What Business Are You In?

Charles J. Bodenstab, May 1996

Back in the 1970's there was a popular management fad where business people were asked to define what business they thought they were in. Generally they answered in a conventional way, saying they were in a specific business or service. Then the questioner would pounce, and point out that they had defined their business too narrowly--and therefore were missing the boat. “You are not in the printing business, you are in the communications business!”

Frequently this process led companies to diversify, lose focus, and start to dabble in areas they knew little about, causing profits to plunge and the companies to come close to ruin. One more management fad had taken its toll.

This same question of what business are you in, however, has different implications in the distribution industry. If I ask that question of the typical distributor (if there is such a thing), I get a very intriguing answer. If they are a distributor of plumbing supplies, then the answer is usually that they are in the plumbing business. If they distribute tires, then the answer is the tire business, and so on. I rarely hear that they are in the distribution business.

I had this point vividly illustrated when I was on the Board of Directors for the Hercules Rubber Company, a very large manufacturing and buying group representing about sixty independent distributors. The other directors were all tire distributors. We met every quarter for about three days. During that time the talk was about tires, tires, and more about tires. They were talking tires at breakfast, during the meetings, and well into the night. What I didn't hear talked about were distribution issues such as; fleet operations, warehouse layouts, inventory optimization, accounts receivables, etc. From what I was able to gather, these issues were generally handled by some operations person who didn't get the same recognition, nurturing and other opportunities as the people on the product side of the business.

This attitude may have been acceptable in the 1960's and even the 70's, when the distribution business wasn't as competitive as it is today. Back then profit margins were virtually twice what they are now, and the distributor was a very vital, honored, and somewhat protected part of the process of getting the product to the end user.

My premise in this discussion is that, in today's competitive environment, unless you see yourself as a distributor you are not going to prosper. The Wal-Marts and the other “category busters” of this world optimize the total business, not just one component. I am personally aware that many of their high-volume items have gross profit margin of under 10%! On the other hand, their inventories are under ten days supply, their receivables are zero, and they get 90 to 120 day terms from vendors. This means that they are actually in a net cash positive position, and the more they sell the more cash they generate, independent of the actual profit margin. Granted, these outfits do not provide the services that you do, but their pricing structure impacts the level of your prices, like it or not! Unless the operations side of your business is optimized to at least approximate the category busters, you are going to have to cope with the price erosion without any compensating cost reduction.

Interestingly, the technology already exists for the smaller distributor to fight back and approximate the internal efficiencies of the “big boys.” This technology can assume many forms, such as fax, voice mail, automated picking lines, etc. -- but the majority of the challenge relates to the utilization of computers and software.

What I do not see frequently, however, is the management attitude or mind set to utilize this technology.

I am frequently exposed to this resistance to adopt new systems and concepts in my consulting roll to distributors. My primary focus deals in inventory control and on occasion accounts receivables. It is a rare distributor that doesn't have an outstanding opportunity to free up vast sums of cash in one or both of these areas by adapting some new system or concept. Nevertheless, I am stunned at the resistance and lethargy on the part of many managers at stepping up to these opportunities. Ironically, distributors in the $50 to $100 million sales range are much quicker to embrace the system than those in the $8 to $25 million range, even though the larger distributors already have relatively advanced inventory management systems in place. It's the old story; the people who need a new technology the least will frequently embrace it faster that those who need it the most.

You might think that the issue is one of cost and affordability, but that is not the problem, since many of the products are priced quite reasonable, and additionally, their price is usually structured according to the user's size. Moreover, the potential returns usually make the investment very attractive. No, it is actually more an issue of reluctance to change the way something has been traditionally done, plus the sheer inertia of addressing something new and different.

Who are the culprits? For starters, we have to chide top management. They, which may translate to you, have to set the tone of any company and provide the priorities, direction and vision. If top management does not make it clear that they are fully behind a new initiative, it isn't going anywhere. You don't have to be fully conversant with the new technology, but it needs your support, and action when appropriate. Support with no willingness to follow through is worthless.

Middle management can also be a problem. In many companies, I find that relatively young purchasing people embrace the new inventory system with enthusiasm, while many old-timers may view the new system as a threat. While I'm talking about how this system is going to free them up for doing what the company needs most -- better negotiating, expediting, facilitating, etc. – they may be thinking, “Hold on. I've been getting away with what I've been doing for twenty years without anyone knowing how to second guess me. Why should I give that up?”

Believe it or not, even MIS managers can be a problem. Although they are identified with new technologies, you would be surprised how many of them become wedded to their own old brand of technology, and fight anything that could be a threat. If they have this attitude, the problem is particularly insidious, since they are in a position to mask their true motivation, and pass off their resistance as bona fide concern for the company.

So the answer to all this is to embrace all the new technology available and change everything as fast as possible. Right? Not really. Caution is called for.

I never implied that the answer was easy. It is, in fact, a pain in the butt. It means a lot of hard, messy, and uncomfortable work at sorting out what is good from what isn't. It means hearing out the stories of vendors, asking good questions that sort through the fluff, and checking references whenever possible. But most of all, it means accepting the challenge, plunging into the mainstream of searching for better concepts and supporting technology, and, finally, taking action even though there is some risk involved.

All your knowledge about product, good vendor relations, savvy about your marketplace, and strong service commitment are going to be key factors in ensuring that you will get by in your industry. However, the fact is that you are in the distribution business, and a major part of your costs is in activities of distribution. Unless these costs are brought down to approximate the big operators in your industry, you simply are not going to thrive and maybe not even survive.