Continuing inflation, geopolitical disruptions and uncertain tariffs present challenges for distributors with already thin operating margins. Passing increased costs on to customers is no longer a sustainable strategy. Forward-thinking distributors who want to be future-built pursue a more nuanced, multifaceted approach to protect and grow their businesses.

The new tariff reality: An existential threat

A government may impose a tariff on imported goods. The importer pays the tariff as calculated on items as they enter through customs and may pass that increased cost on to the buyers. When a government imposes a tariff or threatens to, stock markets react and supply chains quiver.

Tariffs require businesses to respond quickly and adapt to changes in customer demand, pricing and inventory management. Cindy Levy, a senior partner at McKinsey & Co.’s London office, emphasizes the need to prepare for the lasting impacts of uncertain tariff increases. 

Increased tariffs may be imposed on multiple supply chains. They may be short-term or long-term, rescinded, increased or broadened. Tariffs threaten efficiency and productivity, requiring more capacity and capability beyond the reach of some organizations. A shift from traditional 2% duty rates to rates as high as 25% has created a seismic disruption in the distribution sector.

An unstable economy affects distributorships' profitability and long-term sustainability. Our February 2025 benchmark report (https://bit.ly/4jbd5T0), “How Distributors Protect Margins During Cost Volatility: A Benchmark Analysis for Distributors,” explores this risk. 

Distributors who wait too long to implement price updates see an average margin erosion of 1.6%. Poor implementation of price changes leads to an average margin erosion of 6%. These impacts are potentially devastating to profitability and long-term sustainability in an industry with operating margins of 3% to 4%. 

This represents a wake-up call: the old playbook of reactive pricing adjustments no longer works in today's complex market environment. 

Four strategies to manage cost volatility 

CEO consultants at WSJ/Vistage (https://bit.ly/4hWiA7i) announced that early results of their March 2025 Small Business CEO Confidence Index showed that over more than “53% now expect negative business impacts from tariff and trade policies.” According to tax experts KBKG (https://bit.ly/4iPgNlN), “Rising duty rates will come as an unwelcome hit to the profits of many companies.”  

And FutureCFO reiterates findings that companies building for the future generate returns three times larger than their peers. 

Our analysis reveals that up to 35% of annual revenue is at risk because of ineffective price management during periods of cost volatility. We find the following four strategies can mitigate the threats posed by a tariff-driven economy: 

1. Smart pricing optimization: Beyond the blanket increase. Success in the current environment demands a more sophisticated approach to pricing. Leading distributors are leveraging advanced analytics and artificial intelligence (AI) to develop nuanced pricing strategies that consider the following: 

• Product-specific pricing power and value proposition;

• Customer segmentation based on willingness to pay;

• Competitive positioning in specific market segments;

• Historical purchasing patterns and price sensitivity. 

The key to smart pricing optimization means moving beyond simple cost-plus pricing to value-based pricing models. This approach requires distributors to invest in technology that can analyze vast amounts of data to identify opportunities for margin optimization without risking customer relationships.

2. Supply chain restructuring. The tariff challenge has exposed vulnerabilities in traditional supply chain models. Forward-thinking distributors create future-built organizations when they: 

• Diversify supplier relationships across multiple regions; 

• Invest in domestic sourcing alternatives where workable;

• Build redundancy into critical supply chains;

• Implement advanced inventory management systems;

• Develop stronger relationships with key suppliers. 

This restructuring requires a careful balance between short-term cost considerations and long-term strategic positioning. The goals are to reduce costs and build a more resilient and adaptable supply chain that can weather future disruptions. 

3. Value-added services and revenue diversification. Leading distributors have discovered that the answer to margin pressure is no longer found in traditional product sales. Many are expanding into service-oriented offerings that provide: 

• Technical consulting and support;

• Inventory management solutions;

• Custom packaging and kitting services;

• Digital commerce platforms;

• Predictive maintenance services. 

With no tariff on these services, they often carry higher margins than traditional product sales, providing a buffer against cost pressures. They foster stronger customer relationships and higher switching costs, protecting market share. 

4. Operational efficiency through digital transformation. The most successful distributors use the tariff challenge as a catalyst for broader operational improvements, focusing on: 

• Cloud-based enterprise resource planning and warehouse management systems;

• Automated quote and order entry processes;

• Advanced analytics for demand forecasting;

• AI-driven inventory optimization;

• Mobile capabilities for field sales and operations. 

