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Internet Supply Chains Reshape the Wholesale Industry

The most important impact of the Internet on wholesalers is not the front-end, Web-based catalogs and order-entry systems that we have all put in place. Yes, those systems are important, and we would not remain in business very long these days without them. But the real opportunity for wholesalers lies in using the Internet to create customized supply chains that meet the specific needs of individual customers and manufacturers.

Using the Internet, wholesale distributors of any size have the ability to plug into the supply chains of their most important customers and manufacturers in such a way as to provide a tailored mix of value- added supply chain services. These services wrap around the products themselves and create a complete package that wholesalers can use to differentiate themselves from their competitors without having to compete on price alone.

There are two kinds of customers. One kind just wants the rock-bottom lowest price and nothing more. The other kind wants a good price and also some mix of additional services that will make the products he buys more useful to him. And in spite of what people may say, in the business-to-business wholesale world, there are actually far more customers in the second category than in the first.

Customers and manufacturers have a much broader set of needs that smart wholesalers can meet. The customer's needs can be expressed as, “Work with me to solve my business problems.” They include:

  • Give me good prices.
  • Do more of my logistics and inventory-management functions.
  • Provide me with credit and financing options.
  • Educate me in the benefits and use of new products.
  • Give me data on my purchasing patterns and quantities.
  • Use electronic links to lower my transaction costs.

The manufacturer's needs can be expressed as, “Help me to profitably grow my market share.” This means:

  • Support my product pricing.
  • Carry my inventory and be my warehouse.
  • Participate in my product promotional campaigns.
  • Take on more customer service and support functions.
  • Share sales and market data with me.
  • Use electronic links to lower transaction costs.

The Web-Enabled Supply Chain

The Internet is a global, low-cost communications medium that enables companies to quickly connect with each other and pass information directly between their different computer systems. All supply chains depend upon the timely and efficient transmission of only a limited set of documents. Two documents represent the heart of any business transaction — a purchase order and an invoice. Supporting those two are just a handful of other documents such as product descriptions, price lists, inventory status and advance ship notices.

Regardless of the exact format and layout of these documents as defined by any particular customer or manufacturer, the content is always the same. As the “middleman,” the wholesaler can use simple Internet supply chain systems to be the translator of these different documents between their customers and their manufacturers. In the process, the wholesaler becomes the creator and coordinator of supply chains that represent significant channels to market for their manufacturers. And the wholesaler collects data that become vital to customers and manufacturers for managing and monitoring their own operations.

The Electronically Connected Wholesaler Makes the Supply Chain Work

The emergence of the efficient and responsive, Web-enabled supply chain is one of the defining forces shaping our economy. The wholesale distributor is both the humble middleman and also the indispensable player that makes the supply chain work. In the Web-enabled supply chain, distributors become key players if they learn to use new technology and new techniques.

Electronically integrated distributors in a Web-enabled supply chain no longer sell just product. Based on their electronic connections and the data they collect as a result of this, they sell a unique, evolving offer. This offer changes over time and is composed of the product itself along with the services and data needed by both the customer and manufacturer to best use and produce this product. The distributor customizes the offer to meet the specific needs of individual customers and manufacturers. To the customer, the distributor can offer a package of:

  • Outsourced warehousing;
  • Vendor-managed inventory;
  • Just-in-time delivery;
  • Product training, service and repair; and
  • Purchase history reporting.

To the manufacturer, the distributor can offer a package of:

  • Coordinated product promotion;
  • Credit management and risk-sharing;
  • Outsourced customer support and product repair; and
  • Purchase history and customer feedback reporting.

Wholesalers that learn to do this well provide tangible value that differentiates them from their competitors. As profit margins on product alone get relentlessly squeezed, successful wholesalers will find new margin opportunities in delivering mixes of these customized offerings.

A Unique Supply Chain Opportunity

For the most part, wholesale distribution is still a fragmented industry with most distributors being family-owned businesses with $20 million to $200 million in annual sales. At the same time, there is significant consolidation happening in the customer base and in the ranks of manufacturers. These larger companies now need much more efficient and responsive supply chain partners in order to make their own business plans work.

Wholesale distributors who already belong to buying groups can work together to install simple suites of Internet-based supply chain systems enabling them to better serve and grow their business with common manufacturers and common national account customers. At the same time, each individual wholesaler can use this suite of systems to provide customized service to their own local customers.

Groups of wholesale distributors in certain vertical markets are already doing this. These supply chain systems have three components:

  • Internet Portal — a website to support supply chain activities. It provides online product catalog, customer order entry, product usage reporting and features for use by participating wholesalers to coordinate uniform and seamless service to national account customers.

  • Internet Data Transfer — a system integrating different internal ERP systems of wholesalers, customers and manufacturers by translating file formats. It enables electronic exchange of data such as purchase orders, invoices, product masters and advance ship notices.

  • Supply Chain Data Warehouse — a databases- and Web-based usage and activity reporting system for use by customers, manufacturers and wholesalers. These data become vital to all parties for planning, budgeting and managing supply chain activities.

Independent wholesalers that act on this opportunity will remain independent and will thrive. They will grow their capabilities to serve customers and manufacturers alike, and find new profit opportunities in doing so. Wholesalers that miss this opportunity will not be able to keep up with the changing demands of the markets they serve and will stagnate.

Michael Hugos is the former chief information officer of a national wholesale distribution cooperative named Network Services Co. (www.nsconline.com). He developed the suite of Internet-based supply chain systems that now drives their business growth. He is also the author of the best-selling book on supply chain management, Essentials of Supply Chain Management, and has 20+ years of experience in applying technology to meet the challenges of wholesale distribution. Contact him at [email protected].

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