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How SME Distribution is Evolving

An Interview with Ralph Hess, vice president of global sales for Navigator Business Solutions


Interview by Peter Kowalke

The distribution business is changing fast because of online marketplaces, trade wars, the global Covid-19 pandemic and new buyer behavior. As a result, distributors are undergoing digital transformation and reinventing themselves or ceding market share.

To get a sense for the change, and how small distributors are coping with it, we talked with Ralph Hess, vice president of global sales for Navigator Business Solutions and a 30-year ERP industry veteran.

Direct to Consumer (DTC) Shaking Up Operations

So what’s happening in the distribution space right now?

What we're seeing in the industry right now is that there's a lot of growth in companies that have been very entrepreneurial and filled the void where larger companies have exited.

These distribution businesses also have been influenced by becoming fulfillment companies for online marketplaces such as Amazon, eBay, et cetera. Online marketplaces is where the growth in the small to mid-size companies is for SEM distribution firms.

I saw this start to emerge probably five to seven years ago when companies that were selling to big box retailers with very low margins started to do dropshipping for Amazon and eBay. They were able to do onesie and twosie shipments doing fulfillment and making a higher margin. But what that did was increase geometrically the number of transactions they needed to manage.

Rather than getting one big order in from Walmart that they would spend three days fulfilling, they now were handling 50-100 orders a day.

That's dramatically different.

It's a very different business model. Distributors have had to be very nimble in terms of transitioning their business model to handle both. No distributor has stopped doing business with Walmart. But now they need to fit this online marketplace business inside their overall business.

Hence the need for business transformation and a more robust digital core over the last few years among distributors.

This doesn’t sound like traditional B2C anymore. It sounds like B2C with Amazon as the intermediary.

You’re right. That's why they've really changed the terminology to DTC, direct-to-customer. It's not the individual distributor’s relationship with the customer, but they are shipping directly to a customer.

We’ve talked about DTC through online marketplaces, but are distributors also doing much selling direct to consumers through their web site?

Yes, that’s definitely a trend. Everybody, literally everybody, has gone on to multi-channel sales. Distributors are really at a competitive disadvantage now if they don’t allow people to shop online and order from the online marketplaces, purchase in a store or buy direct from the distributor. Distributors need to be everywhere in this digital age to be successful, and that again puts pressure on their back-office system.

ERP Enabling Efficient DTC for Distributors

What challenges are distributors facing as they make this adjustment?

The problem that these distributors are trying to solve today is automating the transactions in a relationship with Amazon, eBay and the other online marketplaces such as Walmart.com and BestBuy.com.

Target.com orders come through BigCommerce, for example, which then requires EDI integration. Amazon.com has its own web services, eBay has its own web services. But in interacting with those web services, distribution businesses need to have a solution that manages the different ways that perhaps Amazon is paying you a commission versus the way that Target is paying you a commission. All the marketplaces have different commission and business relationship structures from a compensation and pricing perspective.

The online marketplaces also all have different ways of needing to update their websites with product availability. So what this comes down to is needing a piece of software which sits between the online marketplace and the distributor’s digital core. That’s why many distributors are contacting Navigator about our SAP Business One solution.

Because QuickBooks isn’t enough?

Exactly. QuickBooks is good for counting the beans and what accounts payable looks like. But with DTC, things start to transition. At some point, QuickBooks tips over. It just can't handle the volume of transactions.

QuickBooks also can't really handle good accrual accounting, so as the company grows and matures, it needs a more robust and mature ERP backend that allows it to start to replace spreadsheets of business activity with forecasting and direct ordering from suppliers. ERP can help them more efficiently manage their inventory availability.

When businesses look to replace QuickBooks, it usually isn’t because the solution is struggling with accounting. It is because that’s all it does. It doesn’t help distributors purchase better or smarter. It can’t keep track of serialized or lot-controlled inventory in an easy way. It can’t get really accurate landed costs on products being sold so businesses can properly evaluate margins and margin contributions.

Fast-Changing Buyer Needs Requiring Better Data

I’m hearing that the move to ERP is partially because of more robust analytics.

