Adding Value as a Wholesale Distributor

Being a successful wholesale distributor of medical devices and equipment is becoming increasingly difficult as customers’ expectations are changing and the value proposition distributors offer is being challenged. Every customer of medical device and equipment distributors has perceived value it receives from its distributors as suppliers, and every distributor has a value proposition it offers to its customers. The question is: Are the value as perceived by the customer and the distributor’s value proposition aligned? More importantly, do you know if they are aligned? Too many good customers are lost because the value as perceived by the customer and the value proposition provided by the distributor are not in sync and the distributor is the last to find out. At that point, it’s often too late to make any substantive value improvements.

The Changing Customer

Customers demand more and have higher expectations of their suppliers, especially distributors. They want what they want when they want it and accept no excuses, no substitutes, no back orders and no split orders. Being out of stock in today’s just-in-time replenishment environment isn’t acceptable and may result in the customer penalizing the distributor for the incomplete order and failure to adhere to agreed-upon order specifications.

There is enormous pressure to meet customers’ order specifications and fill rates. Today, customer loyalty is based on supplier performance. You perform to customers’ order specifications, and you get more orders from them. The distributor’s customers are “time poor” and value conscious with very low tolerance for mediocre performance and price increases. Couple mediocre performance with increased prices, and the risk of losing customers increases.

Customers are changing the rules of play by shortening the lead times from when they place an order to when the order must be delivered and delivered at the receiving dock’s appointment time. They are requesting and receiving added services from suppliers at no additional costs, such as split pallet loads, less-than-truckload delivery, free freight, special packs, single-unit quantity orders, kit assemblies and vendor-managed inventory, to mention a few. Their order specifications and performance requirements are increasing, including order line-item-fill-rate performance, order-complete performance, on-time-delivery performance, order-accuracy performance and invoice-accuracy performance. Performing below the specifications and requirements may result in penalties that would be charge-backs taken off the invoice resulting in a short pay for the distributor, which generally results in added administrative costs incurred by the distributor to reconcile the invoice and chase down the reason for the short pay with the customer.

Customers are placing smaller, more frequent orders and are demanding higher order fill rates. They will not inventory more than is needed just because the distributor can’t fill the customer’s orders complete. So they may require vender-managed inventory where the distributor puts the inventory at the customer’s location and the customer pays the distributor for the inventory as it is consumed, thereby reducing the customer’s inventory investment requirements.

The value a distributor provides is defined by the customer’s perception of value:

• Quality of the products and service, meeting the customer’s expectations and order specifications, accurate error-free processes and information
• Customer service, where orders are filled complete, delivered on time, errors are proactively corrected, contact with the customer is proactive, follow-up and timely response to inquiries are standard practice, the order fulfillment processes from order placement through invoicing, warranty, returns and credits are simple and easily accomplished by the customer
• Cost of the product, cost to order, cost to track and follow-up on orders, cost to reconcile the invoice with the order and delivery receipt, cost of back-order and other costs the customer will incur doing business with the distributor
• Lead time to place and receive an order, follow up on an order or an inquiry, process credits, returns and warranty claims, get authorizations, approvals and decisions.

Successful Distributor Business Model

As customers perceive less distinction between distributors’ products, price, service and quality, and more customers are able to go directly to the manufacturer for their requirements, the value proposition of the wholesale distributor may need to be reassessed. Successful distributors continue to redefine their value propositions to customers with the suppliers of products they distribute by managing sections of the customer’s supply chain for the products they purchase from the distributor. They are relentless in process improvement to reduce their internal cost structure. They recognize market channels shift and develop channel formats to meet the changes by adding new products and services and expanding into new markets or by deleting products and services and exiting underperforming markets.

In addition, successful distributors focus on improving asset performance, specifically inventory performance, order fill rate and improving their working capital requirements, recognizing that they don’t have to inventory every product to have it available for the customer when the customer wants it. They just need to be able to have the product delivered to the customer in the lead time the customer allows. They are implementing technology to improve processes, manage and track customer requirements, improve customer service, forecast and manage inventory requirements and integrate with customer operations.

The successful distributor model consists of the following principles of operation:

• Adding value. The distributor is always adding value and working with their customers and their manufacturer to define their needs and develop value-added services and products to meet those needs. The intent is to be an added-value extension of the customer’s and manufacturer’s supply chain operations.
• Simplicity of processes and integration with customers. Every business process that touches the customer is simplified, streamlined and designed to facilitate and accommodate the customer’s needs of doing business with the distributor.
• Quality and reliability. Quality is built into the processes to mitigate errors and mistakes. When poor quality and errors occur, proactive quick response occurs to remedy the error.
• Ease of doing business. Every point of contact with the customer and the processes that touch the customer are designed to facilitate freedom from any difficulty as perceived by the customer.
• Least total cost. A continuous relentless effort to improve the cost structure of the operations of the business and manage the costs of doing business.
• Measurement of performance. Performance measurements designed and put in place to measure customer service, line-item-fill rates, order complete performance, order lead time to fill, invoice deductions, as well as other relevant performance with the customer.
• Customer profitability. Focus on the profitability generated by the customer rather than the product profitability of each product sold to a customer individually.
• Technology enablement. The use of technology to integrate with the customer, manage customer orders, manage inventory, enable streamlined business processes across the enterprise and provide visibility of performance and management reporting.

More manufacturers are evaluating the value proposition distributors provide. Many have purchased their primary distributors in order to own their products’ supply chain to the customer, assure representation of their products in more opportunities and gain ownership of the customer relationship. Moreover, customers continue to assess the value-add they receive from distributors.

The successful distributor will stay focused on the value they provide for both the customer and the manufacturer for which they distribute products, and can modify their business model to meet the challenges and changing dynamics of the customer and the manufacturer to continue to add value for both.
 

Bruce E. Jacobs is a consulting partner with BrokenGate Consulting and works with client executives to improve operating performance, design and implement improved business processes, value chain and supply chain performance improvement, performance measurements and optimize technology applications to enable improvements. He can be reached at (314)-704-0693 and at www.brokengateconsulting.com.