Distributors, How to Analyze the State of Your Digital Transformation

Distribution is a highly varied business, with many players operating and occupying different spaces from industry to industry. My own distribution experience spans digital leadership roles in both the Electronics and Electrical Distribution space. As such, the lens I apply in this article will likely have more of a focus on these industries, though much of the logic and detail presented in this article also applies to other large distribution markets too, include: MRO, Food & Beverage, Industrial, Medical Supplies, Building Materials and more.

Firstly, a Note about Digital Transformation in General

Countless discussions with colleagues and peers within the distribution industry have provided me with a perspective to the commonalities of certain challenges and opportunities that face these businesses in creating environments that foster digital transformation and innovation, and nuances that are specific for each market and service area.

Across ALL businesses, there are a few common forces that most strongly impact their ability to enact digital transformation and leverage the benefits. These common forces are:

• Systems Architecture (legacy systems, complex logic & heavy customization)
• Inertia to Change (Ignoring threats & focusing on protection over development)
• Lack of Leadership Buy In (Knowing the importance of Digital Transformation)
• Near-Sighted Digital Vision (Failing to ask the “what if in 5 years?” questions)

Technology is evolving at a break-neck pace. If companies fail to be proactive in addressing the common challenges that inhibit their ability to bring about digital transformation, the gap will grow between new native digital players and legacy incumbents.

Distribution has unique challenges that it faces as an industry when seeking to adapt to drive digital transformation. Juxtaposed against the retail space, there are a few benefits for distribution. The impact of potential service interruption and downtime is typically a little more forgiving in distribution, with greater amplification of mis-steps in service offering felt and amplified within retail. The more extensive variety of methods of engagement with customers in distribution (Account Manager, Customer Service, Website, General Enquiries /Phone, Branch) can also provide a buffer should a sub-system or partial outage occur during systems upgrades.

However, the impact of the overall systems architecture within the distribution space is likely more heavily impactful on a company’s ability to change. In distribution, a vast array of rules and requirements have historically been implemented to accommodate a complex set of customer relationships spanning everything from one-person operations to F100 companies, and myriad of specific needs facing both customers and suppliers for selling across this vast B2B transactional landscape.

The Key Drivers of Digital Transformation in Distribution

The biggest internal opportunities for digital disruption for distributors over the last five years have been seen across the following areas:

1. Creating, refining and optimizing transactional ecommerce channels.
2. Empowering and driving digital client engagement through Field Sales and Branch networks.
3. Expanding digital connectivity solutions with Suppliers, customers and associated operations.
4. Articulating expanded service offerings (ex: Kitting & Sample programs, sophisticated delivery) through digital channels.

Of these, the single biggest impact in driving digital transformation for distributors is #2. This is achieved by creating a culture that understands, embraces and rewards transformation focused activities. The availability of sophisticated reporting data and visualization of this data into commonly used sales tools is a key aspect of empowering the sales organization, as this is used for validating the increase to margin and revenues that digital channel creates. Enhancing this engaged sales force’s ability to succeed in providing robust and simple digital solutions to customers can be transformative to the company’s operations. Grainger is a great example of the power of digital transformation in distribution, having growing their Ecommerce sales to 47% share of total business by 2016, and targeting 80% of sales to be achieved via the Ecommerce channel by 2020.

“I’d be surprised if five years from now our sales are not 80% e-commerce.” – D.G. Macpherson, CEO, Grainger

Frequent Blockers to Digital Transformation for Distributors

Readiness for digital transformation varies from market to market and based on the size and complexity of a distributor’s operations, but there are a few important indicators that will impact complexity when looking towards digital transformation that are common across ALL distribution markets:

• Company Size and Expansion Strategy – Has the company grown primarily through acquisition, or through organic expansion into new geographies and markets? This can have a huge impact, as to leverage the impact of the acquisition, some levels of synergy between core systems are required. Costly ERP normalization projects, stretched middleware, and rules abstracted across front-end and back-end of the ecommerce stack will all impact ability to drive innovation, as regional businesses often struggle to align under centralized strategy and tools in every stage, from implementation to adoption.
• Product Offer Management – Findability and sourcing is a key requirement for distributors across all markets, although the scope of the product offer can vary greatly, from as little as a few thousand parts, to many millions. Ensuring strong associated content and highlighting of compelling products, combined with utilizing ‘connective tissue’ across popular product series/families and accessories will drive customer experience and sales growth.
• Pricing Structure & Strategy – This is an extremely important and often challenging area for distributors in pursuing a digital transformation strategy. Pricing is managed in a wide variety of ways across different industries, and can be a huge inhibitor to change if not managed in a way that can be scaled across applications and provided consistently and reliably to customers. Locking discounts behind login walls can lead to perception of poor value for customers when price comparing alternative options, and also prevents aggregation across an industry to equip customers with tools to make value based purchase decisions. This is an area of legacy business operations that is heavily under threat from new contenders such as Amazon Business.
• Supply Chain: Sourcing, Inventory & Shipping – There are three key considerations that can positively or negatively impact your ability to offer a compelling proposition that is enhanced with digital connectivity.

