3 Takeaways on Value Creation

Spreading resources too thin in a downcycle is a common trap.

In a discussion on threats, themes and strategic planning for 2023, James Dorn of the Dorn Group joins Tom Gale on The MDM Podcast discuss thinking beyond rebates, the rise of customer self-serve, the power of segment focus and pain relief, and a call to rewrite the operating manual for distributor-supplier relationships and value creation.

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James Dorn is a regular guest on The MDM Podcast. Listen on your favorite podcast platform. 

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As always, feel free to reach out to talk in greater depth about these and other issues impacting your business.

Podcast Transcript:

Tom Gale: Welcome to this week’s edition of MDM’s Quicktake where we take a look at the news and trends impacting wholesale distribution sectors. I’m Tom Gale, and my guest today is James Dorn, President and CEO of the Dorn Group, a 40-year strategic growth advisory firm that supports manufacturing and distribution leaders. James, welcome.

James Dorn: Hey, thanks, Tom. It’s great to be here with you and the MDM community.

TG: James, I’d like to start out with this question. Certain years characterize themselves as growth years, others are rebuild years. How do you view 2023 from a strategic planning standpoint?

JD: I would start exactly where you suggested, which is trying to figure out if your markets are cycling up or down. In most cases, we’re going to be heading towards softening demand. And that type of situation puts distributors at risk of just simply being able to hit their rebate target, and that’s where a lot of their profitability is made. They’re probably thinking right now, “Hey, how do I start playing that ladder game and readjusting how I work with suppliers and whatnot?”

But I would actually encourage distributors to think through some other ways in which they can add more value to their end customer. And in so doing, they can still partner deeper with certain suppliers, but by understanding their end customer more, they should be able to add more value and steal more market share from their competition, who are playing by some of these, we’ll say conventional tactics of the rebate things that I just mentioned. But if you can figure out which markets are due to slow and then start to dive deeper into understanding more about your own customer and where you can add more value, I think that’s a different way of approaching 2023.

TG: I agree, James. It’ll be a year for taking share and focusing carefully I think, on the niches and the segments that will really matter. With that in mind, I’d like to get your thoughts on what you see as the key drivers that have emerged this year, the guiding lights for successfully planning 2023.

JD: I’d say a good place to start, Tom, might be just to reflect on what we’ve been seeing in the market over the last year. And one thing that comes to the top of my mind is when you really look at the legacy distributor business model, there are so many new threats facing that legacy business model, that I think are forcing a lot of new behavior that we can get into in a little bit here. But some of those threats, you documented them really well, especially at the shift conference. You’ve got manufacturers who are trying to do more direct selling. You’ve got the rise of marketplaces and marketplaces gaining more adoption. You’ve got new services such as logistics as a service with what Amazon is trying to do, make it easier for other manufacturing suppliers to get their product to that last mile aspect. And more consolidation amongst other distributors is also a big threat, big guys are getting bigger.

But I think the biggest one that we’ve been following here with our research is really on that end customer and the behavior of that end customer is becoming more, call it self-service. The mindset of that end customer is just wanting to do more with less interaction from the actual distributor. They’re seeking information in different ways from manufacturers, from the internet and just from even their own peers. Some of these changes and threats that are facing the legacy distributor business model, I think it puts distributors at a point of risk. Are they going to be able to maintain the current levels of market share they have and even be able to grow market share? The big guys are going to be aggregating more of that market share as they get bigger, and some of these smaller mid-size distributors are going to be fighting for a more fragmented portion of that market that’s available to them.

I think with those threats facing distributors, they’ve been able to see a lot of this coming. They’re now asking the question, “We see this. Now what do we do about it? We’re ready to act, we’re ready to start thinking into next year and building new strategies and investing in new things.” And I think there’s some bad advice out there, where some distributors are being advised to, “Hey, well, maybe you should sell your business.” I think that that’s just ill advised. There’s a lot of things that distributors can do to actually improve their business and improve their market share as a whole. And I think that, Tom, is a really good foundation for today’s conversation is, diving into some of those specific things that distributors can do moving into next year.

