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CPG Practice Group
White Paper
The Changing Face of Industrial Distribution:
Trends, Opportunities and Priorities
About the Authors
Ganesh Santhanam
Ganesh Santhanam is a Lead Consultant in the Consumer Packaged Goods (CPG)
business unit at Tata Consultancy Services (TCS), specializing in retail execution, trade
promotion management, and distribution automation solutions. He has over 17 years of
experience working with leading CPG clients in the USA and Europe. He holds a
Bachelor's degree in Engineering from National Institute of Technology (NIT), Silchar,
India, and a Post Graduate degree in Management from Symbiosis Institute of
Management Studies, Pune, India.
Ravi Jain
Ravi Jain is a senior IT executive with over 19 years of industry experience across multiple
business domains and geographies. He has managed sales, delivery, and operations for
large accounts, and has anchored multiple business transformation and organizational
change initiatives. His experience of working with leading global retail and CPG clients
has given him deep insights into a wide array of emerging business and technology
trends. Ravi holds a Bachelor's degree in Chemical Engineering from the Indian Institute
of Technology (IIT), Kanpur, India.
Abstract
In the intensely competitive industrial distribution industry, a profitable sustenance is
increasingly becoming a challenge. Distributors need to keep pace with technological
developments, meet customer expectations, and respond to market complexities; all while
containing costs. Volatile economic environment and customer demand variability require
supply chains to be more agile, robust, and responsive to disruptions. With the emergence
of digital commerce, there is an immediate need to gain an in-depth understanding of
the customers' business priorities and effectively integrate existing and emerging channels
of distribution, to deliver a seamless customer experience. This paper analyzes some
recent trends, challenges, and future drivers for the industry. We also discuss some key
business priorities, which when addressed holistically, will drive growth and enhance
customer satisfaction.
Contents
1. Introduction
5
2. Industry trends
5
3. Challenges
7
4. Future drivers of growth
8
5. Key business priorities
9
6. Conclusion
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Introduction
Wholesale distribution continues to be highly fragmented in spite of consolidation in the industry. In addition, the
competitive industrial distribution environment is compelling organizations to reinvent traditional distribution
functions such as carrying inventory, extending credit, and creating demand. AmazonSupply, Amazon's B2B
distribution initiative, is one such example where an organization has tweaked the traditional cost and service
model in-keeping with emerging trends. It is therefore critical for distributors to assess industry trends and to
benchmark their processes against, not just direct competition, but across industry sectors as well.
With signs of a turnaround in the US economy and the strengthening of demand particularly in downstream
manufacturing and construction, the distribution industry has picked up steam and is expected to grow further.
Given the opportunities, it is important to understand how emerging industry trends and technologies can shape
future growth strategies. Only savvy distributors who are attuned to their customers' needs can successfully take
advantage of opportunities when conditions get better. This paper discusses the industry outlook for industrial
supply wholesalers, changes that are in the offing, and how companies can exploit these opportunities to gain a
distinct competitive advantage.
Emerging Trends in the Distribution Industry
Recent US economic indicators show signs of continued recovery. The unemployment rate recently reached its
lowest level since December 2008, suggesting a growing economy and consequently, a positive outlook for
distributors. Key trends in the industrial distribution industry are discussed below.
Demand for Inventory Management Services
There is an increasing demand for inventory management services including managing inventory, sourcing, and
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fulfilment. A recent MDM survey predicts that this will continue to grow. Having a tight control on inventory is
crucial in today's environment, and therefore many distributors are moving to a centralized distribution center or
using a freight forwarding station, rather than a stocking facility. This ensures easy accessibility, efficient shipping
of products, and reduces the cost of running multiple distribution centers.
Expansion of Product Portfolios and Geographic Reach
Product line expansion will be driven by customer demand. We see distributors aggressively expanding their
product categories and Stock Keeping Units (SKUs) to meet customer demand in a highly competitive global
market. While earlier, distributors specialized in only certain categories of products, today distributors are able to
service a wider range of customer needs. Technology, global competition, entrepreneurship, and converging
channels are the major drivers leading this change. Customers today are looking to consolidate their service needs
from a single vendor, to save time and avoid the complexities of dealing with multiple vendors. Industrial
[1] Modern Distribution Management, 'Better Inventory Management Through Data, Collaboration' by Scott Merrill, June 25, 2014, accessed September 2014,
http://www.mdm.com/articles/32119-better-inventory-management-through-data-collaboration?v=preview
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distributors are consolidating suppliers and broadening product offerings to appeal to customers. However,
distributors are taking a strategic and balanced approach, making sure they are not alienating customers while
chasing growth. Also, product expansion is facilitated by the emergence of new retail channels. The emergence of
e-commerce and the growing number of master distributors allow a broader reach and an expansion of drop-ship
capabilities.
