ACCELERATING WHOLESALE DISTRIBUTION BUSINESS GROWTH Four Strategies for Improved Performance
EXECUTIVE SUMMARY While wholesale distributors face many unique challenges in todayâ€™s business environment, there are two that impact most every market and region: retail consolidation and globalization. Both of these forces create pressure on profit margins from increased competition. Because many distributors already operate with tight margins, achieving success requires new and more efficient operations. Enabling business agility through the use of technology allows wholesale distributors to meet these challenges by automating complex sales processes to increase profit margins, improve customer loyalty, streamline new product introductions, and accelerate geographic expansion â€“ both regionally and globally. This paper reviews the most pressing challenges distributors face today and explains how a distribution solution can help your organization realize the four business benefits mentioned above. It also includes a checklist for the key capabilities you should require from any solution intended to automate your distribution operations.
INTRODUCTION Distributors face a number of challenges today. For most companies, two of the most challenging forces are consolidation and globalization. Consolidation among retailers has been occurring at an increasing pace for decades as cost-savings from operational consolidation pull more and more stores under fast-growing franchises – or as expanding franchises force smaller competitors out of business. The impact of retail consolidation for distributors is that customers now have more leverage to ask you for price reductions due to the larger orders they represent. Wholesale distributors that do not work directly with retailers will have a more complex supply chain that makes traceability and visibility a critical success point. In this scenario, higher-tier distributors are only as successful as their smaller distribution partners – so many larger distribution companies are looking to vertically integrate supply chains to build more efficient operations. A distributor can be customer of another distributor. This makes precisely the Supply Chain more and more complex, and makes traceability and visibility across the chain a critical success point. Under this point of view, higher tier distributors can offer their solution to the lower ones, those who does not have their own integrated system. Globalization is occurring at an even faster pace than consolidation for distributors today. Free trade agreements and expanding economic regions have brought about fierce global competition for large distributors, and in many cases these large, technically sophisticated distributors are attacking smaller, local markets in pursuit of market-share first, and profit later. Compounding the impact of globalization is the shifting nature of where the most affordable labor is geographically located. At the risk of over simplifying, we have already seen the center of lowcost manufacturing shift from Mexico, to China, to South East Asia in only a decade. As a result, a constant stream of new distributors is entering global competition. This trend also impacts the manufacturers that create products for distributors, as they now need to chase low-cost labor across the globe as labor costs change over time from country to country. Distribution has always been a competitive business – but the twin forces of consolidation and globalization are putting historic pressure on profit margins. As margins tighten even further, distributors lose the flexibility to change prices in response to new competitive threats. If your distribution business is already well run and efficient, you may not have the price flexibility to retain your customers if a new large competitor aggressively enters your market(s). Today, one of the most impactful ways to increase the success of a distribution business is through technology, and a key technology to consider is in the form of an ERP. This is because an ERP-based distribution solution automates and consolidates key business processes that every distributor must have control over and visibility into if you are to succeed. As a result, distributors gain valuable business agility in what is already a highly competitive industry. With improved business agility from a solution based on ERP technology, wholesale distributors that can achieve four key business benefits: improved profit margins, increased customer loyalty, rapid new product introduction, and geographic expansion – both regionally and globally. Let’s examine how to achieve each of these in more detail.
INCREASING PROFIT MARGINS WITH A DISTRIBUTION SOLUTION Distribution transactions are complex to execute efficiently, and without control and visibility into stock levels, pricing, and discounting you cannot optimize your margins. This is because in almost every deal there are small opportunities to more accurately assess the cost/value of the goods being sold that ultimately bring you justified and increased profit. While in many cases these increases may be small amounts, over time and across multiple transactions they can have a significant impact on your business. A distribution solution based on ERP technology provides a consolidated source of accurate information regarding the cost, location, and quantities of available inventory for every product. For example, Openbravo’s solution provides automated alerts that tell you on a product-by-product basis when and where products need to be replenished – this in turn, proactively helps increase profit margins. With capabilities like these, you can gain greater predictability for your business and seize the opportunities for increased profitability on each and every transaction. See Table 1: ‘How to Increase Profit Margins with a Distribution Solution’ for examples of how distributors are accomplishing this today. •
Efficient and Accurate Order Taking – For the traditional distribution transaction that occurs via telephone, a distribution solution delivers functionality that accelerates order taking. It can also enable direct sales people to proactively suggest additional products based on your customer’s previous patterns of consumption.
