Post by: Jason Bader - Principal, The Distribution Team
If it’s not one thing, it’s another. Last year, we all dealt with the fear and confusion of a global pandemic. Sure, that one is still ongoing; but people seem to have found ways to accept the circumstances and persevere. This year, we get to deal with a global supply chain meltdown that may, or may not, have been caused by the forementioned pandemic. A couple of months ago, I ran across a video that discussed the supply chain mess. It suggested that the pandemic wasn’t really the cause of the crisis. Rather, it was just the straw that broke the camel’s back on a very fragile system. The JIT (just in time) inventory management philosophy popularized in the 1970s Japanese automobile market reduced waste in the process but relied heavily on a very timely and coordinated flow of materials. In our modern interpretation, the coordination was even more critical to the success of manufacturing. With the shutdowns of early 2020, the whole system was thrown on its ear. This global system which relies on production, shipping, trucking, and labor could not find its groove. That is what happened and is still happening.
Rather than dwell on the answers, of which I don’t have many, I would like to focus on the silver lining to this cloud of scarcity and disruption in our ability to procure product. As I have mentioned many times in my writing, I facilitate groups of distributors with the goal of solving common challenges in specific job functions. We tend to focus on micro solutions rather that get spun up on the macro challenges. We leave it to those who have larger platforms and thrive in ambiguity. Recently, some of the groups shifted focus away from the challenges and reflected on the positive lessons taken from the supply chain crisis. These are their thoughts.
The first area we discussed was around the relationships in the supplier community. Here, there were a couple of schools of thought. Some suggested that the relationships with their key suppliers had become closer during this time. There has been greater collaboration and visibility to the supply process. Distributors have opened their kimonos a bit and shared usage information with the hopes of gaining preferential treatment with allocated product. There has been a new interest in alternative products that may be a better fit than those in the standard buying habits. People are talking more than ever before.
On the flip side, distributors are reaching outside of their traditional suppliers and developing new relationships with alternative suppliers. Those in procurement have become very adept and hunting down and finding alternate pockets of supply. This has led to greater creativity and critical thinking in this department.
In the wake of scarcity, distributors are learning how to segment their customers to determine who their best relationships really are. The days of saying yes to all and trying to satisfy everyone are long gone. Although this is not a new concept, the segmenting of customers by bottom line contribution is gaining traction. Rewarding the loyalty and profitability of the customer base is more attractive. Similar to the collaboration with suppliers, sales teams are learning how to communicate more effectively with their customers. Planning ahead, and the ability to be transparent with supply challenges, has brought salespeople closer to their customers than ever before.
Another byproduct of scarcity is creativity. In the current climate, salespeople have the opportunity to expose customers to alternative higher priced products. Customers who need product are more willing to listen to available product options. Now is the best time to consider upselling and establishing familiarity with premium products.
There are a couple of areas where profit margins can be enhanced in this disarray. First, supplier price increases are coming fast and furious. No one has escaped this new challenge. Rather than dwell on the negative, price increases are the best time to find modest margin gains in your pricing strategy. Sure, you can’t bump the highly sensitive items in your product mix, but at least 85% of your products can take a margin bump at the time of supplier increase. As you move down the sensitivity scale (popularity), add anywhere from .5% to 2% to the supplier increase.
Inventory carrying costs should reduce a bit due to a lack of availability, but we should also see a better turn ratio on the majority of products. Now would be a time to review your slow products and see if they would be attractive alternatives to traditional items. Please don’t misunderstand me here. I am not asking you to reduce your inventory levels on your higher hit items. The love of turns and lean inventory practices are what got us here in the first place.
The pandemic and supply chain fallout have shone a light on company culture in ways we have never seen before. For those with a clearly defined positive culture, this crisis has tested and solidified the positive attributes. For those who have been negligent with regard to their human resources, they are struggling to find solid ground. Leadership visibility and direction has been put to the test. Those who coach and encourage their team will be the big winners.
One of the more positive cultural changes is flexibility. Teams have had to scramble to stay open, find ways to work remotely and collaborate from a distance. The work environment has been rapidly evolving. This is a good thing, and we should not pine away for getting back to normal. Our teams have learned to overcome obstacles, in short order, and found ways to thrive in chaos. They are no longer excuse makers; rather, they have evolved into problem solvers. This is something that leadership needs to encourage and not chalk it up to a passing fad or circumstance.
Our companies have learned how to manage resources better than ever. Inventory management has gone through a transformation. Facilities and delivery methods have adapted to fit the shifting environment. Technology solutions have come off the back burner and have gained a renewed interest in the mission. When our people became sick, we stepped up to fill the gaps. We pulled together like never before. Paul Romer, an economist out of Stanford University, once said “A crisis is a terrible thing to waste.” Our job is very simple. Take the lessons of the past 18 months and don’t let them get lost to the archives of your company. Learn from this time. Capitalize on what you are doing right and how your team is overcoming adversity. Make that your silver lining going forward. As always, I am here to help.
About the Author:
Jason Bader is the principal of The Distribution Team. He is a holistic distribution advisor who is passionate about helping business owners solve challenges, generate wealth and achieve personal goals. He can be found speaking at several industry events throughout the year, providing executive coaching services to private clients and letting his thoughts be known in an industry publication or two. He recently launched his first podcast, Distribution Talk. Episodes can be found at www. distributiontalk.com. He can be reached at (503) 282-2333 or via email at firstname.lastname@example.org. You can find additional resources on his website: www.thedistributionteam.com