Executive Briefings

Globalization-The Risk and Opportunity for Mid-Sized Distributors

It's no secret that globalization is touching virtually every distributor, no matter what size.  Competition for both source materials and market share is getting trickier, yet potentially more rewarding. Impacts are bad, and good.

The Bad: Let's say mid-sized Distributor A is selling operations-necessary materials to a manufacturing facility. The manufacturer decides to relocate to a lower-cost labor environment in Asia or Africa. Because A's trucks don't cross the ocean, the manufacturer finds another distributor close to the new plant. Distributor A loses a customer.

The Good: Let's say Distributor A's source for a commodity item such as insulation is coming from a high-quality, nationally branded maker, but at a high price. Because manufacturing is booming in places such as Asia and Africa, insulation is easily made and shipped from there. Distributor A can realize higher margins and even pass along better prices to customers by using the private-label product.

At no other time have distributors faced such an urgent need to know themselves-their capabilities, their relationship potentials and their willingness to put aside comfortable notions of doing business in favor of growing in unforeseen ways. Thanks to the inexorable pull of globalization and the evolution of collaboration and transparency as emerging business imperatives, distributors today are facing prospects of winning or losing that are dependent on decisions made half a world away. To thrive, or simply to stay alive, they have to move forward - deliberately and strategically, but quickly.

Some are stepping far beyond traditional roles-owning more and more links of the supply chain, and even becoming manufacturers themselves. The rewards can be twice traditional gross margins, or more. The risks can jump, too-not only for the distributor's products, but for products in the chain. Quality-control issues and inventory bloat can be unexpected co-travelers. Yet new tools and new operational models are breaking through to offer distributors a better chance at success. As always, the smart players will leverage the energy of change to grow, and not get run over.  

Inventory Avalanche

Most mid-sized distributors are chasing business-after all, they are entrepreneurial people. And less expensive sourcing from foreign shores is seductive. Yet the lure of growing top-line revenues without heeding the implications of inventory holding can be downright dangerous. A recent report from the Council of Supply Chain Management Professionals found that inventory shipped in FY 2006 was up a whopping 13.5 percent over 2005. At the same time, retail inventories were up a comparatively modest 2.8 percent and tonnage moved was actually down 1.3 percent. This meant retailers were pushing inventory up the channel-an inventory overhang that became an avalanche and threatening to bury many distributors.

The lesson is that success in a globalizing marketplace is more than getting your hands on cheap insulation. Globalization requires nothing less than significant shifts in traditional business thinking. A distributor's core must be built around the customer, not simply the services and goods the distributor historically has provided. Gone are the days when the question was "Here's what I've got-who wants it?" Today, the question is "Here's what they're buying-how do we supply it?"

And as they change, mid-sized distributors will have to look inside before they look outside. The self-exam needs to be rigorous and honest: What are my strategic competencies? What do I provide that the customer needs? And the corollaries: What does the customer need that I don't provide, and what do I provide that the customer doesn't need? Finally, how do we best offer solutions-services as well as products-that satisfy that need?

New Models

With a better knowledge of strategic strengths, a distributor can approach the jump into globalization's uncertain new world by doing something truly frightening-giving up control. The new models of success are inspired by bestselling books such as "Linked," in which Albert-Laszlo Barabási argues that "everything is connected to everything else," and by groundbreaking studies such as those of Adam J. Fein, whose "Facing the Forces of Change: The Road to Opportunity" publications aim to help distributors, manufacturers and B2B technology companies understand how to work together for mutual benefit in a networked environment.

Flexibility, transparency and collaboration are at the heart of these models. If we know ourselves and the value we provide to the supply chain, the thinking goes, all members of a network can link for greater efficiently and profitably. But it takes nerve and diligence to play.

Flexibility implies the openness to grow in new ways. For example, a flexible business may decide to disassemble non-core operations and outsource them to specialty experts-removing less-necessary pieces from a formerly centralized organization and trusting others to perform those functions more efficiently and effectively. And work together on a much more modular and granular level.

Transparency means gaining a better view into what your customers are doing, what your suppliers are doing... and uncrossing your arms so they can see what you are doing. If a distributor is suffering from inventory overage, one reason dragging it down is likely a lack of communication with partners up and down the chain.

Collaboration is the goal, and success depends on how honest we are with the self exam. Collaboration means aligning with a variety of partners, based on the value each brings to a networked environment and how each is able to leverage core competencies. Done well, a collaborative network makes the end-to-end process more efficient by balancing competencies to take costs out, not simply shifting them from one partner to another. The network leverages the strengths of the partners- each partner doing what it does best.

Recent studies show that a collaborative network approach significantly improves forecasting, inventory management and replenishment efforts, improving cycle times and process reliability. Working with vertical partners can also encourage development of new products and new geographies, while addressing inventory issues.

Distributor's Changing Role

Globalization is shifting the view of an individual distributor's role-from the notion of working with my suppliers and customers to that of promoting the vibrancy of my business network vs. another business network. As part of a network, distributors who own broad customer mind share also are seeing opportunities to expand their role, to protect or promote a brand by owning more pieces of it, even manufacturing. Evaluating product, brand value, and power of the distributor are key.

