Wholesalers Making Adjustments During Economic Storm
November 10, 2008 Dan Burger
To find out what companies in the wholesale and distribution business are doing to succeed in these turbulent economic times, I set up an appointment with IBM‘s wholesale industry segment executive, Roberto Sanchez, who works not only with customers, but also with independent software vendors and resellers in the sales channel. Sanchez understands the System i because many companies rely on it in this market and also because he was once a systems engineer for the AS/400.
Like most executives at IBM, Sanchez would rather not talk about platform specifics. His point of view is solution specific instead. Customers are requesting advice about how to cut costs and protect sales, he says. “They don’t want to hear about speeds and feeds. They want to know how we can help protect them against economic turmoil.”
Things are a little dicey out there now. When the economy is brittle, making the right moves is a lot more critical, and making no moves or the wrong moves brings stiffer penalties. Most wholesale distributors will say 2008 has been a tough year. Success is much more difficult and those achieving it are admired for coming through in the clutch.
The wholesale industry is huge. Sanchez says statistics show it to be a $4 trillion business in the United States alone. More than 250,000 companies are involved, with only about 2 percent of those employing more than 500 employees. Using that employment watermark puts the other 98 percent into the small to mid-size business category. Throughout the wholesale industry there is great fragmentation in terms of the subset industries they serve. Industrial supply, medical, pharmaceutical, and food are just the tip of the biggies; everything made needs to be distributed, after all. Each wholesaler has its unique business-specific aspects, but all have similar functions.
In general, through good times and bad, the wholesale distribution industry tends to grow at a slow but steady pace, Sanchez says. “With recent economic turmoil we see it slowing down. When economy slows the supply chain gets constipated. And this is really evident in the wholesalers’ warehouses. Their revenues are going to come down.”
Looking at it from the IT perspective, Sanchez says budgets fluctuate in concert with the economy. He remains optimistic during this downturn, however, saying he expects IT investments to grow modestly. Even wholesalers that are reluctant to take on new IT projects are looking to IT to fix major problems, according to Sanchez. “When a wholesaler is having a good year, the company can get away with some problems. But when sales go down, problems surface. They are like big rocks that are hidden by deep water. When the water level goes down, the rocks show up. Those rocks are the efficiency problems,” he explains.
To mix metaphors a bit, there are many wholesale fish in the ocean, and some companies will always get bigger by eating the smaller companies or driving them away because they can no longer compete. “There are a lot of mergers and acquisitions,” Sanchez says, “because when smaller wholesalers get into a soft economy they face two major problems. One is making the investments to fix problems. The other is the inability to take more advantage of their current strength.”
In more bountiful times, keeping up with orders and providing good customer service are priorities, and profitability usually follows. Economic downturns bring attention to cost-cutting measures. Inventory is one of those rocks formerly below the water line that Sanchez sees as an imminent danger. While inventory control is always on the minds of executives, the penalties for getting sloppy are easily swept under the rug. The best strategy for any wholesale distributor during challenging times is to cut costs associated with carrying too much inventory.
Those who seek advice from Sanchez will likely hear how forecast and demand planning systems will be a wise move today and an asset when the economy turns around.
“For a modest investment,” Sanchez says, “a wholesale company can bring inventory down by 20 percent.” That figure is based on a best-case scenario, not an average or expected reduction. “Why wasn’t that relevant in the past?” Sanchez asks himself rhetorically. “Because they were selling everything that they had. Their biggest problem was keeping track of customers.”
That’s not true in 2008 for a lot of companies. And it doesn’t look like it will be true in 2009, either.
Investments in forecasting and demand planning systems bring more control over inventory. It weeds out stock that is not selling, and that stock can be moved in whatever way it can. The tried-and-true fire sale is a popular method. Get some revenue out of it and do a better job in procuring product that will really sell.
