Why Manufacturing Distributors Are Losing Relevance – and What They Can Do About It

By J Schneider, VP, Strategy

The role of manufacturing distributors has changed. Historically, distributors positioned themselves as product experts and were seen as valued advisers. Today, they are often thought of as little more than order-takers. As a result, buyers are increasingly turning to online retailers or seeking to purchase products directly from manufacturers. This trend extends even to the industrial markets. For many distributors, the outlook is bleak, with all but the most successful businesses flailing to find ways to remain relevant.

Some in the manufacturing space are even beginning to question whether distributors are still a necessary part of the equation. Are distributors the equivalent of a vestigial limb, destined to be edged out by a more evolved supply chain structure? Or do they still have an ongoing role to play? The answer depends on whether distributors can find a way to clarify and strengthen their value proposition to manufacturers and buyers alike.

The Changing Role of Distributors in the Manufacturing Space

Decades ago, distributors represented manufacturers by providing the only available path to the end buyer and vice versa. But they provided much more than just access. They were also product experts and respected consultants. In addition, they added value by supporting the sale both before and after the purchase.

All of that began to change in the 1990s when distributors shifted their models. Instead of representing manufacturers, distributors began representing buyers. They began carrying more product lines and pitting manufacturers against each other to capture the lowest prices. This allowed buyers to have more choice at reduced rates, but it ultimately eroded margins for everyone.

On top of that, the rise of the internet and the proliferation of e-commerce revolutionized the marketplace for every industry, including manufacturing. Today’s buyers are primed (or perhaps “Amazon Prime’d”) to expect a nearly endless variety of options online. They expect to be able to conduct product research, check inventory levels, place an order and receive fast, low-cost delivery without ever picking up the phone or visiting a distributor’s store. Convenience, speed, and cost-effectiveness are the names of the game.

In this rapidly shifting environment, distributors began losing their value to the end-user. They started to be seen as simply filling an inventory need until buyers and manufacturers could find a better way of doing business. To survive the pressure from e-commerce sites, distributors continued distancing themselves from their individual manufacturing partners.

Unfortunately, the evidence shows that this shift represents a lose-lose proposition. Manufacturers are producing lower quality products, distributors are being cut out and buyers are getting worse service and disposable products.

Now for the good news: As a distributor, you still have the potential to bring significant value to the equation. Most manufacturers still don’t want to sell directly to their end-buyers. Doing so represents a logistical nightmare. But it won’t always be that way. Warehouse automation is improving. New efficiencies in shipping and logistics are emerging every year, if not every quarter. Now is the time to leverage your inherent value in the supply chain and re-engage manufacturers and buyers alike. Don’t give manufacturers a reason to try and go it alone.

How Distributors Can Stay Relevant and Grow

For distributors to remain relevant, they must find ways to strengthen partnerships with manufacturers and enhance their unique value proposition to buyers. Here are some tools and tactics that will ensure your distribution business remains in high demand.

• Partner more meaningfully with fewer manufacturers. Don’t attempt to be all things to all people by carrying every product by every manufacturing company under the sun. Doing so necessarily pits manufacturers against each other in a race to the bottom. You may have made the calculated decision to do this in an effort to better serve your customers with more choice and better prices. But the irony is that this approach ultimately hurts your customers, too. That’s because the push for universal availability and lower prices eventually results in lower quality products and a loss of product expertise to support customers before, during and after a purchase. Resist this downward spiral by winnowing down your manufacturing partnerships to those that matter most and investing in those relationships. Work as an extension of your manufacturers by becoming product experts. Invest in innovations in service and delivery to support your sales. If you treat your manufacturer relationships as disposable, your manufacturers will eventually find a new path to the end-customer. And if you don’t add value to the buying experience, your customers will eventually do the same.
• Spread the wealth (and share the pain). Manufacturers may earn more than local distributors, but that doesn’t mean they should always shoulder the burden when prices are squeezed. Keep in mind that any one manufacturer may be working with hundreds (or even thousands) of distributors — with each one petitioning for lower prices and better terms. If you as the distributor are making 50% profit on a product, and the manufacturer is only making 20%, that will almost certainly create conflict in the relationship. Likewise, if the buyer demands a lower price, everyone in the supply chain should work together to get to that price point. Distributors that share the opportunities for growth, as well as the pain, will remain indispensable to the manufacturers with whom they work.
• Segment your buyers and learn more about your customers’ needs. When was the last time you took a deep look at your customers and their needs? How recently have you asked your core buyers what they’re looking for from you that you aren’t already providing? Are you offering the right mix of products and services? If the answer is “I don’t know,” then it may as well be “no.” Start by segmenting your customers, paying special attention to your core customers and segments that represent the biggest opportunities for growth. Next, reach out to each segment to learn more about what they need and value. Take time to learn more about their businesses, pain points, and opportunities for growth. Map the gaps in your products and services and identify ways to fill them. If you don’t, someone else will. Finally, go back to your customers and confirm that your planned enhancements actually fulfill their needs and preferences. Moving forward, plan to revisit this same exercise on a regular basis to ensure that you never lose touch with your customers and their needs.
• Enrich your customer experience. Industrial buyers are always looking for better service and support at a fair price. Many will pay more for a premium product, and they also place a high value on premium service. Your largest competitors – e-commerce sites – offer value that is predicated on fast delivery and easy product returns. You may not be able to beat the competition in those areas, but you can still provide an overall superior customer service experience. For example, distributors are perfectly positioned to act as true advisors to their buyers in a way that e-commerce sites could never do. Other potential service enhancements include help installing, configuring, servicing, and maintenancing your products.

The pressure is on for distributors to prove their utility. But those distributors that truly value their manufacturing partners and end-users will find that they still have a vital role to play in the manufacturing supply chain.