Embracing Technology: Why Distributors Must Evolve to a Generation Two Business Model

A shift is happening in distribution. The advent of increasingly sophisticated and affordable technology is redrawing the industry’s future. Early adopters of technology and new competitors with radically different financial and go-to-market models are threatening traditional distributors. 

Despite this, many distributors have been slow to change how they operate. For distributors to keep up with the competition, they must embrace change and understand how to leverage the right technology to stay in the game.  

How Distribution Started – Gen One 

The rise of distributors began quickly after World War II. With an enormous need for jobs following the war and manufacturers’ struggling with the logistics of connecting their products with consumers, distributors began to fill the gaps.  

Distributors offered a way for manufacturers to avoid dealing with the ins and outs of selling to end-users. Distributors combined capital, energy, labor and materials to offer a beneficial service to manufacturers and end-users.  

Distributors were happy to tie up their capital in the product because they could make a high margin on sales. At the same time, manufacturers were happy to get their inventory closer to the point of consumption.  

That business model went largely unchanged until Amazon Business emerged in 2010, disrupting the distribution industry. Digital technologies have increased efficiencies in distribution operations, especially in the past five years. That’s opened the door to reach end-users in new ways, such as ecommerce, third-party marketplaces and manufacturer direct. 

What Distributors Should Be Doing 

Distributors who have survived and thrived throughout time have been able to adapt to threats and opportunities quickly and efficiently. They understand that customers are at the heart of the need for digital transformation.  

Distributors must embark on a journey to what I call a Gen Two distributor, focused on leveraging technology to deliver an experience to customers the way they want it, quickly and efficiently.  

In addition, distributors should rely less on warehousing large amounts of inventory, which lowers their cost-effectiveness. Distributors must invest time and money into technology and innovation to ensure they meet customer demands, increase efficiencies and refine their go-to-market channels. 

But it’s not just about the technology. 

The sign of a distributor ready to move to Gen Two is how they view technology.  

Gen One distributors view technology as an event, such as buying a CRM and moving forward thinking the world will then be wonderful: The technology solves the problem. 

Gen Two distributors align their goals and customer needs with the selection of technology; they don’t expect a one-and-done. They expect to embark on a journey, knowing that transformation and growth will continue over time. 

Grainger is a good example. They developed the first CD-ROM catalog in the mid-90s. After the internet and the .com-era took over, Grainger continued to innovate and learn from their successes and mistakes. They began by examining their go-to-market strategy and recognized the need to better capture the small customer market.  

They brought in a consultant for multiple years to improve their innovation efforts and embarked on a long-term journey with an eye on sustainable success. As a result, they now do over 50% of their business in ecommerce.  

The key for Grainger was the leadership admitting that what they were doing wasn’t ok, that they needed to change. And then going on a journey to employ the strategies of a future-focused distributor.  

Gen Two: Distribution Unbundling 

When you think of Gen Two, think about unbundling. There are many customers that do not need to be serviced by a field sales rep and few field sales reps would be comfortable sharing this. 

Over the past 10 years, many of the largest distributors have been shedding branches and transforming their business models, with a more digitally focused strategy. As part of this effort, they have been unbundling products and services to support their goal of providing a better customer experience. 

The perfect example of unbundling is Uber – they don’t own any vehicles but are the biggest transportation company. Airbnb also fits this description – the largest real estate company without owning any real estate. Both relied on digital tools to create a mechanism that efficiently delivers the product without owning it themselves.  

With that same technology in hand, manufacturers can now bypass distributors with manufacturer’s reps and third-party logistics (3PL) warehouses for certain segments of business. Common 3PL services include warehouse and inventory management, order fulfillment, shipping coordination, retail distribution, exchanges and returns. 

Nike is one of the best at utilizing 3PL. Nike can deliver a pair of shoes to a retailer the next day anywhere with a  UPS pick up by 4 o’clock. The 3PL doesn’t take title to the inventory but handles logistics for Nike, bypassing distribution.  

However, many manufacturers don’t want everybody to have live access to their finished goods inventory. In many distribution verticals the leading distributors are much further ahead than the leading manufacturers.  

Inventory works like a capacitor in an electrical circuit. It stores up energy (inventory) and then releases it when necessary. However, if a distributor uses technology to know- what a customer will need on Tuesday, they can have it drop-shipped or pipelined out of just in time dedicated customer stock, eliminating the need for just-in case and safety stock inventory.  This allows leading distributors to have 20 inventory turns instead of just three or four. 

Some manufacturers make it easier for distributors to do business with them. For example, Square D (Schneider Electric) lets distributors get special pricing authorizations online without jumping through hoops.  This has a major impact on saving time and improves the productivity of a distributor’s selling efforts.   

How to Create Your Gen Two Strategy 

Distributors ready to embark on the journey to becoming a Gen Two distributor can follow those before them and implement this strategy: 

  1. Start the journey.  

Every journey starts with the decision to start, knowing that it will be a multi-year journey rather than a one-step problem to solve. This decision must come from the leadership team and be upheld from step one, putting customers first.  

  1. Surround yourself with like-minded businesses.  

Get your company into the flow of information and be a fast follower. Don’t try and reinvent the wheel, but look at what other people have done and adapt to your business. Attend industry trade and buyer group conferences to pick others’ brains.  There are many distributors on the path and some are quite ahead of their peers. 

  1. Know your purpose as a distributor. 

Focus on the customer’s buying journey and align your sales and marketing to that goal. Reach out to customers and learn how they want to buy and work with manufacturers to streamline the process.  Help move your team from a field rep-centric way of thinking to a focus on a robust inside sales rep infrastructure for market serving activities while the freed up field sales force can shift to market making activities.  Essentially the field sales role evolves from being the Lone Ranger to becoming the point of the spear. 

  1. Stay committed. 

Embrace the process, make an ongoing and continuous effort and commit to the change. Create a plan for others to follow and involve your sales force and other teams from the jump.  

Gartner research found that 72% of B2B buyers prefer a rep-free experience. When you return to the beginning of distribution, sales reps were the only way a customer could discover what was new. Customer wants are changing rapidly, and distributors must adapt to meet those new expectations.  

Distributors must ask themselves, if all my salespeople quit tomorrow, would I rehire for the same role? Or would I do something differently if given the opportunity? Which look will provide me with the most flexibility and profit moving forward?   

Those that move to Gen Two and figure out how to build a business model that integrates customer-centric digital tools will be able to sell a lot lower in the market than their competitors in Gen One. The gap between leaders and followers is already growing and will only continue to widen as Gen Two distributors pave the path forward.