1. Sourcing = When can you get stock to sell?
2. Inventory = What do you have available to Sell?
3. Shipping = When can you get the product to the customer?

• Logistics – Limited visibility to logistics related information and status is a killer for distributors. Relying on third party logistics provides, and not comprehensively integrating accurate tracking status related to shipments can put distributors at a huge disadvantage. This is a space that is changing rapidly, with the rising of the ‘gig economy’, and quality of service offering should be looked at very seriously by distributors wishing to remain competitive.

Key Indicators of the State of a Distributor’s Digital Evolution

The easiest way to look at the state of a Distributors’ digital evolution is by reviewing their digital channel presence and capabilities, asking the following question:

Does the distributor’s digital presence include the following?

(Listed by category, and in approximate order of state of evolution – first to most recent – within each category):

Product Listing and Display:

1. Individual Product Pages / Listings with Ability to Transact online
2. Product Search, with Auto-Complete on keyword terms
3. Product Groupings by Manufacturer, and Categorization by Type, including Attributes
4. Dedicated and SEO friendly pages for each Category Tier, and Supplier
5. Product Series or Family Groupings display with dedicated landing pages
6. Personalized recommendations of products and services
7. Integrated template-based Product Configurators
8. Evolved Search Methods (Image Based Search, Barcode Scan, Voice Search)

Availability & Stock:

1. Accurate In-Stock Level Indicator
2. Lifecycle of Product indication (NPI, EOL, Obsolete)
3. Inclusion of Location based Stock (Branch + DC)
4. Inclusion of On Order Stock with ETA
5. Cross-Distributor availability level (for multi-banner/brand distributors)
6. Inclusion of Supplier Stock with Lead Time
7. Ability to present shipping costs and options dynamically selection on PDP
8. Inclusion of dynamic delivery timings “Get it before XX: XX” if you order before “XX: XX”

Pricing & Ordering:

1. Inclusion of discount presentation both on SKU level and Product Listing/Search
2. Inclusion of tiered pricing structure based on purchase volumes
3. Ability to filter & sort by pricing and discount structures
4. Ability to present volume discounts available at cart size thresholds
5. Visibility to available credit limits
6. Digital/Real-time Quote Integration

Platform Evolution:

1. Fast & fully featured Desktop Site
2. Optimized Mobile Site
3. Live chat & community engagement
4. Punch-Out Integrations & EDI
5. Fully responsive site design
6. Dedicated Mobile App
7. Progressive Web App featured Mobile Site

Shipping and Logistics:

1. Accurate tracking details for deliveries presented digitally
2. Integrated Inventory Management Programs / Methodology around shipping
3. Digital status notifications across multiple channels (Email, Push, SMS)
4. Third party integration with ‘gig economy’ players (rapid/on-demand deliveries by third party services within fixed timelines)

What is protecting distributor incumbents against new market threats?

Threats to the distribution space vary by a mixture of market and competitor mix. The biggest threats can be seen in general in the commodity spaces, where the combined thread of leading digital players such as Amazon Business, and the evolution of B2B services for leading retailers such as Home Depot, has combined to create a heightened sensitivity in specific product areas.

The ability of distributors to leverage existing relationships, while bolting on digital capabilities, can keep the incumbent in a fighting position to retain their stakeholder ship on this space, but digital transformation cannot be seen as an option for distributors today, but must be viewed as a as a necessity, the need of which is being accelerated by the new external threats and rising customer expectations being brought to market. The areas that distributors can (and should!) leverage to retain their market leadership can be focused around the following pillars of strength:

1. Promotion and leveraging of value added services (ex: Project support, Field Application Engineers, Industry Specialists, Deep Supplier Partnerships) for support of large customer business.
2. Long-standing relationships between customers and distributor partners, bolstered by local sales person support and (in certain industries) branch networks.
3. The complexities of customer relationships and specificities of doing business that exist and are accommodated by distributors (Ex: Rebate structures, customized pricing management, multi-stage sales process and value-added services).

Of these three pillars, the third is the biggest challenge to digital transformation, and is a double-edged sword. While accommodating for customer relationship complexities provides a level of protection for the distributor from new market entrants, the value of making such accommodations to customers is slowly eroding, as those customers update their processes and ways of doing business. Furthermore, the legacy of maintaining this complexity across a myriad of distributor systems (especially the ERP), can make evolving the technology stack all but prohibitive\, and make it difficult to achieve the more sophisticated levels of digital transformation that are now being desired and demanded by B2B customers.

How will distributors survive the market changes and digital disruption that is happening to the space? Will Amazon Business gobble up sectors, or will incumbent players be able to thrive and survive the changing market?