Oleg and Elena Dmitriev were unwinding with a glass of red inside their Edinburgh home when they dreamt up a plan to launch their own premium wine business. They spent the following months sourcing suppliers across Italy and coordinating with distributors, with the aim of renting two shops, one in Edinburgh and another in London. Then disaster struck.

As the pandemic spread and high streets turned into ghost towns, the husband-and-wife duo realised the costs of running the shops, paying business rates and working with distributors were simply too high to turn a profit. They decided to pivot and launch an ecommerce business, with the aim of becoming the best online Italian wine merchant in the UK.  

As well as saving money on running physical stores, cutting out the traditional distributor was key. “We work directly with small family-run Italian wineries; there is no middleman involved,” says Oleg Dmitriev. The pair also invested in a third-party fulfilment centre, while Oleg Dmitriev has used his expertise as a software developer to create an automated CMS that takes care of orders from their online store and communication with their fulfilment centre, enabling him and Elena Dmitriev to focus on developing the business.

The Dmitriev’s story is a window into the new and complex world of distribution. Traditional distributors that bought from manufacturers and sold to retailers or end users, such as hardware firms, are facing huge disruption from the rise in ecommerce businesses, and online marketplaces such as Amazon. They also face the threat of disintermediation from manufacturers and retailers that are delivering directly to consumers via online stores.

These disruptors are using AI and cloud technology to replace distributors, cut costs and boost profits. Cutting-edge ERP systems enable distributors to run their businesses on one single platform, facilitating a host of key functions, for example orders, invoices, POs and inventory management. Historically, these systems were hosted on company premises but cloud technology is changing that and giving a new era of tech-savvy distributors an advantage over their traditional competitors, many of whom have been slow to respond.

Ian Heller, co-founder and chief strategy officer of Distribution Strategy Group, conducts research on the latest disruptive trends in distribution and advises leaders how to respond. “I tell distributors that they need to have a state-of-the-art ERP if they’re going to compete and there are lots of good companies out there who can deliver that,” he says. “My view is that everything is going on the cloud, if you’re a distributor that is trying to hang on to this on-premises model, you're making a mistake.”

Heller says those distributors that adopt cloud technology stand to reap a host of benefits “You can have mobile access to your ERP wherever you are, massive data storage, super-fast processors and the other big thing is data security. Who would you rather have looking after your data – Dave from IT who has done a couple of courses or a software company with PhD-qualified experts who run data security for big data centre owners?”

Many distributors are adopting hybrid business models to provide a wider range of services, for example kitting, assembly, light manufacturing, rental, servicing and subscription billing to reduce the risk of disintermediation. Infor, a multinational software company, is supporting distributors that have undergone this transition though cloud-based tech. CloudSuite Distribution Enterprise is an ERP solution that handles this array of value-added services in one platform, so that distributors can quickly change their business models and then grow at speed.

Who would you rather have looking after your data – Dave from IT who has done a couple of courses or a software company with PhD-qualified experts who run data security for big data centre owners?

Fetim Group, a 103-year-old distributor of home improvement products, delivers to more than 40 countries from its distribution centre in Amsterdam. The company recognised the need to innovate and digitise to avoid losing market share to online marketplaces like Amazon and ecommerce businesses. For much of its history, Fetim was a B2B business, but five years ago the company began to sell individual pieces to individual consumers, who now make up a large share of their annual sales. 

The strategy shift created a big challenge; the company had to adjust its entire software and logistics system at speed to cater for this new demand. Fetim was an early adopter of Infor’s cloud technology solutions. Previously, each of the company’s operational warehouses had individual IT centres and staff, but cloud tech enabled the company to centralise that entire operation in its Amsterdam central office and save a large sum of money in the process.

By digitising distribution and handling, Fetim has also been able to use ERP tools to optimise warehouse management, inventory levels and product forecasting, while boosting visibility of stock across the entire supply chain so they’re in sync with suppliers and customers. The result has been the creation of a high-speed fulfilment service to individual customers that demand a premium B2C online service and a growing, thriving business.

Speed is a continued challenge for distributors as they bid to keep up with the pace of change in technology. Old-fashioned ERP systems required major migration every two to five years; a process that was both time consuming and costly and required the input of key talent. But modern cloud ERP systems deliver monthly updates that are swift and non-disruptive, much like the regular software upgrades on smartphones.

Cloud technology offers distributors a portal in which to rethink and simplify existing systems and add value to their relationships with suppliers and customers. But that alone won’t be enough to halt the relentless march of disruptive online marketplaces and the risk of disintermediation as they continue to eat up market share with a simplified distribution model.

