What can every industry sector learn from the tech sector's distribution channels?
Technology Distribution Channels author Julian Dent explains what makes the technology sector’s distribution channels so well equipped to deliver leading levels of performance efficiently.
“It can’t be done!” This was the expression of disbelief from a senior distribution manager at Procter and Gamble, on hearing the typical cost structure of the leading technology broadline distributors (such as Ingram Micro or Tech Data). We are fairly used now to hearing such comments from the distribution or go-to-market managers of companies in sectors that range from fast moving consumer goods, through, white goods (fridges, washing machines), brown goods (hi fi systems) to capital goods (tractors, diggers) and even industrial products. And these comments are not related just to the cost structure, but other facets of the business model such as these distributors' ability to get products to almost anywhere within 24 hours (often quicker), or the velocity of their working capital turns – which can be above 25 times.
So what is it that makes the technology sector’s distribution sector so well equipped to deliver leading levels of performance so efficiently in economic terms? If you are not familiar with the technology sector then let's start with a little context to help you understand their journey, which could be summarised as “what doesn’t kill you, makes you stronger”. The volume technology sector is relatively young, perhaps 40 years old, and distributors didn’t really emerge as distinct players until the early 1980s. There have been many waves of consolidation, and large numbers of distributors have fallen by the wayside over the years, and not always the smaller, weaker ones. Today the top distributors, members of the Global Technology Distribution Council account for over $130 billion in annual worldwide sales of products, services and solutions.
There are a number of special features of the sector:
- The very short life-cycles of the products (sometimes just a few months), which put the onus on distribution channels to flush out older products and gear up to create and meet demand for the new ones extremely efficiently.
- The need to educate customers, as part of the demand generation process, as to how new technologies and products can solve their problems and unlock opportunities. And then help customers to install and operate the new technologies alongside existing ones that often have yet to generate returns on their investment.
- The complexity of not just selling, but configuring, installing, integrating, operating and upgrading technology products that enable the processes at the heart of most organisations, businesses and public services providers. Those overused words “solutions”, “transformation” and “competitive advantage” really do apply to many projects involving technology products.
- The ability to cope with a constant steeply declining average sales price from virtually the first day of a product’s life, while having almost instant global availability and minimal inventory.
- The ability to simultaneously reach customers as diverse as the largest enterprises or public sector organisations in the world and the youngest member of an individual family, sometimes with the same product (think mobile phones, notepads or desktop accessories). This means engaging with, and enabling, final tier players as diverse as system houses, corporate resellers, dealers, retailers, e-tailers and many other types of specialist player.
So what can these technology distributors teach other sectors?
- Cost control & operational focus – the typical broadline distributor operates on a cost structure around 4% of sales. That’s the whole cost structure including marketing, sales, order processing, product management, logistics, operations, payroll, depreciation, information systems, bad debts, management, the lot. These distributors can run operations handling tens of thousands of individual products on margins that are measured in basis points. Obviously it’s a volume game, but it’s impressive to see their investment in ERP systems that can both drill down into the detail and present the big picture, cut almost any way you wish to view it – by product line, category, vendor, age, customer type, etc. In fact, information technology accounts for around a third of operating costs, one way or another.
- Product management – one of the biggest challenges facing distributors in technology is to manage a product through its lifecycle in terms of pricing, inventory levels, execution of promotional programs, pre- and post-sale support and finally flushing the product through and out of the channels ready for the next big thing. Tough to do for a single product, but technology distributors have mastered how to do this across tens to hundreds of thousands of SKUs.
- Working capital control – in most cases each of the elements of the working capital cycle, i.e. investment in inventory, or receivables, or the value of payables is, on its own, worth more than the entire capital invested in the business. So, when your inventory starts to become obsolete virtually from the day you order it, it pays to be able to manage your inventory levels with tremendous efficiency. Similarly, the credit management function becomes a core competence when each additional day taken on cash collection can add millions of dollars to the working capital requirement.
- Channel recruitment – As technology evolves, vendors need new or additional channels to access their target customers. Distributors may already service these channel partners, providing instant market access, or can put together a program to actively recruit these partners. Doing this well requires the distributor to fully understand or even shape the vendor’s channel value proposition and be able to articulate it in terms that resonate with the target partners.
- Channel enablement – an ugly term that refers to the distributor’s role in motivating, training and equipping the teams in the resellers and other final tier players to drive sales. The distributor plays a key role for its vendors in a range of tactical activities such as go-to-market toolkits, sales enablement programmes, launch events, training design and delivery, incentive programmes.
- Strategic management – More than any other sector, technology distributors need to decide what’s going to be hot and what’s not, in terms of technologies, product categories, products and vendors. Distributors need to position themselves to take advantage of the rapid developments occurring all the time. It’s not just the big shifts such as mobile phones becoming “smart”, or everything migrating to the cloud, but whether the next release of Windows will trigger another round of PC upgrades in the corporate workd or not. Right now everyone’s talking about wearable technology, but the business issue that keeps the distributor CEO awake is not “if?” but “when?”, “how fast?” and “through which channels?”.
So next time you meet someone from the world of technology distribution, don’t ask them about what’s going on in the world of technology, ask them about how they achieve miracles everyday in the sphere of distribution - and take notes – It CAN be done!