Increase in Mergers and Acquisition (M&A) Activity
Industrial distributors are focused on penetrating new geographies and expanding their product lines to better
serve existing customers. Private equity activity remains healthy, signifying satisfactory returns and positive growth
prospects. The industrial distribution sector remains highly fragmented with consolidation opportunities in a
number of end markets. Within the $750 billion North American industrial supply distribution market, the top eight
distributors represent only 31 percent of total sales. With the large majority of the market still controlled by local
independent distributors, consolidation is likely to continue.
Demand for Value-added Services
Based on recent trends in industrial distribution, it is evident that product breadth, availability, and speed of
delivery are some of the most valued capabilities for distributors. However, technical support, training, non-stocked
sourcing, and onsite services, are also gaining importance. The message is clear — customers also value the nonfulfilment services a distributor can offer. Many distributors have started providing add-on services to increase
margins and to gain a competitive advantage. Some of these services include, the financing of purchases, providing
customer service and technical support, product marketing support such as advertising and promotion, technical
advice, and installation and repair services.
Demand for Multi-channel Capabilities
Due to customer demand, industrial distributors are investing in multi-channel capabilities to ensure flexibility,
convenience, and a consistent customer experience across all channels. Distributors are helping customers
enhance productivity and lower purchasing cost in various ways, such as improving system functionality by
providing online and mobile access, easing the ordering process, providing technical infrastructure, and enhancing
the speed of delivery.
Growth of E-commerce
With more and more customers wanting to transact online, e-commerce is increasingly becoming the primary
business model for industrial distributors, however some customers still want someone to come with a toolbox and
show them how things work. It will be interesting to see how industrial distributors balance the two – traditional
sales and online sales. Simplifying the buying process and catering to the complex needs of different customer
personas is critical for growth in the e-commerce space.
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Growth in Mobile Adoption
Adoption of mobile devices has reached a critical mass, with most people in the developed world and in emerging
markets owning a mobile phone. Today, customers want the flexibility of ordering material during their site visits
rather than wait to get back to their office desktops to place the order. Distributors want to get data such as
inventory information and pricing into the hands of their sales people, while they are in the field, to provide realtime visibility into inventory levels and sales across multiple locations and companies. A mobile solution serves as
an effective tool for field sales personnel - an improved method of displaying data during sales conversations as
against the traditional notepad.
Need for Analytics
Top distributors are focused on utilizing analytics to better understand sales, marketing, and product trends, to
drive value-added solutions and streamline operations. In addition, the use of analytics to analyze customer data
for segmentation, and the use of a dashboard to visually represent data, are gaining importance. Analysis of data to
understand customer trends can help distributors proactively meet customer needs.
Challenges Faced by Industrial Distributors
As is the case in other industries, the wholesale and distribution industry must respond to the cost pressures and
complexities of global markets while surpassing the expectations of consumers who demand products of
increasing quality and value, produced under safe and ethically responsible conditions. With the evolution of new
distribution channels and the expansion of existing channels, industrial distributors need the ability to plan,
control, and optimize an increasingly complex supply chain. Dealing with these issues and controlling costs without
compromising on the value of their products, is difficult for many in this industry. The key challenges are:
Volatility in commodity prices affecting operating margins
Commodity-priced materials such as steel, copper, petroleum derivatives, and rare earth minerals are subject to
fluctuating price changes in the commodities market, impacting distributor margins. Frequent increase in the fuel
price also drives up transportation costs. The industry’s ability to pass on increase in costs depends on market
conditions, which are tightening, resulting in lower operating margins. In addition, higher prices can impact
demand for many products, resulting in lower sales volumes for companies in this industry.