Automated Electronic Order Taking – Self-service ordering on line through direct access to a distributors infrastructure or EDI (Electronic Data Interchange) is also growing in popularity. A distribution solution allows your organization to expose accurate inventory levels and pricing to your trusted customers to lower the operational overhead on transactions, and to free your direct sales team to focus on customer loyalty or new customer acquisition.
Proactive Inventory Management – The ‘sweet spot’ for the quantity of inventory to maintain for a given product is usually a moving target because of shifting customer demand and price variability. A distribution solution allows you to maintain the right levels of inventory for each product so you limit your risk of stockouts or the inefficient use of capital due to replenishing inventory too early. This often includes auto-generation of replenishment quotes when stock levels run low to streamline purchasing orders.
Efficient Inventory Storage – A distribution solution allows you to track inventory quantity by location within warehouses with 3D-like visibility that displays how full (in % terms) any given bay is with any given product. This information supports efficient putaway, product movement and picking processes, to ensure products are where you need them, when you them.
Improved Inventory Accuracy – Using a distribution solution makes physical inventory counts much easier to validate, so they can occur more often. Increased frequency of inventory counts allows you to improve inventory accuracy, reconcile failure points in your inventory system if they exist, and eliminate loss due to theft.
Efficient Warehousing – Because a distribution system facilitates and tracks normal warehouse management processes like putting away material, packing and shipping products – these common tasks require less effort and ultimately cost distributors less overhead through improved employee efficiency and fewer mistakes. This is particularly valuable for wholesale distributors as warehouse employees need to become productive quickly and turnover rates are high.
Consistent Price Controls – Pricing can impact all business functions at distribution companies including marketing, sales, and finance. In more complex organizations, pricing processes often vary by geography, product, and line of business – which can make it nearly impossible to present consistent pricing to customers. A distribution solution provides centralized control over pricing as well as capabilities to allow for price variations along nearly any relevant variable.
INCREASING CUSTOMER LOYALTY WITH A DISTRIBUTION SOLUTION Given the global competitive pressures wholesale distributors face and the continuing consolidation among retailers that distributors serve, a key strategy to defend your existing revenue and market share is through increased customer loyalty. There are two general strategies for using a distribution solution to improve customer loyalty: increased customer satisfaction and establishing deeper customer relationships. A distribution solution can increase customer satisfaction by enabling you to offer better services and direct access to the products you sell. A solution like Openbravo improves service levels to your customers with faster and more accurate ordering that reduce delays and ensure order quality. For example, it helps your salespeople by auto-populating customer records with that specific customer’s discount schedule whenever a quote is initiated. The solution also provides reporting and a complete integrated system for auditing orders from your customers. While large wholesale distributors may have contracts that support all conditions, for most medium and small distributors, the ordering and shipping process usually begins with the sales department and is passed to the financial department for approval. Once approved, the request is transferred to a warehouse where the warehouse manager needs to decide when it can be fulfilled. Because this process is so manual, it tends to be very error prone. For some examples of these errors, please see the sidebar: ‘Common Problems with Traditional Purchasing Processes’. A distribution solution helps eliminate the common problems of traditional purchasing processing by integrating all elements for a successful transaction in a single database and providing more accurate information to your sales team. Self-service for distribution customers is a key tenet to establishing deeper relationships with your customers. For example, making it easier for customers to place orders through self-service access to your ordering system or making it easier for your customers to pay you by ensuring accurate invoices are available to your customer at the right time, and are communicated correctly. The solution also minimizes the risk of payment disputes and costly product returns – both of which compromise customer loyalty and attack your profit margins. Since a distribution solution ensures accurate information on available product quantities, when they will ship, and when they will arrive, your customers can rely on you with greater confidence to meet their needs. A solution like Openbravo also streamlines the payment process for customers so it’s easier for them to do business with you. It accomplishes this by generating automated alerts to your finance
COMMON PROBLEMS WITH TRADITIONAL PURCHASING PROCESSES Wrong Discount: A sales person gives a discount from the wrong price, the finance department corrects and the customer is overcharged. Incorrect Orders: Because inventory management systems aren’t integrated, manually re-entering data between systems introduces an error. Minimum Quantity: Particularly for lot-inventory, the quantity ordered fails to meet the minimum shipping quantity. Unavailable Inventory: Requested inventory is unavailable because manual inventory counts always lag available inventory. Wrong Destination: For customers with multiple sites, the proper shipment is sent to the wrong location.