Naturally, other supply chain partners are evaluating as well. DMI Furniture, a manufacturing division of giant Flexsteel Industries, found that by optimizing an installed software package, it could also run a distribution and marketing business, which subsequently has significantly boosted financial results.

Business people are crossing a line. They are becoming more willing to do business with a broader array of partners, even competitors, if their values are distinct. (The Chicago Tribune, for example, recently signed a deal to distribute its cross-town rival, the Chicago Sun-Times, because the Trib has a superior system and both companies will make more money with the arrangement.) Businesses are forging models of networking, focusing on what each partner does best rather than trying to compete in every competency, no matter how good (or mediocre) they are at each.

Is there risk in this approach? Of course. It can be uncomfortable trying to collaborate today with someone you were trying to squeeze (or who was trying to squeeze you) yesterday. Trust takes a long time and much discipline to develop. Not every partner will approach the network with an equal number or depth of competencies. A network collaborator may exit. External market forces will intervene. And one model won't fit all.

Getting Started

Of course, there is help. Consultants which have broad experience with collaboration across industries and vertically throughout all components of the supply chain, can suggest ways to grow by better positioning a mid-sized distributor in a global environment. Software providers now offer sophisticated products that go well beyond inventory control. These packages allow unprecedented visibility and interfacing with partners up and down the supply chain so even customers can participate in forecasting, inventory management and beyond to inventory organization and network design.

Such tools and support open the doors to new levels of self discovery, and allow distributors to grow along the paths of their greatest strengths. The wholesale distribution industry has contributed a quarter of the total productivity gains in the U.S. economy during the last 15 years, Fein reports, as distributors effectively use technology to reduce low value-added activities. Distributors are now comfortable with the necessity of innovation.

Although the risks of plunging into global networks can be daunting and success is not assured, the risks of not getting involved may be even greater. With expertise in services, manufacturing processes and how to warehouse, forecast and exploit technology, distributors are well positioned as players.

Smaller distributors have even more opportunities to replicate what larger distributors are doing because of flexible business models and the advance in technologies. It's important to know what you are valuing and to invest in relationships and the ability to interact with others. The key is to be strategic and know how your competencies fit with customer needs.

Paul St. Germain is IBM's Segment Executive for Wholesale Distribution and Andrew McGlasson is Infor's Global Director of Marketing for Distribution. Visit www.ibm.com and www.infor.com.

It's no secret that globalization is touching virtually every distributor, no matter what size.  Competition for both source materials and market share is getting trickier, yet potentially more rewarding. Impacts are bad, and good.

The Bad: Let's say mid-sized Distributor A is selling operations-necessary materials to a manufacturing facility. The manufacturer decides to relocate to a lower-cost labor environment in Asia or Africa. Because A's trucks don't cross the ocean, the manufacturer finds another distributor close to the new plant. Distributor A loses a customer.

The Good: Let's say Distributor A's source for a commodity item such as insulation is coming from a high-quality, nationally branded maker, but at a high price. Because manufacturing is booming in places such as Asia and Africa, insulation is easily made and shipped from there. Distributor A can realize higher margins and even pass along better prices to customers by using the private-label product.

At no other time have distributors faced such an urgent need to know themselves-their capabilities, their relationship potentials and their willingness to put aside comfortable notions of doing business in favor of growing in unforeseen ways. Thanks to the inexorable pull of globalization and the evolution of collaboration and transparency as emerging business imperatives, distributors today are facing prospects of winning or losing that are dependent on decisions made half a world away. To thrive, or simply to stay alive, they have to move forward - deliberately and strategically, but quickly.

Some are stepping far beyond traditional roles-owning more and more links of the supply chain, and even becoming manufacturers themselves. The rewards can be twice traditional gross margins, or more. The risks can jump, too-not only for the distributor's products, but for products in the chain. Quality-control issues and inventory bloat can be unexpected co-travelers. Yet new tools and new operational models are breaking through to offer distributors a better chance at success. As always, the smart players will leverage the energy of change to grow, and not get run over.  

Inventory Avalanche

Most mid-sized distributors are chasing business-after all, they are entrepreneurial people. And less expensive sourcing from foreign shores is seductive. Yet the lure of growing top-line revenues without heeding the implications of inventory holding can be downright dangerous. A recent report from the Council of Supply Chain Management Professionals found that inventory shipped in FY 2006 was up a whopping 13.5 percent over 2005. At the same time, retail inventories were up a comparatively modest 2.8 percent and tonnage moved was actually down 1.3 percent. This meant retailers were pushing inventory up the channel-an inventory overhang that became an avalanche and threatening to bury many distributors.

The lesson is that success in a globalizing marketplace is more than getting your hands on cheap insulation. Globalization requires nothing less than significant shifts in traditional business thinking. A distributor's core must be built around the customer, not simply the services and goods the distributor historically has provided. Gone are the days when the question was "Here's what I've got-who wants it?" Today, the question is "Here's what they're buying-how do we supply it?"