ShelfNow is an online distribution marketplace that cuts out traditional distributors by connecting manufacturers and buyers directly. Artificial intelligence enables the platform to suggest potential partnerships with high levels of accuracy thanks to an algorithm that quickly and continuously learns the wants and needs of each company, much in the same way Netflix suggests movies based on a user’s viewing history.

ShelfNow’s founder, Philip Linardos, says small- and medium-sized businesses are turning to the company to solve two key problems with traditional distribution. “The current distribution model is outdated,” he says. “SMEs often find it impossible to access mainstream distribution networks and even when they are able to. It costs too much money to leverage and they are not able to make enough money to stay in the game.”

Linardos says distributors have also neglected some retail and food service companies that don’t want to source products from big manufacturers. “Wholesalers are limited in terms of what they can offer customers that want to purchase from small, medium sized brands, new companies, and innovators,” he adds. He says ShelfNow’s tech has resolved inefficiencies not addressed by distributors. “Tech has enabled us to innovate the old distribution model and cut costs. It’s a much fairer and [more] efficient system.” 

Distributors now face a dilemma over the course of action to take to stay relevant, add value and meet the changing needs of suppliers and customers so they can continue to grow long into the future. “Distributors can no longer just buy and sell goods,” says Heller. “That’s not sufficient. And if that’s all that you do then you’re very vulnerable.” Behind the scenes, distributors are deciding what to do next to survive and thrive in this new era of disruption.

In January, distribution leaders gathered in Washington for the 2022 National Association of Wholesalers Conference. The event was titled ‘The Future of Distribution’ and aimed to find solutions facing distributors battling both the risk of disintermediation and the impact of Covid-19 on their supply and logistics operations.

Traditionally, distributors have provided a range of value propositions for manufacturers and buyers, including superior customer service, operational excellence, broad geographic reach and a complete product line. But those offerings are no longer enough. Smart manufacturers are cutting out distributors by using customer segmentation and technology to gain clear insights into what types of customers (and how many) they should sell to directly. This enables them to assume the role of the distributor for their top earning accounts.

Two-step distributors that buy from manufacturers and sell to the end consumer at local branches, such as hardware and electrical firms, are also facing challenges. Amazon now offers easy access to cheaper, readily available items typically sold by these distributors and rapid delivery, cutting out the need to buy in-branch. The pandemic has also changed buyer habits, with customers moving online, leaving those distributors with little or no online presence playing catch up to provide the in-branch expertise and customer service online. To maintain growth and survive disintermediation and new buyer trends, distributors must adapt and fast. Raconteur spoke to industry experts to find out how.

Value added services

Increasing numbers of buyers and manufacturers are working together to cut the costs of working with a distributor. To justify that spend, distributors must now offer additional value to ensure they remain an indispensable part of the supply chain.

Andrew Dalziel, VP of distribution and industry strategy at Infor, says: “Product rental is a good way to add value. In addition to selling goods, industrial distributors are giving customers the option to rent things like sanders. Other services such as kitting and assembly, repair and servicing of tools are good ways for distributors to differentiate.”

Other industries can also offer similar services. “If you’re in the fashion industry, for example, this could be racking and ticketing of clothes so that when clothes are delivered to a store they’re already racked, labelled and ready to be sold in store,” says Dalziel.

Supply chain visibility

Inventory management is critical to profitability, but the pandemic provided a sudden and unique challenge to forecasting and logistics as the fragility of global supply chains was exposed. Some industries, like healthcare, enjoyed a surge in demand, but many others experienced fluctuating demand as lockdowns were enforced and lifted at intervals.

Improved visibility of supply chains and communication between manufacturers, distributors and buyers is therefore key to navigate this problem. Dalziel says: “Supply shortages impact the ability to deliver and so distributors need the ability for logistics, processes and systems to react quickly and adapt to supply chain disruptions and new needs. Infor Warehouse Management (WMS) and CloudSuite Distribution Enterprise helps distributors to act fast.”

Invest in technology

Online marketplaces use a tech-first approach to provide unrivalled efficiency for consumers and distributors must also invest in technology to offer the same standard of service buyers have come to expect. “For a big distributor, the first thing you need to do is hire a CIO who really understands technology,” says Ian Heller, co-founder and chief strategy officer of Distribution Strategy Group. “They are expensive, so if you can’t afford that then you need a technology consulting firm that has those capabilities.”

