Many distributors are striving to transform their business to fend off the threat of disruption by virtual marketplaces and other new players. In doing so, distributor leaders are looking to the future as they leverage digital tools to offer new customer experiences and dramatically improve their operating efficiencies, sales productivity and marketing effectiveness. These efforts are critically important for the survival of distribution as a valuable and valued source, but thoughtful leaders need to ask a tough question: are the improvements made by individual distributors enough? If not, what can be done?
The possibility that individual distributor modernization may not be enough to fend off disruption is based on the fact that as marketplaces, disruptors seek to connect customers and sellers (including distributors). To achieve this objective, virtual markets must move commerce from legacy value chains to their platform. In this sense, disruptors are an existential threat not to distributors, but rather to the long-standing partnership with suppliers. And, if today’s value chains are to remain viable as an alternative to online marketplaces, then distributors and manufacturers need to work together in new ways to transform them.
Truth be told, manufacturers define the workings of legacy value chains. They do so through policies that authorize distributors to sell their products — through pricing that reflects the differences between lines of trade and by offering incentives that encourage distributors to represent, support and sell their products. Large distributors, buying groups and distributor consortia can extract concessions from suppliers, but traditionally, they do not lead.
There are signs that distributors are stepping up, as evidenced by work to communicate preferences around supplier channel compensation programs, programs to enable automated digital content collection from suppliers for distributors and more. But progress is too slow, especially when measured against the pace of transformation attempted by disruptors. Moreover, current leadership attempts from within distribution do not sufficiently address the fundamental weaknesses of legacy value chains.
Relative to disruptive marketplaces, incumbent value chains are small in scale, slow in throughput and stuck in the status quo. In contrast, disruptors build vast reservoirs of data, apply state-of-the-art artificial intelligence, build large and automated warehouses and leverage automatic programming capabilities to constantly adjust customer experiences in real time. In contrast, the operating rules of incumbent value chains are designed to lock in place the roles of distributors and manufacturers. They are much more about limiting conflict between partners than about encouraging collaboration. The operating rules that guide today’s value chains are working against their evolution. They are creating the possibility of extinction.
Another critical weakness of today’s value chains as an alternative to disruptive marketplaces is the fact that they comprise many players. Disruptive virtual markets are one business made up of multiple innovation teams working toward a common goal. Value chains are made up of many companies with in-house innovation teams working toward unshared goals. For disruptors, innovation happens through a robust competition of ideas and survival of the fittest. In incumbent value chains, no such mechanism exists. It’s not even close. This is a fatal flaw that must be addressed.
To help kick-start a conversation about collaborative innovation between distributors and manufacturers regarding the evolution and survival of the incumbent value chain, I suggest a robust debate about how to achieve Zero-step Distribution through virtual means. I am not proposing the elimination of distinct roles for manufacturers and distributors. Instead, Zero-step Distribution is about intensely close coordination enabled by digital tools and shared platforms.
The historical precedent for this concept is based on the steady migration away from multistep distribution structures over the last several decades. Some 20 years ago, it was not uncommon to find three- and four-step distribution in U.S. markets. Distributor consolidation and manufacturer channel policies killed this structure, but progress toward greater operational efficiencies and customer experience effectiveness has stalled.
Let the debate begin! The quest for virtual Zero-step Distribution is about eliminating redundancies and creating unprecedented coordination of activities and inventories. To achieve these goals, a common understanding around three pillars of change needs to be advanced:
- Digital technology is a critical enabler, but implementation must shift from implementation of digital tools to development of value chain solutions. This requires Internet of Things solutions designed for value chain operations and a platform and app developer community structure to match the internal competition of ideas at disruptors. Technology solution providers must embrace this cause to help advance value chain innovation even as they seek competitive advantage and client loyalty.
- Artificial intelligence and machine learning are massively essential, but applications must build on total value chain data. Distributors and manufacturers must pool inventory, logistics and customer data at a neutral third-party site. Individual companies can then leverage proprietary capabilities to create exclusive customer experiences and competitive operations. Without a total value-chain database, artificial intelligence and machine learning innovations will never compete with the scaled competitiveness of disruption solutions.
- The traditional supplier/distributor partnership must evolve. Change must start at both ends. Manufacturers must reconsider their territory-based distribution authorization policies and reinvent compensation policies that make it more profitable for distributors to chase rebates than to innovate customer experiences. Distributors must create new business models that focus on front-end capabilities over warehouse and inventory management, and find an alternative to margin-based buy and resell business models.
The Zero-step Distribution concept is one of 25 innovation ideas that we have collected through our ongoing research for the next Facing the Forces of Change® wholesaler-distributor trends study. All 25 innovation ideas can be found in the recently released new challenge paper, Creating Innovations and Shaping the Future of Business: A Look at Commerce, Technology and Human Forces in Distribution, which I hope you will read. Every idea is identified through brainstorming with distributor leaders, and by bringing new ideas to bear from outside the distribution industry. All of our innovation ideas are a work in progress. We need your help. If you have comments on this post, or if you have relevant examples or expertise to share, please reach out to me at email@example.com.
And, if you’d like to receive updates related to the next Facing the Forces of Change® study, complete and submit this form and we’ll keep you in the loop.