TG: The theme that comes out for me in what you just outlined is, if I think of an analogy, its Amazon has created this amazing consumer experience and brought it over to B2B, which I think you and I both agree that you can’t do that in B2B. There’s too much complexity to have as simple an explanation for what’s going on here. And that said, we’ve all, the last couple of years basically have been sitting on our couch and channel surfing. B2B customers now have a remote control in their hand and it’s a lot easier for them to channel surf. They have a lot more channels to choose from, a lot more options.

JD: You’re exactly right, Tom. And on the B2B side, it’s certainly moving into more of that, we’ll call it digital commerce of just having a lot of different ways to have procurement connected to their distributor partners, EDI, overall e-commerce, so there’s just a lot of ways in which B2B is far more complex.

I think to that point you made, our research was showing that meaningful interactions with the distributor account manager and their end customer, it was down about 42% this year. When you think about the amount of influence that your distributor selling teams actually have, especially field selling teams, they’re just simply not getting the conversations they used to get. The amount of influence that these sellers have today is far lower than it ever has been. You think about the other touchpoints that you have with these end customers and it’s spread out. There’s more touchpoints with that end customer and them researching manufacturing solutions directly and then also with digital interactions that you have through your, we’ll say omnichannel experience as a distributor.

Trying to be able to recognize that this end customer is now in control, I think that’s probably the first and most important thing to recognize moving into next year, because it’s going to help your team actually acknowledge that something needs to change and something needs to move more into this direction. If you’re going to add value to that end customer.

TG: There’s somebody listening right now who’s thinking, “That’s great. It doesn’t apply to me. My sales team is great. We have a more complex product or set of solutions that differentiate us out there. I can see that with some of my larger national competitors, but we’re doing okay.” What would you say to them?

JD: It’s common. If it hasn’t hit you yet, it’s definitely coming. Just look at the way in which you procure or buy complex products today. You can configure your own automobile. You don’t need to go into a dealer to actually do that. Heck, Tesla’s got an excellent, what I’ll call configuration tool or CPQ tool where you can build your own car and have it shipped directly to you. You can even do that in with heck, golf carts now and a Gator and a riding mower. Everything’s moving in that direction, and I think that’s the part where if you aren’t seeing it in a predominant way today, it’s happening and it’s coming. You’re better off planning for it and being proactive about it.

TG: How would you go about getting better insight into how your customers are changing and their behavior.

JD: Step one, recognize that this is changing. We covered that. Step two is try and get your team in the mindset of building stronger moats around your customers. This is where distributors need to get laser focused on a customer segment that they can add a lot of value towards, and that the customer will in turn be willing to pay you a lot of money for that. They actually will be open to receiving more value from you.

Once a distributor can actually hone in on a customer segment or a series of segments that they can focus on, I think it comes down to understanding that customer at a much deeper level. How do you help them solve pain in their facility, in their operations, in their projects? The more you can develop solutions around solving that pain, the more successful you’ll be at creating stickiness and creating higher margin opportunities for you and the organization.

To action this point, Tom, it’s one thing to say, “Hey, we already know our customer really well. Our sales team is in the field. They’re talking to them every day.” But this is only surface level, and this is where I think distributors can get more intentional about investing in the actual research and the input they’re getting back from their customers. And the sales team is not entirely equipped to do this well.

They can get surface level information, but they’re thinking, “How do I sell them a product? How do I get them this type of product faster and whatnot?” And I think this is where if you’re listening more, if you’re observing more, you’re understanding more about that customer’s operation and distributors are in a wonderful position. They’ve got a front row seat to the entire operation of their customer’s business. They can look end to end, and be able to actually identify pain points and then in turn develop solutions around that to actually solve some of that pain.

TG: I just have to go back because I think I heard one of the most diplomatic things I’ve ever heard, perhaps your salespeople aren’t the best people to be trying to get this type of customer research. How do you gather that? Is that a marketing team research? Who’s really leading this type of making sure that you are staying close and learning about how the customer wants to buy and what their pain points are?

JD: Yeah, it rolls up to an innovation topic, and I think ultimately senior leadership, even the CEO needs to own innovation at a distributor level. How they can design innovation culture and an innovation team is a much bigger topic for today, but I think it starts with that CEO or that leadership team to where they’re gathering information and encouraging their team in all aspects to drive innovation.

TG: Give me one example of what it looks like for a distributor to drive some real value for a customer in today’s environment.

