August 2016 issue: Pilot systems for mining shovels: Large motions begin with tiny valves + more

Building a better distributor

 
Not long ago, I had the opportunity to sit in on a “University of Industrial Distribution in a day” class at the annual NAHAD Convention. UID is held every March in Indianapolis, and includes four full days of intensive courses. NAHAD gives its meeting attendees a taste of UID, and I found the hyper-condensed classes to be extremely educational.

One in particular really captured my attention, having started out in industrial distribution myself, some 20 years ago. Dr. Albert Bates of the Distribution Performance Project discussed what he said were the real profit drivers for a firm in this line of business.

Bates conducted a research project that surveyed 885 distributors across 17 lines of trade. The study was conducted in a typical year for sales growth. He was interested in focusing on what critical profit factors increased both return on assets (ROA) and profits before taxes (PBT).

He found some interesting results. For example, the impact of sales size—is it good or bad to be large? Larger distributors can achieve economies of scale, but they can also become a bureaucracy. But to his dismay, the research showed that it’s hard to be small in distribution these days and still be successful. Even slightly on the small side is a challenge, he said—not an absolute barrier, but a challenge. “You must be incredibly flexible and fast on your feet” if you are a smaller company, Bates said.

Bates showed NAHAD member trends over a period of five recent years:
2007 5.4% average growth
2008 1.0 %            2010 14.5%
2009 -18.5%           2011 11.1%

“I have no way to make money in that model,” he said. “I can’t take those trends and make money. It is an up and down model in which there is no reasonable way to make money long term. Can we moderate these swings? I don’t need 14% up, but I can’t take 18% down. I would like to have at least 5% sales growth every year. I also would not like to grow faster than 10%.”

Bates said that there are three big drivers across distribution: Maintaining reasonable level of sales growth, gross margin and expenses. Expenses are “the biggest of the big. Expense control seems to overwhelm almost everything we have in our bag of tricks,” he said.

In addition, the survey showed that size matters, but isn’t controllable in the short run … and inventory turnover and day sales outstanding (DSO) should enjoy benign neglect. The bottom line is that distributors that were able to do better than normal (in the upper 50% amongst their competitive set) on gross margin and operating expenses, are the best performing firms, period.

If I could learn so much in a few hours, imagine what you can absorb in a week. I’d encourage you to check out the UID at univid.org and consider attending next spring’s sessions, to help your company grow the right way.