Supply chain disruptions
In the distribution business, the scale of operations is critical since it drives higher levels of customer service, more
productivity, and ultimately, more growth. So, investment in supply chain infrastructure helps create economies of
scale and competitive advantage. But a disruption to the logistics or the supply chain network due to natural
disasters, transportation problems, or other events may cause one or more of the distribution centers to become
non-operational, and can adversely affect timely delivery of inventory. This could in turn impair distributors’ ability
to meet customer demand for products and result in lost sales or damage to reputation.
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Changes in sales operations
The need for multichannel engagement, sales force expansion, and talent shortages are factors that directly affect the
distribution industry. Sales across digital channels are increasing at a faster rate than traditional modes. The
distribution industry is targeting product line expansion in organic and inorganic ways. However, inorganic expansion
requires an expanded and effective sales force, which remains a challenge for the industry. The expectations for a
salesperson to be connected at all times and have immediate access to product information, stock availability pricing,
and other information, have drastically increased in recent years to the point of being mandatory.
Varying levels of customer service
As new distribution channels continue to grow, existing channels are expanding through outsourcing, partnerships,
and the use of new technologies. These changes have led to the emergence of a new set of challenges in customer
service. While the customer needs in this industry are similar across channels, buying behavior is based on the size of
the customer’s business. This has driven the industry to rethink the way it can serve customers of different sizes and
yet remain profitable. Large customers, with complex needs and requirement for customized services, wish to reduce
their total cost of ownership. Small customers use fewer services and are often willing to spend more time on the
buying process. Thus, the industry needs to adapt to meet the varied demands of its customers.
On-boarding acquired companies
Many companies do not realize the expected economies of scale and resource synergies from a merger or an
acquisition, because they are unable to rapidly consolidate disparate organizations and business systems. A
properly executed on-boarding strategy is required to realize the intended Return on Investment (ROI), by
leveraging the scale of the new organization and capitalizing on the synergies of the merger or acquisition.
Drivers of Growth
n
Capital Reinvestment: Businesses require significant capital re-investment to keep up or get ahead. So, firms
must focus on capital appreciation and retain their market position, instead of focusing merely on capital
preservation. A robust, targeted, and effectively executed capital plan is necessary. Distributors following the
broad-line, multi-channel route must have robust back-end and front-end (customer-facing) IT systems, efficient
logistics, and new geographic and product offerings.
n
Broader Offerings: Customers want a broader offering across a wider regional area that can be ordered and
delivered efficiently through several channels. Over time, companies have responded to this by adding products
and services to their core line, expanding geographically and investing in more effective channel strategies. The
risk of not investing in new channels is that the customer can opt for an alternative to suit its convenience.
n
New Technology: As customers become more tech-savvy and demanding, distributors have to invest in
technology to stay relevant. It has become imperative for distributors to build an interactive online channel of
engagement. In addition, a robust technological base is the core of any long-term growth strategy that is
logistically efficient. System-wide visibility of inventory and some control (within limits) on pricing in the field,
are other important considerations.
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Key Business Priorities
The trends and challenges discussed earlier in this paper will play a key role in shaping the future of the distribution
industry over the next few years. Distributors should prioritize their business needs while carefully analyzing market
trends. They have to take selective risks and turn them into opportunities to improve growth prospects. Further,
best-in-class distributors have tried to differentiate themselves from commodity players by creating distinct
capabilities around services and availability, such as providing more value-added services and charging a premium
for the services.
Our analysis of the industrial distribution marketplace has identified some business priorities aligned to success in
this industry. These are shown in Figure 1.
Product Line
Expansion
Geographical
Diversification
Business Growth
Improvement in
Operating Margin
M&A
Business priorities
Supply Chain
Network Optimization
Inventory
Management
Automation
Vending Initiatives
Multi-Channel
Capabilities
Multi-channel
business model
e-Commerce
channel
Enhancement of Sales
& Service Productivity
Productivity
Integration of sales and
service organization
Customer-centricity
Improvement in
Customer Experience
Figure 1: Top Business Priorities for Industrial Distributors
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Business Growth
Some initiatives to ensure sustained business growth are:
n
Product line expansion to enhance the distributor’s ability to serve as a single source of products. The customer
would like to see the distributor as a one-stop shop offering a complete package. This is good news for
distributors as they can target a bigger slice of the customer's spend. With customers consolidating suppliers, a
broader product line offering could help create an attractive outlook for the distributor.
n
Operating margins can be improved by consolidating back-office operations to reduce expenditure and
leverage economies of scale. Integrating end-to-end IT infrastructure maintenance can help reduce IT-related
operating expenditures.
n
M&A activity can spur growth and help sustain current market position. This approach offers strategic
advantages in expanding reach and product portfolio to gain new customers. It also helps in increasing
geographical diversification and thereby, sales and profitability. Further, global sourcing provides opportunities
to offer high quality products at lower price points.
