutions, subscriptions and marketplaces. Value-added customer service with exceptional digital experiences is becoming critical. In order to do that, you have to provide additional personalization, offer platforms with product intelligence, or even guide customers on potential cost savings or cost recovery options—and you need to do all of that with performance tracking metrics. That puts selling solutions as a service on the top of the list.
For example, one distributor I’ve worked with in the A&D industry broke out from the classic EDI order fulfillment model and jumped headfirst into digital VMI (Vendor Managed Inventory Service) offerings with machine learning triggers and a subscription-based billing model. This drove customer connection, helped box out competition and provide an ROI model that drove additional profit and value.
To go even further, I would say that there’s an incredible need for customer stratification. Stratification looks at customers by buying power, loyalty, profitability and cost to serve. It helps you gain knowledge and build a process to make margin improvements as customers demand more tailored solutions, products and pricing.
You can achieve customer stratification by leveraging B2I (business-to-individual) marketing models that allow you to anticipate needs, create new incentive models and optimize price. Experience management becomes a discipline as you manage multiple entities, brands, channels and experience models that are really targeted to your B2I targets. And you can do that by leveraging intelligent technologies, like machine learning and augmented intelligence, so that you can fine tune your approach, scale and automate.
Industry is driving the evolution of the network experience to connect suppliers and customers in an intelligent way and create an even tighter ecosystem. Fulfillment networks provide services and logistics while asset and product networks ensure product integrity and access. This in turn pushes you to anticipate the need for those assets so you can keep uptime moving as buying and selling networks move products and services around the globe.
Now let’s talk about the obstacles
There are a couple of obstacles specific to the wholesale distributor industry environment. Even though the revenue numbers of distributors can put other companies to shame, a comparatively low margin puts a damper on what’s possible from an investment perspective. So if you don’t get it right the first time, those missteps can be costly and cause ripple effects that last for quite a while for your entire organization.
As a result, it’s common to see generational investments while continuous investments are based on long-term roadmaps. This is not sufficient anymore because technology is changing rapidly and the cost of doing business continues to grow.
For example, as distributors work to improve the efficiency of their operation and attract talent, they often pay top dollar to onboard certain skillsets for thought leadership projects and compete with companies that have a higher brand visibility. This creates an innovation tax on projects for every distributor that wants to run one.
Because of this, many distributors ask for ways to reduce the stake they have in technology so that they can extend their core business competencies. This does not mean that they don’t want to innovate with new technologies, but it does mean that these innovations need to be built on clear value management principles with the ability to benchmark the impact of each investment.
Here’s how you can innovate and make it a sustainable practice
From a practical perspective, this is where modular deployment options for cloud solutions come into play. The best practices associated with these value-driven investments allow you to get it right the first time. You can make a business case to justify these technology investments because you are able to identify costs, simplify processes and change management practices in order to accelerate impact, even during the early phases of the project rollout.
From a strategic perspective, it’s important to think about value prioritization during a digital transformation. While distribution trends are accelerated by customer demand, a transformation is built by the people inside your organization who need to focus on value, differentiation and vision.
Using the cloud-first approach helps you avoid getting bogged down by just keeping the lights on. This reduces total cost of ownership and frees up resources to focus on increasing scalability as needed, in the process of meeting demand. It also allows you to pick and choose the components that make the most sense and deploy them at the right time.
Capital gains are then maximized because this stairstep approach allows you to keep an eye on both your present and future needs. You can now prioritize each element based on customer need, differentiation, value realization and targeted ROI. And, just as important, your plan can evolve over time as your business shifts along with industry, technology and market dynamics.
The final step is to incorporate value management practices that include developing metrics for success, understanding the real input cost, value scoring, conducting uniformity of value analysis, trying to remove bias wherever possible and tracking results over the time.
How can you connect with NTT DATA Business Solutions?
We have a variety of insights to share with wholesale distributors that are evaluating SAP solutions or current customers planning their business transformations. Please follow us on LinkedIn and visit our channels for more background on how we help you thrive and transform.