Economic cycles create opportunities and disadvantages for distributors. Investopedia explains the classical 4 stages of the economic cycle, this is also referred to as the business cycle. In this article we discuss five key initiatives: Inventory management for distribution companies, focus on cash management, customer service, eCommerce and technology, that together can help you work through challenging economic conditions. Understanding the economic cycle and adjusting your business strategies for the current environment can drive market share growth. There is opportunity available in each phase of the cycle if you know how to go after it.
Many distributors think that market share growth only comes at the top of the cycle - this is not correct. Market shares do not tend to shift widely between competitors during either boom or bust times which affect all players similarly, although the best-positioned players know to take advantage of these times too. Instead, the biggest shifts in market share typically occur in the seams of the business cycles. Now, as we turn our sights to recovery and then to expansion, it is time to evaluate how tweaks in your business structure, and handling of receivables, inventory DOH, and working capital can help improve your market share.
As we unpack the factors that contribute to a distributor’s success – or demise – though changing economic cycles, let us first identify the four basic phases of economic growth and contraction:
Phase 1: Peak – Highest Sales: while many distributors have their highest sales growth rates during the peak of economic cycles, so does everyone else. Margins remain competitive, and not a lot of share changes hands.
Phase 2: (Seam) Contraction
Phase 3: Recession or Depression – Lowest Sales – Little working capital to invest, demand is weak
Phase 4: (Seam) Recovery and Expansion
Today as we see light at the end of the tunnel after the Coronavirus pandemic, we are probably coming to the end of Phase 3 and looking forward to Phase 4. There are several important adjustments distributors can and should make.
Inventory Management for Distribution Companies
The biggest costs for distribution companies are tied up in inventory so this should be the area of primary focus. Inventory management for distribution companies is all about understanding what inventory is moving and what is not. For inventory that is moving, focus on increasing turns, consider cutting back on safety stock levels and reduce review periods. To improve inventory management and turns, push, push, push the faster moving items. More frequent turns help create cash on the balance sheet and allow for investment in expansion when the cycle turns. For slow moving inventory, find ways to incentivize salespersons to move these products and cut back on purchases even if this means missing out on some sales. Typically, in Phase 3 stock levels tend to get more bloated and those with the best inventory management for distribution companies will get ahead and increase market share.
Pay Attention to Receivables and Manage Cash
In tough times, in addition to inventory management distribution companies should also pay close attention to their receivables and their credit policies. Distribution companies that have good real-time accounting reports and have put in place strict receivables policies will separate from the pack and grow their market shares. The other side of paying careful attention to your receivables is controlling your cash outlays. Stretch your payables and put off paying your vendors for as long as you can. Negotiate better terms with your vendors who are all trying to keep their customers. By attacking both sides of the cash flow equation and focusing on inventory management, distribution companies can best position themselves for the coming upturn in the business cycle.
Do not Underestimate the Power of Customer Service
While focusing on inventory management distribution companies can run the risk of negative customer feedback as inventory is made to work harder and back-office efforts are made as lean as possible. That's where customer service becomes more important than ever. Those distribution companies with great customer service will capture market share from competitors. Another reason that good customer service is so incredibly important right now has to do with the competition from Amazon and eCommerce, in general. In this time of Coronavirus lockdowns, eCommerce has been the go-to route for most locked-down customers. Distributors need to compete not only through offering their own eCommerce channel, but also by delivering highly targeted, on-point customer service to satisfy and protect their long-established customer relationships.
Understand that eCommerce is here to Stay
One thing we have learnt from shocks to the system like the Coronavirus pandemic, is that they often bring about long-term changes to the old ways of doing business. Distributors have to recognize that after a year or more of lockdowns, eCommerce is here to stay and they need to adapt. Successful distributors will offer their existing customers self-service portals that allow their customers to conduct business with them online. Perhaps even more importantly than catering to existing customers is the need to serve new customers through one or more online stores. Customers are now used to shopping online even for expensive, specialized items that they used to get from distributors. Make sure they are shopping at one of your stores that are linked to your ERP solution.
Embracing eCommerce has several added benefits for distributors. A well delivered set of eCommerce solutions facilitates better inventory management for distribution companies as there are more diverse channels to move goods. In addition, eCommerce allows distributors to operate with fewer employees reducing costs and allows employees to work from home which means distributors can better implement social distancing and reduce liability.
Improve your Technology
The best inventory management for distribution companies is achieved only when you have the business intelligence tools and dashboards that show where you stand at all times. Real-time business intelligence and reporting gives you tight control over your business to manage your receivables and customer service closely. If you are not yet selling online, get a solution that gives you multiple eCommerce options. Strongly consider Cloud-based technology that allows everyone to operate remotely and frees you up from having IT departments on your payroll.
Accolent ERP Cloud distribution software can help you with all of this. Accolent ERP runs end-to-end in the AWS public Cloud, is linked to many established eCommerce platforms, gives you clear visibility into all aspects of your business and provides you with the data necessary to make the right decisions. If you are a small and mid-sized distributor you need inventory management for distribution companies like yours. So get on the phone and learn how Accolent ERP can help you achieve your business objectives. Chances are a software upgrade will pay for itself over time and open up another window of opportunity for you.