In our first installment, we reviewed the “ugly” numbers of distributors as online commerce grows; only 2 in 10 distributors show sustainable online progress. These firms, typically, have 25 percent or more of their sales online and are taking share from their slower-to-change competitors. Furthermore, new online models such as Zoro Tool, Civic Solar and Sustainable Supply are taking share from traditional distributors and today have some 47 percent of the online B2B space.
Combine this with a recent announcement by Home Depot that it will have 100 new shipping outlets to give next day/24-hour delivery, and the future of full-service, analog distribution looks less enticing.
Far too many distribution firms are not investing enough for online growth and even fewer are making changes to their model of business to compete online. Today, online commerce is about 12 percent to 15 percent built-out; therefore, many executives don’t feel compelled to make big changes as they can’t see the need. However, online B2B commerce grows at an 8 percent Compound Annual Growth Rate — which means by 2028, some 30 percent of demand will be online.
Not making competitive changes at this late stage is, in our estimate, too late; the competition will be well-established and will take share from analog competitors who operate full-service, undifferentiated distribution firms.
In this installment, we review the three stages of e-commerce change before returning to our mock distributor, Sioux Falls Supply, and the changes to its sales effort as it builds-out its e-commerce platform. Our documentation of these stages follows our work in identifying and researching steps that leading distributors take as they adapt to a digital marketplace.
These stages are poorly understood and seldom taught. Most distribution executives believe they can simply “morph” their firms as e-commerce grows. Our research and experience find that this is a dangerous assumption; one that leading firms and new-age distribution models take advantage of every day.
The Three Stages of Online Transformation
Changing a full-service, “analog” distributor from a branch-and-sales-intensive organization to an online juggernaut takes a long-term view and considerable effort. Plans will be made, changed, rethought and struggled with as unexpected events unfold. At stake, however, is the future of the firm. Today, 80 percent of distributors are fighting for less than 11 percent of e-commerce pie. They’ve ceded their online potential to the top 20 percent of online distributors and new-age distribution models as well as direct manufacturer sales.
Unless they improve, quickly, their online future, and possibly their ongoing future, is in doubt. In Exhibit I, we’ve included the three stages of e-commerce change: software platform, branch and salesforce changes, and strategic growth. Inputs and events are separated from the executive actions to fulfill the stage; the graphic is split along a horizontal plane to display this.
• Stage I: Software platform. The goal is to build-out the e-commerce software platform. Most distribution executives believe e-commerce involves developing the online transaction platform and, when accomplished, they place it on top of the firm like a cherry on a sundae. Too often, this leads to an event we’ve dubbed an e-commerce wash-out, where the firm sells no more than 5 percent of total demand online.
The problem is that a competitive online offering takes multiple software “bolt-ons,” including transaction platform, product information management (PIM), faceted search, punch-out suite and quotations module. Each of these pieces of the software puzzle has a specific function and our 2017 research on leading online distribution firms found a minimum of three of these bolt-ons in usage. It is also important to note that these firms had built-out their platforms throughout many years.
As e-commerce matures, we expect additional software offerings for a competitive and satisfying online experience. Today, however, simply purchasing a transaction platform and placing it on top of the firm while expecting the customer to move online will yield disappointment.
• Stage II: Branch and salesforce changes. The distribution firm uses technology to replace redundant parts of the firm as there is less need for customer service, inside and outside sellers. Leading firms review account financials including activity profits to help decide which accounts to migrate online and what this does to the sales effort. Often there is over-capacity which means not all sellers can or need to be retained.
Along with changes in sales support, there are changes in the number of branch outlets. Why? As product availability and location is online and in real time, the need for close-in inventory, just in case, is greatly reduced. Hence the forecasting and storage of product become more efficient. Quality and speed of information decrease stock-outs, which means less warehouse space is needed. In recent years, outside of establishing new online business models, WW Grainger reduced its branch complement by some 40 percent.
The reduction in sellers and branches is often overlooked from a cultural and human resource perspective. Layoffs done poorly and without proper planning and communication can be disastrous. Affected workers can cause a litany of problems before their release, inclusive of increasing order errors, treating customers poorly and turning retained employees against management.
Good transitioning requires executives to carefully plan employees’ exits, including severance pay, outplacement and medical benefits. Plan branch closures with exacting detail including movement of inventory, communication to customers and capacity planning for the truck fleet. For the remaining sellers, new territories should be configured to both ability, experience and time considerations.
Compensation changes must be made fairly and ensure against loss — at least for the first year or so of the transition. We’ve seen enough problems in reducing the sales effort and branch footprint that we use a Ph.D. in organization change to help our clients.
Poorly done change efforts can waste or even derail online progress. In one recent incident, we found where a top 40 distributor built-out the best in online technology but paid little attention to change management as its online sales grew. Executives did not decide which accounts were to move online versus which would remain in outside territories. As accounts ordered online, sellers did not receive a commission on the sales.
Sellers, once they found they were losing revenue to their online channel, cut the price to the customer below the online price. The result was dubbed a digital stall out, where online sales declined from 11 percent of volume down to 8 percent in less than two years.
It is important to note that making changes to the sales effort and branch complement does not and should not wait until completion of the full e-commerce software suite. If customers can be migrated online with three of the five parts of the e-commerce platform in play, then sales and branch reductions should be concurrent.
• Stage III: Strategic growth. Executives plan strategy moves including developing new business models. New business models, typically, follow two paths. This includes transactional efforts such as the reduction of redundant sellers, branches and services, and the introduction of a new online, low-cost model. Or a value chain restructuring model is used, where a new value proposition is identified and enhanced by technology.
Transactional and value chain restructure models do not try to compete with full-service distributors. Their goal is to take a slice of the existing full-service distributors’ customers with a very targeted and well-defined product/service platform. Many distributors don’t make it to Stage III; our findings are that the level of change is too far outside a traditional executive’s M.O. However, successful new business models easily gain share versus full-service competition and deliver a higher return on sales. We’ve seen new models where the price is reduced by 10 percent or more and the return on sales is 30-plus percent higher than the analog full-service platform.
Finally, in Stage III, distributor executives will need to define, recruit and nurture new online positions. Job titles of content manager, automated marketing manager, e-commerce operations manager, etc., are becoming more common in distribution. These positions will need the support of the executive suite as analog cultures are often not supportive; they see new hires as competition for their longevity and value to the firm.
In Part Three, we will examine the detailed work of Sioux Falls Supply as it changes its sales complement for an online future. We encourage readers to study and think through the three stages of e-commerce change. Leading online distribution firms are moving ahead with these changes and the future will demand a more-efficient, higher-quality supply chain at a better price.