Routine communication with consulting firms and raising tech competency amongst staff is another opportunity for distributors to remain relevant and stay ahead of the curve. “This needs to happen at least once per month,” says Heller. “Consultants will tell you what you need to do and how to do it. You also need to raise the IQ of everyone in your leadership. If you don’t understand tech, you can’t make the right strategic decisions. If you can’t understand how people are going to compete with you in the future, you can’t anticipate what customers will want.”

Optimise your website for businesses, not consumers

While individual consumers typically research and buy a product in the same channel, for example looking for and purchasing clothes online, businesses operate differently. Since the start of the pandemic, buyers are increasingly using a distributor’s website to do their research about a product before paying for the product in branch.

The reason for this is that most businesses have strict buying processes for making purchases. Heller adds: “If I'm working for a big manufacturing company, I may go to your website, put together a quote for $5,000 worth of stock, but I can't put it in a shopping cart. First of all, I may not have a credit card. And if I do, I'm not supposed to make those kinds of purchases with it. I have to go to my purchasing system, which is attached to my ERP and, and enter the order as a purchase requisition.”

But Heller says many distributors use the wrong metrics to measure their website because they misunderstand how buyers purchase. “They build these consumer style sites, expecting to drive conversion through the shopping cart, but that doesn’t work because most businesses can’t buy online. But the website is still key - buyers need to know about pricing, technical information, delivery, sales rep support. The point of the website isn’t to drive sales through the site, it’s to drive it in branch.”

Global headlines for the past two years have rarely been free of distribution challenges, warehousing updates or supply chain issues. But, in distribution, margins are still being eroded. The business of distribution is rapidly changing and those companies that don’t adapt may get left behind for good.

And it’s complicated, too, by the intricate web of logistical ties linking producers and manufacturers to warehouses to delivery companies to retailers to ecommerce sites to end consumers. This network is mutating, making it even harder for distributors to keep products on shelves while also making enough money to continue to do so.

“There’s no slack in the model. Any stock that you’re holding is basically cash that’s locked down. Cash flow is king in a lot of industries,” says Infor’s industry principal sales manager Susan Macleod. “That doesn’t mean that you should immediately increase the stocking levels because demand changes. It’s more about being able to manage that visibility and make those decisions as things are changing in the industry.”

That’s the name of the cloud-based technology game in distribution, visibility. If a distributor can gain greater insight into its stock levels, demand, finances and more, it can make better informed decisions based on real-time data.

But she adds: “You can’t run a business in a spreadsheet.” Distributors have to consider their supplier relationships, the rate of demand, discounts, expiry dates, rate of stock moving in and out of the warehouse and much more. By building a full picture of the marketplace, distributors can make better informed decisions.

Once companies can achieve a level of insight and transparency over their operations, they can then start to futureproof their businesses. Distributors are doing that by finding ways to add value to the supply chain.

You could almost say you no longer a wholesale distributor anymore, because you're adding more value into the supply chain. And that's got to be what it's all about. You've got to be adding sufficient value to exist.

In some cases, that might be purchasing product care packages, or renting tools or machinery to support the use of a product. It might be a service warranty or a subscription service. “For a lot of distributors, it’s really about customer engagement,” Macleod says. If distributors can build relationships with their customers, they can then better equip those customers to find what they need and thereby enrich the transaction.

Andrew Dalziel, VP industry & solution strategy, marketing, at Infor adds: “Distributors are taking some of the risk and cutting some of the buffer inventory in the supply chain,” a process, he says, that reminds people of the value distributors add into the chain. “If it’s a simple product, then it’s about price and maybe speed of delivery and it’s tough to compete,” he says. “But if you’ve got more complexity and can offer value-added services on the things you’re offering, then you start to differentiate yourself. It’s not easy for Amazon to replicate some of those things.”

Infor’s cloud-based software provides mechanisms for distributors to identify these niches and then fill them with valuable services. Macleod points to sensors that can auto-order repeated products when something runs low. Similarly, Infor Nexus offers insights into the supply chain, showing distributors where in the world their products are – something that was of immense value during the pandemic.

It goes one step further. Companies that can add that extra value and those that can harness the power of their data can start to change the way they operate. “The market is fickle. Things change. For a lot of distributors, we’ve seen so much disruption in the last three years,” Macleod says. But distributors can use their knowledge of customer needs to transform their own businesses. If a distributor sells food products, can it offer recipe cards? Can a door be sized, painted and fitted with hardware to a customer’s specifications by the distributor? Can upgraded wheels be added to a vehicle before it hits the road?

