Growth is a primary goal for most distribution companies. Unfortunately, many barriers block the path of growth for distributors and many of those barriers come from internal issues. In fact, according to research by Bain & Company, eighty-five percent of executives surveyed report that their greatest barrier to growth come from their own internal issues.
The study found that top business performers are able to systematize the goals and processes of their company for automation and reproducibility. They consistently measure their progress and can respond to changes with great agility. They are aligning strategy with tactics, execution and adjustments. Thrive users will recognize these qualities from our four practices: Alignment, Measurement, Precision and Proactivity.
In a distribution organization, inventory often represents the largest commitment of capital, space, labor and overheads. So it should come as no surprise that inefficient inventory practices are also one of the largest barriers to growth.
Issues With Scalability
Do you know how many SKUs your demand planner or purchasing agent can proactively measure and manage? The rule of thumb in distribution is that a demand planner can work with around 5,000 SKUs. The average distributor stocks many thousands of SKUs in each location, in some cases tens or even hundreds of thousands.
With growth comes growth in inventory. If your distribution business is growing, it also means that you are adding on new brands, new product lines, opening new branches and expanding your offerings online. The typical approach that most distributors take in response to that growth is to simply hire more buyers to support their growth. That is not a scalable way to address growth as it adds more labor to what in most cases is already a very manual and labor-intense purchasing process. These distributors are simply not efficient enough to scale their purchasing and inventory requirements without eating into new profits.
Are Your Buyers Overwhelmed?
Of course, another common approach is simply to overwhelm your current buyers with higher workloads. Your buyers are probably already feeling overworked and feeling the pressure of each stock out or lost sale. If you add to the number of SKUs they have to manage, you will stress the system further, lose more sales, tie up more profits in carrying cost and fail to scale.
If you are wondering if your inventory practices are ready for an overhaul, one area to look at is how many of the suggested purchase quantities from your ERP system have to be overridden by your buyers. You might be surprised that overrides could be as high as 60% to 70%. When overrides are that high, you are relying on the tribal knowledge of your buyer to hit the right inventory levels. You are failing in your alignment of strategy and instead relying on your buyers eyeballing the numbers.
Inventory-Related Growth Risks
Growth has some other inventory-related risks and challenges as well. You land a big account and suddenly one customer is buying 80% or more of a particular item at a location. How long does it take you to respond to that increase in demand to make sure you are continuing to service the new big customer along with your smaller loyal customers? Now what happens if you lose that big account? It can take the average distributor five to six month to understand the impact of that change. That means you continue to buy the same quantity for several months even though you’ve lost 80% of your sales on that item.
In these kinds of situations, distributors are not able to respond quickly enough without automation. Your ERP system will continue to suggest a high level of purchasing. Your sales reps won’t believe at first that they’ve really lost that big account, so they aren’t communicating the loss to you and your buyers. The buyers are overworked and they want to support sales, so you end up grossly overstocked.
You Need Automation to Grow
The only way out of this cycle is to put strategic inventory policies in place and then tie those strategies into your tactical buying processes with automation. That way, you are less reliant on each buyer’s individual knowledge and are building your strategy into the way your purchasing system recommends new buys. Thrive’s forecasting engine analyzes customer activity for each item. That means it picks up changes in customer activity much more quickly than your ERP system does. It might even change the model it uses as it sees the demand pattern changing, something that could take months for your sales reps and buyers to recognize. When it sees a change in customer demand, it can then alert your buyers on their dashboards for prompt response.
Top growing companies understand that strategies have to be aligned with tactics and then built into an automated and repeatable model. Hiring new buyers isn’t scalable and if you’re relying on individual buyer expertise it isn’t repeatable. Thrive can help you remove the barriers to growth caused by inefficient inventory practices.