department and Dunning-style email reminders to your customers in both text and PDF format based on payment due dates, and whether a given payment is overdue. Finally, in some cases your customers will value a deeper relationship with you so much that they will integrate their internal systems with your solution. This is a very desirable scenario for most wholesale distributors because integration between the two systems enables you to become part of your customer’s business process. A role-based, 100% web-based solution like Openbravo allows this deeper level of integration to occur simply and securely—without having to integrate a separate portal product.
RAPID PRODUCT INTRODUCTION Introducing new products is key for the success of wholesale distributors because new products set the foundation for growing your customer base and increasing the average order amount from your existing customers. Aggressively adding new products also insulates you from geographic competitors that may be able to compete against you on price for a few items due to low cost labor or raw materials, but fail to compete against your full product catalogue. Introducing a new product as a wholesale distributor is no simple task because it requires that you find new suppliers for new products and then integrate the products into your catalogue in both an accurate and compelling manner to drive sales. The frequency of new product introduction will vary depending on the market your distribution company serves. For consumer packaged goods, new products are seemingly constantly available to choose from, while for construction materials, new products are more rare. Distribution solutions like Openbravo have rich product classification and description capabilities that provide a central definition for all the products your company sells. It also allows you to assign an infinite number of attributes to each product so that sales people and self-service customers can quickly find the products they need. Because it is a single, company-wide system, a distribution solution provides all employees in every facility, region, or country with consistent and immediate access to new product information, as it is introduced. For an example of how this can be valuable to you, see the sidebar: ‘All I Wanted Was Some Ice Cream’. The benefits of a distribution solution do not end with employees and customers, because it also helps you with supplier management. From the supply side, this type of solution offers compelling benefits because it enables you to have all suppliers conform to the same product information hierarchy. This allows you to reduce the complexity of introducing and managing new products, such as using the solution to track the quality characteristics of products from individual suppliers, then use that information to more accurately evaluate supplier performance and ultimately bring higher-quality products to market.
ALL I WANTED WAS SOME ICE CREAM As stated before, new product introduction for wholesale distributors is complex. Here’s an example of how a distribution solution makes it easier on a company wide basis for a mid-sized consumer goods company that decides to add ice cream to their product mix: New Product with Manual Processes: If a wholesale distributor were still using manual processes or basic spreadsheets, the process of adding the product would typically begin with the operations department deciding to introduce the new product (ice cream). The operations team would make a list of vendors and evaluate them – but often with no oversight in the selection process. When the new product is introduced, all price lists need to be manually updated. What’s worse, the company is distributing 10 different flavors in 3 different sizes, so it’s really 30 new products that are being introduced. New Product with a Distribution Solution: If a wholesale distributor is using a solution like Openbravo, when the request to add a new product is made, automated reviews and approvals are required before it can be added to the catalogue. This provides the opportunity for oversight of the supplier selection process. Additionally, because Openbravo allows you to assign multiple attributes to the same product, the company would be introducing only one new product (ice cream) with two attributes that have different variables (flavor and size).
