10 Distributor Questions to Jump Start Your New Year
For most of
my career, I have taken the week between Christmas and the New Year to reflect
on the previous year and plan for the next.
Let me share a few thoughts…
Ten
questions that demand answers
Our mission
as distributors, and those who work in distribution, must include this Top 10:
1. How can we make life better for our
customers in the next year?
2. What can we do today that makes it
harder for our competitors to attract our customers?
3. What might we do in the future to
attract new customers?
4. Precisely why do our best customers buy
from us?
5. Which customers drain our profitability
and how might we move them into a positive revenue position?
6. Are there new products we should be
selling that we are not currently selling?
7. Is the productivity of our team better
or worse than our competitors?
8. How do we rank our use of technology in our
business? Is there room for improvement?
9. Are we using all the data available in
making future decisions?
10. Which processes within our business
might be improved?
The
big problem of 2021 was Supply Chain
We reported
on the supply chain issues with this special report to AHTD members.
|
Post
Pandemic trends for AHTD Members As we stumble our way out of the worst of the
Pandemic, Automation distributors face several new challenges. For example, by early to mid-summer, most
realized the delivery issues associated with getting products to their customers
were not destined to be short-lived.
This could not have come at a worse time. Further, both distributors and their
supply-partners had felt the impact of other pressure points on the business. To better understand these phenomena, River
Heights Consulting launched a major research project to apply some metrics to
the changes.
The information below is an executive summary of
what we discovered.
Major shortage of products continues Upon launching into this situation, we wrongly
assumed most delivery issues would be tied to a global shortage of electronic
components as the automation industry competed with consumer-based products
for electronic chips. As we pushed
into adjoining industries (Electrical, Fluid Power, and Power Transmission),
it became clear the shortages were broad-based and included outages in the
plastics, specialty gearing, steel components, and a wide array of other
products. Quite frankly, we discovered
virtually no area was unscathed by the supply chain issues.
We expected to hear product issues in countries hardest
hit by the Pandemic, but once again, we were incorrect. Proving the supply chain for nearly
everything was truly global, even North American manufacturers experienced
major issues with supplying products.
Metrics on the supply-chain issues We asked distributors to rate their experience with
supply-chain and delivery issues on a scale of one to five with one being
terrible and five being normal (2019 levels).
The highest rating reported was two and a half with an
average rating falling somewhere between one and two.
For distributors, this means a great deal of time
is currently spent expediting and scouring the marketplace to locate critical
parts for customers. Here, AHTD
distributors have an advantage over their less technically oriented
counterparts in other industries. Many
distributors told us they were investing time to work with customers to
engineer alternative “workarounds” for their customers. The majority were focusing these efforts on
existing customers rather than using the approach to attract new clients.
Most Automation Distributors were not
switching suppliers Unlike reports from the electrical industry where a
meaningful percentage of distributors have switched or are contemplating
switching suppliers, automation distributors appear to be holding the course
with existing suppliers.
Most of the electrical distributors we talked to
were contemplating switching commodity-type products and expressed feeling
comfortable with the one-to-one equivalency of the products. For the most part, this process does not
cross well into our industry.
Distributor backlogs continue to grow Distributors report backlogs have reached a record
high. Most report a good “normal”
backlog of 60 days. At this point,
the average backlog is approaching double this and, in a few instances,
distributors see backlogs at the 150-day mark.
Distributors have increased their
inventories to serve customers Despite some very long and unpredictable lead times
and major league backlogs, distributors report their inventory levels as
being well ahead of pre-pandemic levels.
Based on distributor comments, we estimate the average distributor has
escalated their stock levels by 40 percent with ten percent of the
distributors telling us they have doubled their inventories. Two distributors reported inventory levels
at triple their normal levels.
Some of this is tied to holding materials where the
customer has asked the distributor to ship the order once complete. This makes sense. However, the distributors with the largest
increase of stock on hand tell us they are holding inventory to support
specific customer needs.