And as they change, mid-sized distributors will have to look inside before they look outside. The self-exam needs to be rigorous and honest: What are my strategic competencies? What do I provide that the customer needs? And the corollaries: What does the customer need that I don't provide, and what do I provide that the customer doesn't need? Finally, how do we best offer solutions-services as well as products-that satisfy that need?

New Models

With a better knowledge of strategic strengths, a distributor can approach the jump into globalization's uncertain new world by doing something truly frightening-giving up control. The new models of success are inspired by bestselling books such as "Linked," in which Albert-Laszlo Barabási argues that "everything is connected to everything else," and by groundbreaking studies such as those of Adam J. Fein, whose "Facing the Forces of Change: The Road to Opportunity" publications aim to help distributors, manufacturers and B2B technology companies understand how to work together for mutual benefit in a networked environment.

Flexibility, transparency and collaboration are at the heart of these models. If we know ourselves and the value we provide to the supply chain, the thinking goes, all members of a network can link for greater efficiently and profitably. But it takes nerve and diligence to play.

Flexibility implies the openness to grow in new ways. For example, a flexible business may decide to disassemble non-core operations and outsource them to specialty experts-removing less-necessary pieces from a formerly centralized organization and trusting others to perform those functions more efficiently and effectively. And work together on a much more modular and granular level.

Transparency means gaining a better view into what your customers are doing, what your suppliers are doing... and uncrossing your arms so they can see what you are doing. If a distributor is suffering from inventory overage, one reason dragging it down is likely a lack of communication with partners up and down the chain.

Collaboration is the goal, and success depends on how honest we are with the self exam. Collaboration means aligning with a variety of partners, based on the value each brings to a networked environment and how each is able to leverage core competencies. Done well, a collaborative network makes the end-to-end process more efficient by balancing competencies to take costs out, not simply shifting them from one partner to another. The network leverages the strengths of the partners- each partner doing what it does best.

Recent studies show that a collaborative network approach significantly improves forecasting, inventory management and replenishment efforts, improving cycle times and process reliability. Working with vertical partners can also encourage development of new products and new geographies, while addressing inventory issues.

Distributor's Changing Role

Globalization is shifting the view of an individual distributor's role-from the notion of working with my suppliers and customers to that of promoting the vibrancy of my business network vs. another business network. As part of a network, distributors who own broad customer mind share also are seeing opportunities to expand their role, to protect or promote a brand by owning more pieces of it, even manufacturing. Evaluating product, brand value, and power of the distributor are key.

Naturally, other supply chain partners are evaluating as well. DMI Furniture, a manufacturing division of giant Flexsteel Industries, found that by optimizing an installed software package, it could also run a distribution and marketing business, which subsequently has significantly boosted financial results.

Business people are crossing a line. They are becoming more willing to do business with a broader array of partners, even competitors, if their values are distinct. (The Chicago Tribune, for example, recently signed a deal to distribute its cross-town rival, the Chicago Sun-Times, because the Trib has a superior system and both companies will make more money with the arrangement.) Businesses are forging models of networking, focusing on what each partner does best rather than trying to compete in every competency, no matter how good (or mediocre) they are at each.

Is there risk in this approach? Of course. It can be uncomfortable trying to collaborate today with someone you were trying to squeeze (or who was trying to squeeze you) yesterday. Trust takes a long time and much discipline to develop. Not every partner will approach the network with an equal number or depth of competencies. A network collaborator may exit. External market forces will intervene. And one model won't fit all.

Getting Started

Of course, there is help. Consultants which have broad experience with collaboration across industries and vertically throughout all components of the supply chain, can suggest ways to grow by better positioning a mid-sized distributor in a global environment. Software providers now offer sophisticated products that go well beyond inventory control. These packages allow unprecedented visibility and interfacing with partners up and down the supply chain so even customers can participate in forecasting, inventory management and beyond to inventory organization and network design.

Such tools and support open the doors to new levels of self discovery, and allow distributors to grow along the paths of their greatest strengths. The wholesale distribution industry has contributed a quarter of the total productivity gains in the U.S. economy during the last 15 years, Fein reports, as distributors effectively use technology to reduce low value-added activities. Distributors are now comfortable with the necessity of innovation.

Although the risks of plunging into global networks can be daunting and success is not assured, the risks of not getting involved may be even greater. With expertise in services, manufacturing processes and how to warehouse, forecast and exploit technology, distributors are well positioned as players.

Smaller distributors have even more opportunities to replicate what larger distributors are doing because of flexible business models and the advance in technologies. It's important to know what you are valuing and to invest in relationships and the ability to interact with others. The key is to be strategic and know how your competencies fit with customer needs.

Paul St. Germain is IBM's Segment Executive for Wholesale Distribution and Andrew McGlasson is Infor's Global Director of Marketing for Distribution. Visit www.ibm.com and www.infor.com.