Inventory Management
n
Supply chain network optimization aims at improving inventory availability and reducing working capital,
thereby improving customer satisfaction. Supply chain network optimization can help drive operational
efficiencies through:
n Automating critical business processes, thus reducing internal costs
n Accurately tracking shipping and delivery through the use of automatic data collection
n Understanding demand through the creation of accurate demand forecasts.
n
Automation to enhance distribution center capacity and information systems is of prime importance. The use of
automation will continue to drive more efficiency, improve performance, reduce processing time, and lower cost
of distribution operations. Automation of the distribution center, and managed commerce infrastructure and
service will enable growth and improve productivity.
n
Vending initiatives are becoming popular among large distributors for smart inventory management. Vending
programs supported by sensor technology can be a big success as they automatically alert distributors to
resupply to the consumer once thresholds are reached.
Multi-Channel Capabilities
E-commerce presents opportunities to expand or shift elements of existing channels from the physical marketplace
to the virtual marketspace. Many distributors have launched revamped websites in recent years with a focus on ecommerce capabilities. Several are also considering moving their catalogs online, recognizing that the new
generation buyers want easy access to information.
Distribution companies must recognize that they are not just delivering an alternative channel to interact and do
business with. They are in fact offering a whole new buying experience by providing powerful visual and interactive
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tools to search products, compare prices, and nab offers and promotions, thereby addressing the varied needs of
different customer groups, be they contractors or manufacturers. Distributors should focus on e-commerce
channels to provide customers with a better user experience through enhanced website capabilities such as easy
access to products, better order management, and enhanced order visibility.
Productivity
Enhancing Sales and Service team’s productivity by increasing interactions with prospects and customers and
improving the quality of those interactions. Sales executives continue to rely on traditional communications such as
face-to-face interactions, e-mail, and telephone to carry out sales activities. However, we believe that emerging
channels such as online portals and social media will go a long way in boosting sales and streamlining sales cycles. Key
functionalities such as automated opportunity management, and data-driven forecasts for better opportunity and
order management could be game changers. With the dynamic nature of the distribution industry, sales people
require rapid access to business information and near-real time visibility of demand signals for proactive sales planning
and execution. Flexible workflows for reduced administrative work will offer more quality time with customers.
Customer-Centricity
Customer-centric distributor organizations are building an in-depth understanding of customer needs and
expectations to design business processes that recognize different customer segment needs. Delivering a positive
and seamless customer experience at every touch point across the customer life cycle, and making every customer
interaction enjoyable is critical to building loyalty.
Focused solutions for an active dialog with customers (and for acting on feedback) include:
n
Customer experience enhancements such as improved handling time, and faster resolution of customer issues
through first contact resolution
n
Digital technologies to understand the customer and to capture customer preferences and sentiments in
addressing emerging needs
n
Mobility solutions to enable anytime easy access to products and on-the-go purchases
Conclusion
As the industrial distribution industry settles into a pattern of slow but steady growth, it is prudent for distributors to
evaluate their business operations and strategy in terms of the trends, challenges, and future prospects delineated in
this paper. Based on market indicators, we believe that to succeed in this fast changing environment, distributors must
focus on developing broad-line, multi-channel routes supported by efficient logistics. Geographical reach, innovative
product offerings, and efficient services will be critical for sustainable growth. Best-in-class distributors have already
embarked on this journey by developing technical sales (value-added services) capabilities, a highly trained and
knowledgeable sales force (with provision for continuous education), and strong fabrication and assembly capabilities.
We also see a clear focus on growing revenue from existing customers, adding new products or product categories, and
expanding the sales team to support product expansion and reach new customers.
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About TCS Consumer Packaged Goods (CPG) and Distribution Practice
Tata Consultancy Services (TCS) has strong experience in the CPG and Distribution industry and
specializes in designing solutions that are aligned with customer needs and emerging trends. TCS
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Industry. We leverage our core offerings and provide specialized capabilities in Mobility, Big Data,
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