B2B distributors must change their operating model to survive, let alone thrive

One-click ordering has transformed the way customers shop in the B2C space, and the same change is coming to many B2B distributor segments most notably “industrial” and “construction” related products. Yet many such businesses seem unprepared for this change, continuing to rely on a branch network model that says: ‘we’ll store it near you so you can come to buy it’.

Being able to provide a product no longer means having to store it everywhere. While walk-in trade is still important in many areas, getting what the customer needs, when they need it, where they need it, is increasingly the name of the game. Price, Money Saved and On-Time-In-Full (OTIF) Delivery Performance are replacing price, local branch numbers, vehicles, and volume of stock.

Amazon is coming

Many distribution businesses are already operating on thin margins. Competition from the likes of Amazon only squeezes margins further. Amazon’s move into the space has been progressing slowly for some time but in recent years has grown. In its first year of US operation (April 2015 to 2016) alone, Amazon Business claimed a billion dollars in sales. Already nervous, the worst fears of some North American industrial distributors were confirmed when in 2016 court transcripts revealed Amazon Business identifying Grainger and Staples as priority targets. They have responded and have some cards to play with. Grainger for example has accelerated its efforts to streamline the network, scale their sales and support contact centers to better serve customers and have also cut prices.

In Europe players have also been making changes in their operating model but many are essentially maintaining their traditional branch based sales and stock networks. As Amazon Business grows in their markets they need to reflect on the words of Jeff Bezos in his to shareholders in April of last year:

“I’ve been reminding people that it’s Day 1 for a couple of decades… Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1. To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.”

Fight or flight

Some of our clients are asking “how long have we got?” They put a brave face on their plight but being caught in the cross hairs of this century’s new titan is not comfortable. We believe many can and should fight, not simply seek flight. They have some advantages over newcomers: customers value their services and are reasonably loyal. Traditional operators have significant expertise among their staff across different product categories. In construction, distributors can advise on how to achieve desired performance and conformity to regulation. In MRO, they can help companies reduce their overall costs, better manage their replacement part needs, and even help identify what part is needed. They also have expertise in how to source and supply a product effectively for the customer and crucially increasingly do so operating within the facilities of their customers – a footprint Amazon does not have, yet.

Innovative models have pointed the way, fusing online and efficient supply chains with a new (and often reduced) distribution centers and branch network to take share. As executives ponder the ‘flight or fight’ conundrum across their portfolio and streamline their businesses, some headroom is also offered by the consolidation potential in such a fragmented industry. It may indeed take decades for some to see Mr Bezos’s day 2. But for those wishing to remain focused on day 1 a clear strategy is needed.

Adapt now to survive and thrive

For distributors to adapt to deliver customer needs and protect profits, they need to:

• Rethink the role and necessity of their branches, to either close or repurpose to appropriately service walk-in trade where volumes justify it
• Centralise product expertise and make it accessible to the whole customer base, industrialise order taking and administration, including enabling self-service via mobile and web (and in the future, voice)
• Manage customer inventory in customer sites, utilising technology and analytics to deliver on savings promises while still safeguarding margins
• Ensure logistics models deliver outstanding and consistent OTIF delivery performance
• Focus external sales teams on outcome performance within the new cost effective model, not selling inputs as a way of swaying customers.

If distributors can start to replicate an operating model that delivers what customers want, easily and efficiently, they will not only build resilience into their businesses for the future, but will start to eat a greater share of the market too. Amazon need not be the only long-term winner.