Dalziel says: “You could almost say you no longer a wholesale distributor anymore, because you're adding more value into the supply chain. And that's got to be what it's all about. You've got to be adding sufficient value to exist.” Macleod adds to SMEs and warehouses of all sizes: “This is your future and we will help you get there.”

Distributors are being pinched on both sides. Customers are going direct to the supplier. The likes of Amazon and Alibaba are turning stock over in warehouses more quickly and cheaply. But the future is not lost. Distribution still has a valuable role to play in the supply chain, if only it can play to its strengths and add value along the way.

The distribution industry has been forced to weather a perfect storm caused by the pandemic, Brexit and the environmental crisis. While towns and cities are gradually reopening, further disruption appears inevitable, and that uncertainty is likely to change how distributors operate for good as they bid to anticipate and safeguard against future problems.

It’s likely that an increasing number of distributors will adopt Industry 4.0 technologies to satisfy customers who expect deliveries on time and in full even when unforeseen issues hit supply chains. Industry 4.0 software provides greater insights, for example global maps of real time predicted product flows and ETAs to enhance the customer experience.

In the event of extreme weather, Industry 4.0 software can warn of the risks of adverse weather in advance and then implement responses; for instance, filling or killing orders, contacting customers, rerouting or using alternate fulfilment sites to fulfil affected orders and customers, reroute/expedite shipments, transfer inventory among stocking or production locations, and place additional orders from alternative sources. 

These digital tools will also enable supply chain integration to enhance communication and visibility between all parties. “The distributor will have full visibility of the supplier and the customer has better visibility of what the distributor is doing,” says VP of distribution and industry strategy at Infor, Andrew Dalziel. “And, most importantly, everyone will know where the inventory is in the supply chain.”

Improved visibility also allows distributors to see which partners are at risk of failing during times of crises. When partners are flagged as at risk, Industry 4.0 software can evaluate all current upstream and downstream product flows of a partner and determine if there are any potential negative impacts on quantities and value. If there are, specific transactions can then be diverted to avoid stock shortages, source from new partners or locations, reroute shipments, contact customers and share results with stakeholders. 

Distributors are likely to use these greater insights to assess and reshape their existing supplier networks to bolster supply chain resilience. Sourcing products from manufacturers closer to distribution centres and end buyers will shorten supply chains and reduce the risk of products getting stuck in backlogs. Equally, distribution centres could also be moved or opened in new locations to enhance their fulfilment services.

Distributors are also likely to specialise in a host of areas. To add value, they are likely to focus on higher value items that require the distributor’s industry expertise, rather than widely available items that are stocked on Amazon and other online marketplaces. “Distributors must specialise in some way,” says Ian Heller, co-founder and chief strategy officer of Distribution Strategy Group. “That could be in terms of the products they sell, specialised logistics and warehousing capabilities, or specialised services.”

In the US, Blackhawk Industrial is providing a window into the future of B2B distribution. In addition to its global manufacturing network, the company offers an extensive range of add-on services, including reconditioning of dull and worn tools, vendor managed inventory, online ordering, product customisation and even vending machines, that are installed on production lines at factories and contain drill bits, safety vests and glasses. The machine keeps track of its own inventory and reorders automatically from the distributor.

The influence of technology is set to continue at speed, with robotics and automation taking on tasks previously performed by warehouse workers and accelerating the sprint towards fully automated warehouses. Research carried out by Ernst & Young in February 2021 found that 52% of supply chain executives surveyed stated that the autonomous supply chain, e.g., robots in warehouses and stores, driverless forklifts and trucks, delivery drones and fully automated planning, is either here or will be by 2025.

In the meantime, distributors must now move towards or optimise their hybrid business models, allowing customers to purchase either online or in-branch. “The expectation for people these days is that they get the same level of sort of customer service in the distribution chain as they do in B2C,” says Dalziel. “They're looking for that consumer grade experience, they're looking to be able to purchase and use multiple channels.”

It’s clear that the events of the past two years have changed distribution for good, but the costs involved in investing in technology, staff and value-added services could prove to be beyond some smaller distribution companies, meaning acquisitions and mergers are likely. “If you're a $5-20m distributor, you may not be able to afford spending $3m to invest in digital capabilities,” says Heller. “But if you combine with three or four others or sell to a private equity group, you'll have the right capital to make those kinds of investments.” 

In the months ahead, those distributors that build the right digital capabilities, develop a high technology IQ and have an extensive value-added services menu, with talented people at the helm, will be the winners. Those that don’t follow that path face an uncertain future.