SUCCESSFUL REGIONAL AND GLOBAL EXPANSION To remain successful in the wholesale distribution industry, you need to be at the right place at the right time geographically to ensure you don’t miss the opportunity to win valuable new customers. Depending on the size of your company, this could be an expanded presence in your current territory, a new region in a country, or a presence in an entirely new country. Regardless of how you decide to expand or when you decide to expand, a distribution solution will significantly increase your ability to succeed in different ways in each of these scenarios. Geographic expansion forces distributors to consider new variables that can impact the success of your business, such as the complexity of inventory management, free trade zones, and even considering an external partner to manage new facilities. Moreover, as you expand into new countries, it’s likely that you’ll need to modify or improve a number of key business processes related to international trade. Conversely, distributors also need to be prepared to defend against new global competitors as they can suddenly and unexpectedly move into your area(s) of business to pursue your customers. For small to medium distributors, this is particularly important, because competitors with greater economies of scale can suddenly undercut the established cost of goods in local markets. Regardless of the size of your operations, there will always be a chance that a large-scale competitor may aggressively target one or more of your territories and apply price pressure both on cost of goods and transportation. Defensive preparation for global competition of this nature can be easily overlooked, particularly for successful small to medium distributors who, after winning against local competition, may become complacent or overstate customer loyalty. A centralized distribution solution can help you meet nearly every challenge of regional or global expansion – regardless of whether you view growing global competition from the offensive or defensive perspectives outlined above. A solution like Openbravo provides visibility and control to master the challenges of expanding operations based on the location of a growing customer base, including: •
Orders From Different Warehouses – If your solution is web-based, there is no infrastructure expense and only minimal setup time to add new warehouses and facilities into your current order-to-fulfillment processes. Plus, your distribution solution delivers consistent and accurate inventory visibility at all facilities.
International Orders from Current Warehouses – A centralized distribution solution minimizes the probability of costly international returns, refunds, and billing disputes through more accurate inventory and ordering processes.
Multiple Currency Support – How and when to invoice international customers and allocate currency exchange fees is complicated and time consuming – a distribution solution automates and eliminates the complexity of multi-currency support.
Multiple Language Support – For international transactions, your customers will want invoices and documentation in their native language. If you provide self-service to international customers, they’ll also need your product information in their native language. Using a distribution solution will help manage all multi-language needs automatically, without tedious manual processes.
International Reporting Requirements – Because countries have differing tax laws, regulations and standards, country-specific documentation is needed for international commerce – a distribution solution can streamline these critical reporting requirements.
Traceability for National Security – With global security heightened around the world, products related to sensitive industries such as defense, aerospace and medical devices require traceability of all components for import/export. A distribution solution automates and documents this complex process for faster and more reliable shipping.
As you can see, an integrated distribution solution can help expand your business and defend it from global competitors looking to gain market share by acquiring your customers. To make these issues more concrete, let’s quickly review the role a wholesale distribution solution can play in three different expansion scenarios: regional expansion, economic zone expansion, and international expansion.
REGIONAL EXPANSION When expanding into a new area or region from a country you already have operations in, a key challenge is enabling operational independence while maintaining visibility and control over pricing and inventory. Operational independence empowers managers at each of your facilities to make decisions in the best interest of the business based on local market conditions. A solution can also automatically enforce that prices are changed only under approved guidelines, regardless of where sales or inventory are physically located If your distribution solution is 100% web-based, new facilities can be supported by it rapidly and cost-effectively – without the need for new server-side infrastructure. Additionally, only a web-based solution allows you to increase overall efficiency through shared services including, HR, payables, receivables, accounting, plus a database and price lists for multiple sites on a single system. For successful regional expansion, it’s important that your distribution solution has a flexible organizational model that allows the performance of independent regions to be analyzed (such as north and south California). It should also provide a role-based separation of duties so that authorized employees can view the performance of multiple regions through a single view.
ECONOMIC ZONE EXPANSION When expanding within an international zone such as the European Union, your business will operate within the legal framework of that zone in every country you expand to. However, you will encounter important language issues from new international customers that will insist that ordering, documentation, support and receivables are all in their native language. Your distribution solution should have multi-language support to deliver information to your customers in their preferred language from a single system. In addition to those capabilities, Openbravo provides ‘language sensitive logic’ that allows a user of the solution to automatically view product information in the appropriate language. Language sensitive logic is critical to successful intra-economic zone trade because it allows you to create a single product code for each of your products, regardless of which language they are being sold in. By avoiding creating unique product codes for the same product based on the language you sell them in, you minimize the risk of mistakes, enable consolidated reporting, and ensure your distribution solution delivers the business benefits it should.
