Category & Supplier Management Strategies

Customers are experiencing price increase fatigue and looking for new ways to reduce costs in their operations. James Dorn shares thoughts on how distributors can manage their manufacturer suppliers more strategically to protect margins going forward as supply chains normalize.

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Podcast Transcript:

Tom Gale: Welcome to this edition of MDM’s Quick Take. I’m Tom Gale. My guest today is James Dorn, president and CEO of Dorn Group, a strategic advisory to manufacturers and distributors. James, welcome.

James Dorn: Thanks, Tom. It’s great to be here.

TG: We were together this past week at the Industrial Supply Association meeting, a great event and a lot of energy coming out of that. You and your team put on a session there. There was something I wanted to come back and focus on this week that I pulled out of the findings of some of your research that you shared there, James, and that’s around supplier and category management. If I think back over the last 10 years or so, it seemed in the 20 teens, there was a real move to streamline the supplier base, and not only at customers, but also distributors were really starting to pay more attention to the number of manufacturer suppliers that they were working with. Yet you presented some findings that I felt kind of went against that conventional wisdom, so I wanted to just dig into that today.

JD: I’m happy to share more on this topic. We think now is an ideal time for distributors to optimize their supplier base and get more strategic on how they stratify their supplier base to effectively compete with the new challenges that are coming into the market ahead of them. One of the biggest things that we’ve seen from our research and from distributors at large is there’s this dynamic that we call suppliers gone wild, right? Over the last three or four years, distributors have increased the amount of suppliers they’re working with just due to a lot of the supply chain disruption. Also due to just the amount of M&A that’s been going on with consolidation at the distributor level. Then even through organic expansion initiatives like distributors moving into new markets or expanding into adjacent product categories. There’s just this ever-growing list of suppliers that they’ve taken on.

So we’re advising distributors to say, “Hey, it’s a great time as you’re moving into potentially markets decreasing in demand, and as you’re moving towards new competitive pressures of … You just won’t be able to maintain some of those profit margins that you’ve had over the past couple of years because … and customers have been putting a lot more scrutiny on cost reduction initiatives and pushing back on price increases. Now is just a great time to get more strategic on evaluating what suppliers you’re working with and then trying to really partner with those suppliers in deeper ways to offer more to your end customers and hopefully keeping those record high profit levels. If you can do this effectively, then that should help you move into the coming years with maintaining those profit margins.”

TG: Is this as simple as when all the supply chain issues hit as COVID came online, that distributors were just scrambling if they couldn’t find product from their core set of suppliers of going out and just finding in any way? Or are there some other elements that are playing into that?

JD: No, that’s one of the biggest ones. Biggest contributing factors is to increase in your supplier base. That’s a big one, Tom, and as supply chain normalizes, it’s already easier today for your stock and flow items that you have really good means of getting those core products into your location. We’re already starting to see some of these distributors going through this category and supplier management process.

TG: Take the pencil out and make sure that you’re being smart about how you’re sourcing at this point.

JD: That’s exactly it, Tom. It’s going to get harder and harder for you to maintain those profit margins that you’ve seen over the last couple of years here. A lot of that is due to the end customer going through this price increase fatigue. They’re starting to seek new ways of trying to reduce costs in their operations. Then on top of that, you have the supply chain normalizing to where more suppliers and more distributors are able to get the products that may have been a little more difficult to source. You got to start deploying new strategies in order to maintain those same profit margins that you’ve benefited from over the last few years. You could do that through category management and supplier management practices of trying to work with your suppliers in new ways to have them help you deliver more value to that end customer.

TG: James, you and I have worked together enough that I know by now that behind that strategy is you’re never comfortable until you have a little bit more of a tactical list of things to chase after. Can you just share some things that you think are really the critical levers here that distributors have to work with?

JD: One example is we’re currently working with a distributor client who has an interesting story because in their home market they have been very strong in winning market share there and partnering with the best suppliers. But as they’ve grown over the years through M&A and just organic market expansion, they’ve been unable to replicate winning conversion of being able to bring new customers into their other branches, and part of it is there’s still this regional aspect of the way in which distributors work with suppliers. If a supplier and a distributor are super strong in one market, that same relationship may not follow that distributor into a new market that they enter into. I think that’s the part where if distributors can work closer with their suppliers to overcome that, that’s a major win for some of these regional or super-regional distributors out there.

I mean, when we unpack this dynamic of the regional aspects, it’s really a story of two worlds. From the manufacturer’s point of view, they historically have taken a very disciplined approach, almost a war room approach, to trying to figure out which distributors they can partner with in order to win the market share across every region of the territories they play in. They’re quantifying their market share at a category level and at a key market level, and they’re even getting data as to who the top distributors are within those markets. They then strategically set out to partner with the key distributors within each one of those regional markets, and they offer those distributors strategic preference to those types of distributors.

They still have other distributors they work with, but they don’t fall into that strategic category. They might get different terms, different support and whatnot. Now, if you contrast that approach to what distributors have historically done, I mean distributors, they’re dealing with so many partners, they’re dealing with the end customer all day every day. They may not be as organized in how they approach that side of the business and managing their manufacturers in the same way. Where we see the opportunity and where we’ve seen the success in working with our clients is really bridging the gap, almost taking this war room approach to distributors and helping them build a system to assign strategic, preferred and approved manufacturing ratings to each supplier by major product category. These are things that distributors can start to adopt some of these practices and use that as a way to get more out of their supplier relationships and use category management to help them do that.

TG: It’s a deeper stratification schema essentially, that you dive in a little bit deeper and make some more data informed decisions based on that about where you focus.

JD: That’s exactly it, Tom, and there’s a lot that’s changed in the market over the last few years and there’s a lot that’s still changing moving forward. It’s just a great opportunity for distributors to get more strategic on how they work with their suppliers and try and get those best terms across their suppliers to give them hopefully the best opportunity of winning new market share with their end customer.

TG: That’s probably a great place to wrap things up, James. We will be diving much more into this at our Virtual Profitability summit hosted by MDM and the Dorn Group on July 19th. If you go to our website, click on the events tab at the top. It will be the first item there, more information there, and please register. We’ve already got a couple hundred signed up. I’m really excited about how this is coming together. I know you’ll be talking more about this specific topic. We will also have some other speakers, and I know we’ll be diving into the supplier and distributor stratification pieces of this as well. So James, as always, thank you.

JD: Thank you, Tom, and we’re looking forward to that event, because I think that’ll be a great forum to get hands on with topics exactly like this, just to dive into some more examples.

TG: No question. Very timely. Have a great week.

JD: Great. Thank you, Tom. You, too.