Industry Expertise · July 23, 2020

How Wholesalers Can Manage Rising Distribution Costs

The costs associated with filling product orders—including warehousing, delivery and shipping—have been trending upward for several years. Recently they've rapidly escalated due to major supply chain impacts brought about not only by market changes but also the COVID-19 crisis.

Managing these increasing distribution costs is one of the biggest challenges facing wholesalers. By improving operational efficiency and flexibility, wholesaler-distributors can remain competitive and even thrive.


How this trend has evolved

Shifting industry standards have put pressure on a variety of industries. For example, the advent of fast fashion provided rapid inventory changeovers for clothing retailers. More recently, Amazon has rolled out its own delivery services, putting pressure on many types of online retailers to promise faster delivery times. The level of automation and personnel training required to fulfill this promise all drive up overall costs.

Online platforms have also been making it easier to engage directly with customers. Distributors that implemented customer-centric, multi-channel engagement are outpacing their competitors by offering a much stronger customer experience. Because Amazon provides a high level of digitization in customized reports and inventory transparency for professional buyers, more end users expect this higher level of service. There are definite costs to install these technological and operational systems.

Manufacturing-driven impacts

With ongoing trade tensions between China and the US, tariffs often drive surges in wholesale costs. To reduce the impact, some US firms have been scrambling to find partners in other countries, such as Vietnam. Others have decided to stick with their Chinese suppliers due to the longevity and interconnectedness of the relationships.

In response to COVID-19, many Chinese manufacturing plants shut down for weeks, further disrupting the supply chain and exacerbating the lack of availability of certain types of goods. Supply chains have also been impacted by the grounding of plane fleets, the shutdown of manufacturing plants and employee unavailability as a result of the pandemic. All these occurrences reduce supply, increasing competition and driving up costs.

Build online platforms

As more consumers utilize online retailers to purchase goods of all types, manufacturers have successfully found ways to go direct to consumer. Distributors can counteract this by building their own e-commerce sites and direct-to-consumer systems. While it may increase costs in the short term, this setup enables companies to sell more products at higher price points. It also reduces medium- and long-term distribution costs and foster a more streamlined user experience.

Distributors should consider upgrading to customer-interfacing software systems to make it easy for customers to conduct procurement activities online. Enabling your customers' employees to log in and complete various transactions would empower quicker responses. It can also optimize your own employees' interaction time and increase customer satisfaction.

Streamline operations

Sales of non-durable goods have decreased in the wake of COVID-19. Wholesaler-distributors of these goods may find they need to reduce inventory and related costs to lessen the financial impact. They may also need to adjust short- and mid-term staffing levels to match the new work load.

Distributors can automate warehouses by installing scanning systems, automated pickers and even robots where feasible. The operational efficiency improvements will likely surpass the initial capital investment costs very quickly.

Upgrade financial systems

If you're a wholesaler, work toward streamlining credit and collections by creating and implementing fair, highly systematized procedures and automating where possible. You can also track payment trends for customers and make periodic adjustments to terms and purchasing limits. These steps reduce the risk of failed or late payments while increasing responsiveness to well-performing customers.

For distributors, consider offering payment options by partnering with your bank or financial technology firms. Being able to extend credit-worthy customers longer terms beyond the traditional 30 days can drive down sales costs and differentiate you from competition. You might also partner with a purchasing group to help small customers consolidate their buying power. While this may seem counterintuitive, it could increase purchasing size and frequency as well as customer loyalty, driving down a portion of the distributor cost.

Fill a new need

Incorporating a greater variety of services, such as inventory tracking or product installation services, can help your business demonstrate more value to customers. If you're a distributor, consider leveraging your expansive product line, deep product knowledge and technical expertise. For additional improvement ideas, poll customers to find out what matters most to them. Let this feedback guide the changes you make toward operational improvements and cost reduction. 

When you implement any of these steps, be sure to identify and track relevant KPIs at all organizational levels. This will help determine if your company needs to revamp its maintenance program, restructure its product mix or outsource non-core capabilities in its ongoing efforts reduce costs and stay competitive.

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.