High-growth companies commit to the future, focus on key aspects of digital, harness the full range of sales analytics, invest in their people and marry a clear vision with leadership action. 

(subhead) Four-phase implementation roadmap 

In 2022, McKinsey & Co. researchers focused on the future of distributors (https://mck.co/4jhLlfP). They warn that the distribution sector has “reached an inflection point” and admit that some businesses will “wait and see” as multiple challenges unfold. They encourage distributors to “take bold action now, using the crisis to pivot toward profitability and growth.” 

Long-term prosperity in a volatile environment requires taking preventive steps to ensure that dynamic pricing responses occur before the bottom line is negatively affected. Advanced analytic tools ensure that decision-makers have the pricing to stay ahead of the competition and the operations to improve the customer experience.

This implementation roadmap leads to resilience. It assumes “resilience” means the tensile ability to take the hits. However, it also refers to the capability to bounce back, pivot and rebuild. To find opportunities in this uncertain economy, distributors should follow a structured approach: 

1. Assess current performance. Daily news reports show businesses across the economy wrestling with new tariffs and the promise of more. They must consider whether to pass on increased costs to customers or eat the increase as a sunk cost and compress their margins. 

We recommend that distributors start by assessing their performance in depth: treat cost management as a project management task, fix any issues that need attention and determine how to optimize existing technology. 

To start, examine these business metrics: 

• Analyze the percentage of SKUs with outdated costs;

• Quantify the impact on margins;

• Identify bottlenecks in current processes. 

2. Automate core processes. Businesses of all sorts focus on tactics. They spend time and money on ways and means. This usually leads to a reactive business model, one that believes it can survive a storm. The mindset may tighten some loose ends, but it repeats itself, hoping to find “a new normal.” 

Small to mid-sized distributors work toward modest goals with narrow profit margins, often without strategic planning. Without a strategy, they make decisions based on limited information. And they mistake acting immediately for data-driven choices. 

For a proactive approach: 

• Implement AI tools to process vendor price files automatically;

• Create standardized workflows for price updates;

• Establish clear approval processes. 

3. Build monitoring systems. A future-built company has its own dynamic. It does not function by routine; it has processes, but its operations continue to learn and improve. Its organization remains flexible and fluid. And its culture remains self-aware. 

The future of work favors companies with clear lines of shared accountability. They reward merit but foster collaboration. They replace those legacy tables of organization that describe vertical chains of authority with agile and resilient workflows. Distributors must identify pain points, of course, but they must also use key performance indicators to mark positive and negative events. It makes sense to trust technology with monitoring these systems. Make sure to:

• Track key metrics such as margin erosion and update cycle time;

• Set up alerts for significant cost changes;

• Report regularly on pricing effectiveness. 

4. Develop backup plans. Our benchmark research found that distributors experience an average margin erosion of 1.6% when they delay pricing competitively. Those who implement pricing poorly suffer a loss of 6%. Distributors must understand that this economy requires a transformation of their business model. 

Distributors cannot proceed without measurable readiness. They must build their future by improving their project management capabilities, talent development and communication dynamics. This new business model remains viable only if there is strong backup: 

• Document all pricing processes and procedures;

• Cross-train multiple team members on critical tasks;

• Implement systems that reduce dependence on tribal knowledge. 

(subhead) Looking ahead 

The distribution industry stands at a crossroads. McKinsey & Co. notes: “We expect high-performing, resilient distributors to gain a considerable strategic advantage during the current environment of uncertainty, just as some did in the Great Recession.” 

While rising tariffs present immediate challenges, they also offer an opportunity for forward-thinking companies to differentiate themselves. Success will come to those who view this challenge not only as a pricing issue but as a catalyst for comprehensive business transformation. 

The gap between industry leaders and laggards is widening, but opportunities remain for companies willing to invest in the future. Distributors need to invest in advanced technologies to segment customers and prospects, price to match their behaviors and upskill frontline sales teams.  

By combining smart pricing strategies, supply chain optimization, service diversification and operational efficiency initiatives, distributors can build resilient businesses capable of thriving in an increasingly complex market environment. 

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Nelson Valderrama is the founder and CEO of Intuilize, where he leads a team dedicated to helping mid-sized industrial distributors unlock their hidden potential through data-driven decision-making. With more than 25 years of experience in the distribution and wholesaling industry, Valderrama identified that distributors were sitting on a wealth of untapped data. Contact him at [email protected] or visit www.intuilize.com.