The economic challenges facing the distribution industry mirror the troubles plaguing other industries.
“If you turn on the TV or open a newspaper, it seems like there is no business to be had,” says Steven H. Gross, CPA, a principal with Skoda Minotti. “So the challenge is how do you actually go out and get business in an economy where it seems to be all doom and gloom.”
The solution seems simple, but it’s not easy to achieve. Companies must figure out how to increase revenue and cut costs no small feat.
Smart Business spoke with Gross about how the distribution industry is handling the recession.
What types of challenges does the distribution industry face today?
When people pick up the newspaper, they read that today is worse than yesterday. It causes fear in people. They don’t want to spend on anything that isn’t absolutely needed. In some other industries, like the beauty industry, the effect is that someone gets their hair cut every 12 weeks instead of every six weeks. They may not be losing customers, but their customers are spending less.
This hurts distribution businesses because they are closely tied to the retail industry. Retail sales dropped 7.6 percent compared to last year. As a result, several sectors had declines in sales; however, health and personal care products have increased over last year and medical supplies are expected to increase due to H1N1, so there is opportunity out there.
As sales lag, though, distributors that finance their inventories are more sensitive to interest rates since they are holding inventory longer than usual. This, too, affects various sectors differently. Sectors where inventory turns over quickly, like groceries and clothing, are less affected.
What must those companies do to adapt and succeed today?
One thing distributors can do is focus on managing their inventories more efficiently. While it is important that they don’t run out of product, they may be able to lower the level of inventory they carry compared to sales by taking a closer look at the delivery and fulfillment processes. They can also look into offering just-in-time delivery services, especially if they have industrial customers, or order fulfillment services, which are useful to retailers that don’t want to maintain an inventory.
Another way to keep inventory under control is through Internet sales. If your inventory levels are high, that gives you an opportunity to sell through less traditional means.
What are some ways these companies can find more business?
Companies have to find a way to create the demand. That’s why some products keep coming up with new improvements, like the latest iPhone or video game. Come up with a better version of your product and everyone will want that newer one. Companies have to figure out a way to create a demand for current products or new products.
Or, try to think of another use for your products or services. Many distributors are adding processing services. For example, steel distributors are processing standard steel into finished goods and electrical distributors may assemble kits of components that customers can use to make products. Get creative; there may be other markets for your products if they are packaged or processed differently.
Companies also need to get more creative when it comes to marketing and advertising. Even though budgets are getting smaller, the need is still there. Keep in contact with current customers on a regular basis, while still looking for new ones, to see if you can help with any of their needs that arise. Although both aspects are important, retaining current customers costs less than chasing a prospective customer.
Also, use the Internet. Facebook is not just for high school and college students to keep in touch; it can be very powerful to help build your network. LinkedIn is another good program for building a network of potential clients and referral sources.
What can other industries learn from how the distribution industry has faced these challenges?
First, every industry should have client/customer service as its No. 1 priority. Make that part of your monthly meetings. Ask questions about how your customer service has been. How can you improve your customer service? Although some people just shop based on price, plenty of people like customer service and they are willing to pay a little bit more if they feel like you are going above and beyond for them.
Also, all companies should look at every aspect of their business as a way to improve the efficiency of their operations. Is there excess? Are there wasted resources? Do you have too much of a lot of different things?
Also, businesses are going to be less likely to give credit for longer. When business is flowing, they may get a little lax with their credit policies like what happened in the mortgage industry. You’ll find that once you get to a certain point, they’ll cut you off. Whereas in the past, they would let you go.
Steven H. Gross, CPA, is a principal with Skoda Minotti. Reach him at (440) 449-6800 or firstname.lastname@example.org.