HVACR wholesalers and distributors will remain relevant only if they improve productivity without compromising service levels. Warehouse operations are a crucial area for productivity improvement since more than 20 percent of all wholesale distribution employees in the United States work in the warehouse.
Traditional distributor economics allow a weaker component of the business to subsidize a stronger one — an inefficient warehouse with an above- average sales force — as long as average profitability remains positive. This cross-subsidy is getting harder in the face of three important logistics trends.
One, large customers such as home builders are increasingly demanding direct business relationships, better national account pricing and new options for purchasing products. These customers are increasingly unwilling to pay for the selling infrastructure of a wholesale distribution channel, especially when the traditional channel adds little value to sales or marketing. Instead, the manufacturer sells directly to the national account but pays a fee to their distributors for local fulfillment service. Distributors must justify their logistical efficiencies to participate in these sales.
Two, logistics companies are pressuring the cost structure of traditional wholesale distribution channels by offering à la carte supply chain services without the constraints of a buy-and-resell business model. For example, 80 percent of the 200 largest logistics companies already offer pick-pack-ship warehousing services — activities usually performed by a wholesaler or distributor — as a stand-alone service. According to our research for Facing the Forces of Change, a majority of manufacturing executives already see logistics companies as a viable alternative to wholesaler-distributors.
Three, alternative channels, such as home centers and Web-based retailers, now provide additional options for material purchasing along with service and cost levels that differ from traditional distributors. Customers turn to these channels for different buying situations, chipping away at wholesaler-distributors' longstanding share of channel sales.
To meet these challenges, distributors will need to lower costs, increase productivity and improve the performance of their warehouse operations. Advances in wireless technologies are now at the forefront of internal operational improvements in wholesale distribution.
Wireless networks have rapidly moved into the mainstream with applications. In a recent Pembroke Consulting survey, we found that two-thirds of industrial distributors report using wireless local area networks (LAN) today, and another 21 percent expect to adopt the technology within the next few years. The relatively low cost of wireless LAN has encouraged adoption by both large and small companies.
In the warehouse, the productivity improvements from wireless networks come from substituting technology for potentially error-prone human activities such as order processing, inventory control or picking. For example, information sent from either hand-held wireless scanners or RFID chips creates real-time stock information and eliminates the need for manual inventory counting. Wireless technologies allow data to move directly from the warehouse floor into the business system rather than manually recording and entering information into the system later. Similarly, wireless voice-directed systems can also reduce human picking errors by pointing warehouse employees to the right location and quantities.
Many distribution executives may not yet realize how wireless systems change both the cost and usefulness of warehouse automation. For example, the availability of pervasive wireless data to any physical location also allows a distributor to achieve the benefits of new systems in an existing warehouse configuration.
Some distributors have improved so much that they now offer logistics and outsourced fulfillment as a fee-based service for customers or suppliers. Two separate business units — one for the logistics division and one for the traditional wholesale distribution — can co-exist within the same parent company.
Physical product handling will remain a core skill for wholesaler-distributors. Distribution executives should adopt new wireless technologies in the warehouse to ensure continuous operational improvement.
Adam J. Fein, Ph.D., is the founder and president of Pembroke Consulting, a firm providing strategic advice to executives operating in channel-intensive industries. Contact Fein at 215/523-5700 or at www.PembrokeConsulting.com. His new book, OUTLOOK 2006: An Executive's Companion to Facing the Forces of Change, is available for purchase online at www.nawpubs.org.