“There are a lot of financial resources being freed by simple, easy to use forecast and demand systems,” Sanchez claims. “Do they have to make investments? Yes, but the reduction in inventory is worth it. We’ve seen instances where items overstocked, the company hasn’t sold any of it for six weeks, and they have an order placed for more of the same items.”
Adam Fein, founder and president of Pembroke Consulting and a noted expert on distribution channel economics, is solidly behind demand-driven supply chains. The point of a demand-driven supply chain is to provide upstream suppliers with access to sales and product movement as close to the end customer as possible.
Most executives in wholesale distribution companies see orders from customers. That’s not enough says Fein. The usage or consumption information is far more valuable. The lack of visibility, he says, leads to potentially false assumptions about true demand and potentially a stockpile of unnecessary inventory.
Fein will be the guest speaker on an IBM-supported Webcast for wholesale distribution and manufacturing executives, distribution channel managers, marketing analysts, sales managers, private equity investors, software executives and consultants. Unlike most Webcasts, this one is not free. The cost is $79. The session begins at 2 p.m. EST on Thursday, November 13. For more information, click here.
Allowing wholesalers and their customers to share point-of-sale and product movement information establishes the upstream supplier as the responsible party for determining order size and timing by the downstream customer. According to Pembroke Consulting’s research, almost one-third of wholesale distributors made use of this strategy in 2006 and that number is expected to double by 2012.
“It’s a matter of getting the inventory they need and when they need it,” says Sanchez. “When sales drop, you have to buy smarter. You want items put into inventory in a timely manner. Not two weeks in advance. Not three weeks in advance. It’s a matter of timing.”
Company executives want to know one thing up front: How will the solution enhance their business?
Sanchez says he can make the case with almost any wholesale distribution company that software can be used to shorten lead times, save money, and provide the information that will make a company more competitive. His conversations with executives have taught him that most of the concern is about the reliability of the solution. “A lot of that has to do with the platform it is running on,” he says. “When I have conversations with customers running on the System i, there’s not a lot of conversation about reliability and security.
Reliability and security are big factors for companies that are just beginning to use the Internet. Suppliers and retailers are demanding interaction and the capability to look into the wholesalers’ systems.
“I used to be a systems engineer with the AS/400,” Sanchez says. “I was giving a presentation about all the great things the AS/400 has, and a customer was asking all types of questions about service, parts that are in the local warehouse, system downtime, and some other things that I didn’t know the answer to because I never knew these were ever issues with System i users. I didn’t think they existed anywhere.”
“Wholesale distribution has been traditionally one of the strongest market segments for the i client since the days of the AS/400,” says Ian Jarman, IBM’s manager of Power Systems software. “One of the reasons it sells so well is that typically, in warehouse and distribution, you have thousands and millions of small transactions being tracked from warehouses to retailers and so on. This fits very well into the database and the transaction processing that we do on the platform.”
The AS/400 became very well positioned in this market segment because it was an excellent choice for deploying distributed applications in regional distribution centers. Jarman described the wholesale distribution market segment as “probably the strongest industry segment we have on the platform.”
In the past ten years, the industry and some of its most successful companies have grown much larger. “Many of the companies that started out using the (AS/400) midrange product are today doing wholesale-distribution applications on some of our largest servers,” Jarman says. “There has been a process of consolidation throughout the industry. The way the AS/400 was used is really quite different than data center deployment of Power Systems today. Where companies once would have had many machines distributed around the country, they are now being brought into regional data centers and serving a broader region of the country, for example.”
There is still a place for the Power Systems i in wholesale distribution. So don’t worry. And the issues that wholesalers are facing play to the strengths of the i platform. Business resiliency is an issue that Sanchez hears about often. Backup, recovery, and security are important. The infrastructure is important, he says.
“I am not a systems expert. My conversations are more on the solution capabilities,” Sanchez says. “My advice to companies is: Don’t do things for the same reasons you did three months ago. We see people spending money for the wrong reasons due to lack of inventory control. We say spend money for the right reasons and gain advantages.”