Potential issues tied to the supply
chain mess Aside from the issues tied to customer service and
customer satisfaction, we see two major problems looming on the horizon: ·
Customer order cancelations – Reports
from a small sample of OEMs and panel builders in our industry indicate our
customers are building their own inventory whenever possible. Most are also placing anticipatory orders
to lock in future delivery dates. When
asked what happens if the product becomes available and they don’t need it,
most believe they will be able to leverage their position with their current
distributor and not take delivery. ·
Bloated distributor inventories cause
supply chain overshoot – When manufacturer delivery dates improve,
distributors will begin burning off excess inventory with the idea of
returning to a “normal” level. This
could create issues for our supply partners.
Just about the time they adjust their manufacturing for the new higher
demand, business will slow down from the distributors. This will create an overshoot, which could
impact factory efficiencies. Since
most distributors do a poor job of forecasting and few report future
opportunities to their suppliers, this overshoot has the potential to create
a new set of margin-reducing price wars.
Price increases are flowing like water
out of a hose Many of the price increases being passed along can
be directly tied to supply chain issues.
One manufacturer with global manufacturing facilities reported the
cost of obtaining materials from Asia has increased by over 400 percent. Similar increases were also evident for
products shipping from Europe.
Once these products landed in North America, the
manufactures experienced even more escalating costs tied to shipping to and
from their facilities. For those
suppliers who provide prepaid freight, the costs are even higher.
On top of these increases come some of the
naturally escalating prices of raw materials.
One manufacturer indicated that some of the “chips” have increased
by as much as 20 times the pre-Covid cost. Similarly, the cost of plastics and various
other metals have also seen much upward volatility.
What do the price increases look like? We asked distributors how many price increases they
have seen from their supply partners in the last 12 months. The majority of suppliers have switched
from a single (and usually October-November timed) price increase to two per
year with nearly 35 percent of the suppliers issuing more than two.
The average 12-month rolling average for these
price increases falls between 9.5 and 11 percent.
|
2022
comes with the issue of rising labor costs
Again, pulling
from our AHTD Report, labor rates are escalating for most distributors.
|
Labor
market cost increases We asked distributors if they had hired any new
people “since the end of COVID” which we defined as the day vaccinations were
offered in January 2021. All but a
couple of distributors have added people.
We asked for a breakdown of people, keying in on
entry-level people to offset the difference between hiring a new worker and
attracting one of your competitor’s key workers, which could influence the
compensation level.
We asked the distributor to contrast the starting
compensation of the new hire against a similar person hired in 2019. Removing the anomalies tied to
distributors operating in very high cost of living cities – New York, Boston,
San Francisco, and Los Angeles, here’s what we found:
Extending this further, all the distributors we
spoke with indicate they have already or soon will be boosting the comp
levels to others already on staff to match this new and higher compensation
rate.
Based on these reports, we estimate the typical
AHTD Distributor will see an escalation of people costs in the range of 11-12
percent. This presents a new
squeeze for distributors.
Comparisons against AHTD PAR Report Using the numbers from the 2021 AHTD Financial
Benchmarking Dashboard, which reflects costs during calendar 2020, we see
some critical, and perhaps alarming information.
For Automation Distributors, people really are
their largest investment. The typical
AHTD distributor spends 67.3 percent of their gross margin
dollars on people (salaries, bonuses, benefits, and payroll taxes). This number tracks a full 10 points higher
than NAED distributors and reflects the nature of the kind of businesses we
operate. Knowledge-based solution
selling in a technical environment is expensive contrasted to a more
commodity and part-oriented business.
Even if distributors ensure that all price
increases are passed along to customers, there will be an erosion of
profitability. Our reports from the
field point to many situations where, for one reason or another, the
distributor has not been able to do as such. Since increases in the cost of
labor stand to exceed the immediate price increases, even in the case of full
pass-through, there could still be profitability issues.
Now is the time for distributors to look for
productivity gains. |
Wishing
each of you a Happy and Prosperous 2022
See you next
year…
Frank Hurtte is the Founding Partner of River Heights Consulting. When he's not stalking Reddit at 3am, Frank provides practical expert advice to knowledge-based distributors and their manufacturer partners.
His easy-going demeanor and “Iowa-speak” make him a relatable favorite among speakers.
Email or call today to see how River Heights Consulting can take your distributor business to the next level.
Comments