JD: Yeah, if you even break it down to a category management team, they should have people out in the field observing and talking to customers to really understand what their current pain and challenges are, because their business has changed a lot over the last few years. The more category management can get out into the field and understand these challenges, the more that they can actually identify some of these pain points and then in turn, they could bring that input back into the organization and then start to work with suppliers to actually develop solutions around it.

When you think about the way it works today, it’s probably more the suppliers coming in saying, “Hey, we have this product ready for you. Can you go sell it for us?” Or, “We have this new product. Can you go announce it to your customers?” And it’s backwards. It should flow from the distributor’s customer and their category management team understanding, “Hey, this is the problem we’re trying to solve for our customer. Now how do we bring in the right suppliers to actually work to solve that problem?” Because there’s a lot of new challenges today, from a safety standpoint, from an operations standpoint, from labor shortages. The end customer is struggling with all of that, so there’s just a ton of opportunity for distributors to actually dive deeper into that and then try and bring in the right suppliers.

TG: How do you shift that partnership with suppliers? That’s what I’m hearing you say is that there’s some opportunities here going forward to really change the nature of that relationship to build stronger value for customers.

JD: Yeah and I think, Tom, so that’s really, I think the third and final topic that I think is relevant here for if we’re moving into next year, is we talk to both manufacturers and distributors, and we help them come together with strategic planning. There is a huge appetite from the supplier side of things to partner deeper with distributors and understand more about that distributor customer because distributors have that front row seat and manufacturers crave to understand exactly what they can do to solve problems. I think what distributors just simply getting to the table and doing joint planning with their suppliers to say, “Here are the customers that we’re in front of every day. Here are what they are currently struggling with. How do we work together with your resources on the manufacturing side and the supply chain side, to solve this problem in a new way, where it might be cheaper, it might be faster, it might be more productive for that end customer’s operation.”

And I think that’s the part where there’s this renewed sense and appetite from a supplier standpoint, because just getting to the table and talking about the same things of, “Hey, here’s our terms. Here’s what we did last year. Here’s the rebate structure movement in this year.” All of that is table stakes, but if you’re really going to add value and create stickiness with that end customer, both from the manufacturing side of it and the distribution, you have to do things in a new way. And you have to be able to see where customers are struggling today. And I think it all stems from having that intimate knowledge of their operation and where their business is at today, and then being open-minded and doing joint planning with your suppliers in a new way.

TG: You mentioned earlier about the need to carefully focus more on specific segments where you know can really create value and be successful, be profitable. Is that the same recommendation that you see in terms of distributors looking at their supplier partners as well?

JD: Yeah, that’s exactly it, Tom. And it’s just being more intentional, instead of just looking at a geographic market, you’re looking at a specific customer type. You’re looking at personas within those organizations like safety managers, production managers. You’re looking at different contacts to really expand, share a wall within those customers, and then you’re understanding what they’re struggling with at a functional level.

The more you understand that, the more you’ll realize, “Hey, we could develop some solutions in areas to really help them do their operations better. That will lead you to, I think, the supplier side conversation of, which suppliers do we really need to deepen our relationships with to provide these solutions and which suppliers are willing to work with us from an innovation standpoint to actually develop these solutions. And I think you’ll find today that there are some really willing suppliers to actually dive deeper into those types of conversations with you.

TG: To bring this full circle, I want to ask you, where do I focus? Is it on my product managers? Is it on my sales team? Is it my marketing team? Is it all of the above?

JD: Yeah, I think it is, Tom. I think it’s at the corporate strategy level, and it’s timely this time of year because a lot of distributors are having these conversations. And I think it’s having a plan on how you’re going to win over the next three years and being intentional about that. And I think it all starts with thinking in this vein of understanding, identifying your customer, who you’re going to win, and then building a plan to actually understand their business at a deeper level and work with your supplier base to develop solutions to keep that business sticky to you and to grow that business.

TG: James, thank you so much for your time and thoughts today.

JD: Yeah, thank you Tom, and happy holidays to you as well, and to the MDM community.

TG: And finally, if there are topics you’d like to see us explore on Quicktakes, please send them to my attention at tom@mdm.com. You can find more conversations like the one today at mdm.com/podcast. Thanks for listening.