When you expand your distribution operations into new countries within an economic zone, you’ll also need to address the traceability of products and components in assembled products. Traceability is required by governments for products in sensitive industries such as defense, aerospace and medical devices so that in the event a security or liability issue occurs, the root-cause of the issue is documented and the appropriate party can be held accountable.
INTERNATIONAL EXPANSION When you expand internationally the need to represent and denominate transactions in different currencies will introduce new complexities into your payables and receivables processes. Beyond simply accepting multiple currencies, you need to manage variable exchange rates that must be aligned with payment term dates as well as differing accounting standards that impact financial statements including balance sheets, P&L, and more. For example, let’s assume you have a shipment going from Germany in Euros to the U.S. that needs to be reconciled in U.S. Dollars with net-30 payment terms. However, the exchange rate between Euros and Dollars changes between the purchase order date and the date the transaction is posted to your books – as a result you have accumulated an exchange gain or loss that needs to be properly accounted for. Imagine the complexity of calculating this manually for one transaction, let alone hundreds! Another common complexity with international trade for wholesale distributors is the revaluation of products/inventory. For example, let’s assume your operations are based in the U.S. and you have products that have cleared customs in a bonded warehouse in Mexico – then after clearing customers, the value of the Mexican Peso relative to the U.S. Dollar drops. In this case, you now have products that are overvalued from an accounting perspective. Products in this state are sometimes referred to as ‘Maquiliadora’ – see the sidebar ‘What’s a Maquiliadora?’ for a definition of this term. In the example above, you can bring back inventory to U.S. to recapture the loss in value, but you can’t sell the products for their U.S. Dollar value in Mexico. Fortunately, Openbravo’s distribution solution supports re-valuation that can automatically and accurately account for shifts in the value of products in this scenario. Other examples of multi-currency complexity range from both general issues such as when a customers sends you payment in a foreign currency you’re not expecting, to country specific issues such as the fact that in Switzerland, all denominations must be rounded to the nearest ‘.5’. So, whether you’re expanding regionally, within an economic zone, or internationally – any type of geographic expansion will create new challenges for your business. By adopting a global distribution solution, when you encounter these challenges, you’ll have a common infrastructure throughout your wholesale distribution operations that can automate and streamline key business processes and set the stage for growth.
WHAT’S A MAQUILIADORA? According to Wikipedia: “A maquiladora is a concept often referred to as an operation that involves manufacturing in a country that is not the client's and as such has an interesting duty or tariff treatment. It normally requires a factory that may import materials and equipment on a duty-free and tariff-free basis for assembly or manufacturing and then "re-exports" the assembled or manufactured product; sometimes back to the originating country. This type of operation principally occurs in Latin America, but also occurs in other countries in the world that have adequate legislation. Currently about 1.3 million Mexicans are employed in maquiladoras.”
CHECKLIST FOR EFFECTIVE DISTRIBUTION SOLUTIONS Throughout the review of the four major business benefits a distribution solution can deliver to your business, a number of recommended requirements have been discussed. To help find a solution that meets the unique requirements of wholesale distribution, use the checklist below to confirm that any solution you chose has the right capabilities. Remember that deploying distribution solutions with ERP-like capabilities can be expensive, complicated and even disruptive to your business – so the most important criteria for distributors is to ensure your solution is 100% web-based. This is because a 100% web-based solution eliminates the need for on-premise software, and as a result, you avoid many of the cost overruns and delays associated with sending IT personnel to each of your physical locations to install or troubleshoot your solution. A 100% web based distribution solution removes implementation cost and complexity, and dramatically reduces the risk of business disruption, keeping employees focused on what they do best: making your distribution business successful. To dig deeper into the key capabilities you should require from any distribution solution, see the ‘Capabilities Checklist for Distribution Solutions’ below.
