The Profitability Squeeze: Strategies and solutions to protect wholesale distributor profit margins

Strategies and Solutions to protect wholesale profit margins.

Profit margins are your lifeblood. Many wholesale distributors like you are experiencing a “profitability squeeze” due to inflationary pressures, changing market conditions and increasing competition. Your suppliers and shippers have substantially raised prices to levels not seen since the 1980s, and your customers are looking to you to get them through these challenging times.

As costs rise, the impact on profit margins — and your growth potential — has been immediate and intense. You need to consider the range of factors impacting your business models to find the appropriate balance of cost management, sales volume, revenue sources and net profit.

A sour surprise

When it comes to protecting your profit margins, there’s no shortage of challenges to overcome, including:

• Pricing Pricing large volumes of products can be a complex and time-consuming process. You must balance your profit margins with market demand, competitor pricing and customer needs. Consequently, margin compression and pricing errors can occur, leading to a drop in profit margins.
• Inventory Overstocking or understocking can result in unnecessary expenses and/or lost sales. You must optimize your inventory management to ensure the right products are available at the right time and in the right locations to meet customer demand.
• Sales channels Like many wholesale distributors, you likely sell through multiple channels, including online, direct sales and through resellers. Managing various channels is critical to maintaining profit margins. Each channel may have different pricing, terms and conditions impacting profit margins.
• Seeing profitability Given the many buy-side and sell-side contracts and agreements you have with various manufacturers, suppliers, retailers, resellers and customers, it can be difficult to see profitability. Real-time visibility across complex promotions, incentives, rebates and growth programs is needed to understand how each truly impacts your revenue and profits.

When life gives you lemons, make lemonade

Despite the challenges and risks, there are 6 best practices to help you protect profit margins.

1. Cost control Minimizing costs is even more critical in times of inflation. Low-margin businesses require streamlined operations to optimize their operations and maximize efficiency. Negotiate more favorable pricing with suppliers. Seek better incentives, rebates, trade promotions and payment terms. Look to leverage automation wherever possible in such areas as order processing, inventory management and warehouse operations.
2. Pricing This is more involved than an 8-10% across-the-board price increase. Take advantage of intelligent price strategies like cost plus, value-based, dynamic and bundle pricing. Good communication with your suppliers, shippers and customers is essential. Nobody likes a price increase, but you should proactively address the issues, share why you are taking specific actions and mutually execute your plans. You also need to offer appropriate and reasonable lead times and be open to ideas that mutually drive costs down and efficiencies up.
3. Inventory management Normally, you seek to avoid stockouts or overstock situations. Just-in-time (JIT) inventory levels are the gold standard for running as lean and efficiently as possible while having near 100% order fill rates. In times of volatility, tweaking your inventory levels can have a huge impact. When costs rise, your procurement processes must focus on opportunistic buys. Before a supplier promotion expires or a new price increase occurs, consider increasing the inventory you carry on hand. This is called a “forward buy” and will increase your ability to supply at lower costs.
4. Sales channel management By managing sales channels effectively, you can reduce the risk of channel conflict and optimize sales to maximize profit margins.
5. Value-added services Differentiate yourself with unique offerings like customized packaging, pre-assembly, kitting, specialized logistics and after-sales support. Additional services can help offset higher pricing and customer satisfaction.
6. Investing in technology Your industry has a long history of being slow to adopt new technologies, but there has been significant improvement in the last 3-4 years. Distributors who invested in artificial intelligence (AI), blockchain, cloud, ecommerce, robotic process automation (RPA) and other technology are in a better position than those who have yet to explore digital technologies.

Squeeze the day

To succeed, you need to adopt an intelligent, data-driven approach that helps you:

• Streamline operations Reducing costs and increasing efficiencies may yield unrealized benefits. Benchmark your company to understand where opportunities exist. Data will help you identify the value of more flexible order management, inventory optimization, higher fill rates and optimizing financial metrics.
• Negotiate with suppliers Suppliers are more likely to be receptive to lowering prices and trying different approaches when data supports this. Lower pricing, more impactful trade promotions and more substantial incentives can drive better results. Your suppliers are more likely to lower costs when there is a mutually agreeable plan to grow volume and profit.
• Innovate with technology Automating complex processes lowers costs while creating new sources of value. Data-driven solutions can also provide valuable insights into market demand, competitor pricing, revenue, inventory, sales channel management and customer needs so you can optimize pricing to maximize profit margins, remain competitive and enjoy the fruits of your labor.

Profitability is essential for a healthy business ecosystem. Innovation and technology offer new avenues to create value, reduce costs and drive profitability.