What distributors are doing is a lot in Excel and a lot in QuickBooks, but the information is siloed. So they don't have the right information to make rapid business decisions. And when somebody goes through an implementation of a Business One solution and they're transitioning off of QuickBooks and spreadsheets, that’s one of the core reasons for executives. They can make better, more rapid decisions. Things are changing so fast, and supply chains are so messed up, that’s really important for many distributors.

This is especially important for product demand.

A distributor might have just ordered 500,000 widgets, but starting two weeks ago demand started waning. So who’s buying it? Why are they buying? What price are they buying it at? Is it profitable, and should they go ahead and adjust the purchase order?

Or the opposite. For the past three weeks, a product has been really trending up at a pretty good ramp-up. At the current rate, the distributor will run out of inventory in two weeks, but it has a four-week logistics window for replenishment. If the business can see the trends on the increase two or three weeks in advance, then it can respond to prevent stock outs or having to avoid paying air freight to get it here from Asia or Europe on time.

This is where distributors are making it or breaking it, because consumers are so finicky and what is hot the first three months of the year might not be hot later in that same year. That and being able to really evaluate the cost of buying the same thing from multiple suppliers, and being able to understand who is giving the best deal beyond just price—factors such as quality and reliability.

Being able to perform vendor performance analysis in real-time can help distributors make better buying decisions. For distributors, this really is where business is made or broken. It is all about having the right product, at the right price, at the right place, at the right time.

And with the Amazon factor, this matters more than ever. When I don’t find what I want at Lowe’s as a buyer, I get on my phone and order it from Target.com right then. The whole consumer experience in the digital age has really put the pressure on overall supply chains and on distributors to be able to have more amounts of inventory of various things available, and much more quickly.

Now let’s talk about B2B distribution. What’s going on in that space right now?

The dynamics are not vastly different. People are being influenced by their personal shopping experience. So the expectations of a B2B relationship are now being influenced by everybody's own personal shopping experience. What do you mean you don't have a B2B site that I can just go and order on? How come you're out of stock on this? I need you holding that for me and allocating that amount of material for me so that when I need it, I can just get it immediately.

There's been a significant influence from the consumer experience, shall we say. People are bringing their consumer experience into their business relationships.

Trade Wars Requiring More Supplier Relationships

Are there any other major disruptions to the distribution business besides online marketplaces and increasing expectations from buyers?

 I would say supply chain disruption. This started about three years ago. US companies have had supply chain disruptions from external factors. What was supposed to be here in six weeks is now here sometimes in two and a half months.

That has meant that distributors have had to be very nimble. Strategically they might want it from a certain distributor in Shanghai, but they also have had to keep a relationship with a domestic or near-shore supplier and manage that secondary relationship by allocating to both suppliers.

The most successful distributors have had an intelligent digital core for managing and understanding those dynamics.

I’ve been hearing a lot more about Warehouse Management Solutions (WMS) lately. What are distributors asking for in terms of WMS?

Faster, more accurate, easier to use. Distributors need to have a more accurate real-time view of their inventory and where it is located. Location accuracy is nearly as important as quantity accuracy in the distribution business. That’s because knowing where something is in the system so you can go get it improves warehouse productivity by between 25 and 30 percent.

When should a business consider a WMS?

Any time they're starting to get to 30 or 40 sales orders or shipments a day. You're either going to throw more people at it, or you need to have an automated barcode solution.

Most distributors at some point in their evolution are going to want a warehouse management solution because they are struggling with productivity or they have too many picking errors.

Correct ERP Setup is Key

What should distributors look for when selecting an ERP solution for their digital core?

ERP has become a commodity. All major solutions solve the problem. The big difference is the setup. A poorly implemented NetSuite solution won’t be as good as a properly implemented SAP Business One solution no matter how many integrations NetSuite comes with out of the box.

So you're basically saying that a good Japanese knife might be nice, but it doesn’t matter unless you know how to use it?

Exactly. Distributors choose Navigator and SAP Business One because we have the experience in their specific industry. We know the tips and techniques for setting it up properly for distributors, and we have even developed a prepackaged industry solution made specifically for distributors.

That’s why distributors go with us even though Netsuite tries to woo customers with a big first-year discount (which doesn’t last after the first year, I might add).

Knowing how to set up a digital core for distributors is what makes the largest difference, not the software itself.

Thanks for letting me pick your brains, Ralph.

My pleasure. Any time!

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