CORE ERP CAPABILITIES
DISTRIBUTION SPECIFIC CAPABILITIES
100% Web-based Return on Investment (ROI) is often difficult to calculate when it comes to evaluating enterprise software. To deliver rapid ROI, your solution should be 100% webbased to avoid costly and time-consuming software updates. A web-based solution also dramatically accelerates your speed of deployment.
Flexible Organization Model The ability to have a single, consolidated solution for sales, inventory, receivables and payables – and at the same time the ability to analyze the performance of independent regions from a single system and a single, role-based user interface.
Modularity The ability to add pre-built capabilities onto your core solution provides a means to cost-effectively add new functionality when you need it. It also ensures a small functional footprint for the core application itself, for faster deployment times.
Automated Inventory Alerts A solution should have customizable alerts that let employees know of pending inventory shortages in advance through pop-up windows in the solution, email, and text so you never miss an order.
Intuitive Usability For technology to be adopted, it must to be easy to use. Legacy solutions often fail due to poor usability. Familiar application attributes like multi-tab views, spreadsheetlike interfaces and contextual help can greatly facilitate adoption of your ERP.
Multiple Product Attributes To facilitate the successful sales of new products, the ability to assign multiple product attributes to related products allows you to assign a single product identifier to a product that may come in multiple shapes, sizes or other variables.
CORE ERP CAPABILITIES
DISTRIBUTION SPECIFIC CAPABILITIES
Customizability Generally, you should seek to extend, not customize your distribution solution. However, itâ€™s important to have the ability to customize your solution if needed. Two factors will contribute to ease of customizability: modularity, and if your solution is open source - because you can adapt open source software with zero license fees.
Multi-Currency Support Automating how different currencies, exchange rates, and fees for currency exchange must be supported. Your solution should also extend to track payment dates and help reconcile issues related to changing exchange rates and shifting values of currencies and inventory.
Interoperability To ensure your solution can work with your existing systems and grow with your business, ensure it can interoperate with other software systems. Generally speaking, open source software uses open standards that greatly facilitate interoperability.
Multi-Language Support International customers will want invoices and documentation in their native language. Your solution should also support language sensitive logic that enables the use of a single product code in multiple languages.
3rd Party Integration The ability to expose your distribution solution for customer self-service may provide the opportunity to integrate with customer applications. Ensure your solution is flexible enough to meet this requirement if you think it likely you may have this type of opportunity.
Traceability The source of products, product components, and product lots (and their serial numbers) should be traceable back to the supplier that provided them. This allows distributors to comply with national security concerns and recalls for sensitive or perishable products, should that be necessary.
CONCLUSION Wholesale distribution today is one of the most vibrant and competitive economic sectors worldwide because it is at the forefront of two key trends that are fundamentally changing commerce: globalization and consolidation. For distributors to continue to prosper in this new competitive environment, it is essential that you leverage technology to automate manual processes and streamline complicated processes as you expand. A distribution solution offers wholesalers the opportunity to capture significant business benefits including improved profit margins, increased customer loyalty, rapid new product introduction, and geographic expansion â€“ both regionally and globally. Understanding what your growth strategy is today and tomorrow will help you determine the key capabilities you need in a solutio
OPENBRAVO DISTRIBUTION CASE STUDIES Would you like to see how some current wholesale distributors are leveraging Openbravo to reach their business goals? Take a quick read of these customer case studies to learn more: Newlux http://www.openbravo.com/customers/success-stories/details/distributor-relaxation-products.php Berotz http://www.openbravo.com/customers/films/#distributors Frilac http://www.openbravo.com/customers/success-stories/details/frozen-products-distributor.php Itâ€™s important to note that the faster your distribution business grows, the more agility you will need. This is because growth entails more suppliers, more customers, more countries, languages and currencies that you need to manage. As your business grows to encompass more facilities and more employees, the value of a centralized distribution solution can offer will increase exponentially with the complexity of your business. Making the right decision now on how to use ERP-like technology to automate your distribution can have a massive impact on the success of your business tomorrow and beyond. If youâ€™d like to learn more about how a distribution solution can impact the performance of your business, Openbravo and our network of certified partners are here to help you. Simply contact us at: http://www.openbravo.com/form/customer/