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Source: ID Channel Report

Arguably, order management and customer service are more complex in distribution then in any other industry. These complexities drive costs into the process not only for distributors, but customers and suppliers as well. Distributors who want to combat shrinking margins or capture more market share need to develop a plan on how to streamline these complexities.

Distributors' customers (end-users) do a precarious balancing act every time they make a purchase. If they buy too much, they have a high carrying cost. If they buy too little, they will lack the materials they need to run their businesses. Both of these scenarios cost end users a great deal of money. Many end users do not understand these costs, but many distributors do, understand these cost that their customers are dealing with. They realize if they can reduce these costs, for their customers they can capture some of that cost reduction as profit - increasing margins and improving customer service.

One way distributors can do this is by using technology to streamline the product procurement process. Something as simple as setting up a blanket order - also known as a release schedule - allows an order to be entered once for many deliveries throughout a certain time period.

The process might be looking at the last years usage that a customer has had for a particular item, then speak with the customer about the trend they see going forward. The distributor and end user agree on set delivery amounts and schedule. If the distributor does this correctly they have explained the cost reduction the end-user will getting. Now, the key for the distributor is to mange the process to insure success.

A distributor who tries to do this without using technology would have to create a schedule with pencil and paper and hope they don't miss a date. With technology they just set it up and the system takes care of the rest. Insuring the product gets delivered in time, but more importantly insuring that the product is there to deliver, but not too much of the product to cause an overstock issue.

A more complex example might be one in which the distributor not only manages the delivery of the product, but actually owns the product until the end user needs it - known as consignment. This helps reduce the end user's carrying costs because it works on the assumption that given the right technology, a distributor can better manage inventory than an end user can. Distributors that have reduced the costs for their customers to acquire and carry items can charge a service fee for the cost reduction services they provide.

Distributors that fail to take advantage of the full potential of their technology and try to maintain competitiveness by lowering their prices, only hurt themselves. Lower prices mean lower gross margins, which, in turn, lowers net profitability.

An aggressive use of technology can help improve gross margin dollars per employee - a key business indicator measuring the health of a distributorship.

In our next article we will continue to explore how technology can affect the customer service and sales side of a distributor.

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