Does Size Matter? Challenges in Supply Chain that Small Companies Face
Digitization of supply chain allows companies to be more efficient and customer-focused, however, optimization in supply chains come at cost so how do companies position themselves to win [1]?
Digital technologies are transforming how companies operate by accelerating innovation, improving speed/quality, and increasing visibility of information flow. But what does this mean for various players in the supply chain ecosystem? Within industrial distribution, the market size is growing and shrinking, simultaneously. In other words, as supply chains become more agile and companies begin investing in automation, the total market size of industrial distributors increases but the number of players decreases. The industrial supply segment has historically been extremely fragmented which has left it susceptible to technological disruption [2]. So how do smaller companies, such as Distribution International (leading B2B supplier and fabricator of insulation and materials in NA), grapple with these challenges and position themselves to thrive in a highly competitive environment in which margins are already razor thin?
Distribution International (DI) is a niche player in the insulation sub-segment. As the company thinks about long-term growth it is increasingly important to observe what competitors are doing. Industrial supplier behemoths (Grainger, MSC, Fastenal) and smaller scale competitors (SPI, Bay Insulation, SilverCote) are all investing in supply chain improvements due to a shift in consumer behavior and increased levels of information access. For example, traditionally customers placed orders via telephone or in brick-and-mortar locations, however, customers have aggressively shifted to a “multi-channel” strategy which includes online. For example, in 2012, e-commerce represented ~30% of orders at Grainger which grew to ~46% in 2016 [3][4]. Investment in e-commerce is a high priority across all suppliers because it makes a company’s sales force more efficient and allows greater access to customers [4][5]. Richard Keyser, Grainger CEO, iterated this point by saying that “technology is not a mere indulgence or nice to have. It is at the heart of our business and helps drive our multi-channel strategy” [6]. Additionally, having an e-commerce platform allows distribution companies to react to and compete with Amazon which sells industrial products “directly on its marketplace, eliminating middlemen and often undercutting traditional local suppliers” [7]. Over the years DI has invested heavily in an easy-to-use online platform so it can quickly respond to customer demands across channels, deliver convenience, and compete with larger, more agile players.
Along with shifting trends around how customers purchase goods, the digitalization of an integrated supply chain has increased transparency and information flow downstream and upstream. In the supply chain ecosystem, distributors add value through on-time and fast delivery of goods, customer service, and by serving as a “one-stop-shop”. Thus, decreasing lead times without jeopardizing quality of service is important to customers, while providing POS data and visibility are valuable to suppliers. Because data is exchanged among so many different sources – suppliers, warehouses, distributors, customers – “quality and interoperability of data is critical, and still a significant technological barrier that companies are working on” [1]. Moreover, to respond to these challenges DI has implemented continuous process improvement initiatives to improve existing quality, tracks CSR metrics (% on-time, error rate etc.), invested in an ERP system, and leveraged increasing scale with vendors to optimize rebates.
However, these changes come at cost so DI has been very judicious in rolling out initiatives. Due to capital constraints (personnel and systems), DI prioritized e-commerce and CSR early on. Then, the company invested in an ERP system and focused on procurement; along the way DI has been focused on ongoing process improvement initiatives (e.g. barcode scanners, RFID sensors) that can be implemented slowly. Another approach that DI has taken is to acquire companies with some supply chain capabilities that DI lacks which allows the company to grow while addressing its supply chain gaps.
Additional Considerations:
Although DI has made significant strides in digitalizing its supply chain, the company still has a long way to go if it wants to survive in this competitive environment. In my opinion, DI should continue taking a long-term view on where its investing since it does not have the capital or scale to transform the company overnight. As a niche player, DI differentiates itself by providing unparalleled customer service that larger industrial suppliers are not able to provide and thus, DI should focus on investing in solutions that further enables it to reinforce and expand its value proposition to customers. For example, DI could create a delivery tracking app allowing customers to view where an order is, expected delivery date/time, etc. Additionally, optimizing the flow of DI’s warehouses is a significant area for potential investment which includes warehouse robotics, automated belting systems, and prescriptive analytics among many more.
As DI continues thinking about growth, what capabilities should it consider investing in (short-term and long-term) to create a defensible position among competitors (particularly larger players e.g. Grainger, Amazon)?
Word Count: 800 words
[1] Schrauf, S. and P. Berttram, Industry 4.0: How Digitization Makes the Supply Chain More Efficient, Agile, and Customer Focused, PWC Strategy& (2016)
[2] Moazed, Alex, “Amazon Business Has Painted a Bullseye on the Industrial Supply Market,” Inc. (Oct. 29, 2016)
[3] Weitzman, Hal, “Amazon noses into industrial supply chain,” Financial Times (May 20, 2012)
[4] W.W. Grainger, Q2 2016 Earnings Transcript.
[5] Phone interview with Michael Eggers (Director of Strategic Sourcing at Distribution International), November 10, 2017.
[6] W.W. Grainger, “Investor Resources,” http://invest.grainger.com/phoenix.zhtml?c=76754&p=irol-newsArticle&ID=619810, accessed November 2017.
[7] Page, Paul, “Today’s Top Supply Chain and Logistics News From WSJ,” Wall Street Journal (Aug. 21, 2017)
Thank you for the essay – this is a very interesting topic. Given the capital investment required for distribution businesses and the rapidly changing supply chain here in the US, it is clear DI is facing critical decisions on what direction to take their business in and how to fend off Amazon. At high level, I agree DI should focus on the value proposition they provide to customers (convenience, customer service, etc.) and continue to perfect its e-commerce platform.
One interesting view point that comes to mind when thinking about planning for the future is making sure DI is serving the right customers that will stick with them. There is a difference between selling products through Amazon as a “1PL” customer, a “3PL” customer or a FBA customer [1]. In the FBA model, Amazon is actually taking inventory risk, using their warehouses / facilities to house the products and then shipping to consumers. However, many businesses are doing their own drop-ship directly to consumers via the 1PL and 3PL models. DI can make sure to target 1PL/3PL Amazon customers to preserve their value add in the long run, fulfilling shipments for various customers at a comparable cost.
[1] https://www.spscommerce.com/blog/amazon-fulfillment-options-spsg/