Adam J. Fein: Wholesale distribution in a demand-driven world

AMR Research, a supply-chain research company, coined the DDSN phrase to describe the technologies and business processes that allow companies to respond to real-time demand across a network of customers, suppliers, and employees. Related buzzwords include “demand chain optimization” and the “demand-based supply chain.”

Regardless of the terminology, demand-driven ideas represent a genuine opportunity for many supply chains. The demand-driven concepts implies basing forecasts, inventory purchases, and other supply chain planning decisions on changes in actual customer sales activity rather than internal forecasts or simple replenishment of sold products. 

Surprisingly few distributors rely on demand-based data when making inventory buying decisions. A recent NAW/DREF study found that 70 percent of wholesale distribution buyers forecast future purchases using relatively simple mathematical extrapolations of past demand. The remaining 30 percent did no forecasting at all or just looked at the number of times the product is sold. Few buyers even bothered to use the forecasting tools already available in their current technology systems. 

The foundation of a demand-driven channel is greater information transparency between trading partners. Consider the way in which large retailers like The Home Depot and Wal-Mart have been wringing supply chain efficiencies out of manufacturers for years. These power buyers require manufacturers to replace products as customers purchase them on store shelves, not merely replenish channel inventory. Manufacturers are required to respond to demand information generated by point-of-sale data.

In contrast to retailing, there have been relatively few efforts to apply demand-driven concepts to the business-to-business supply chains in which wholesale distribution plays a large part. One major stumbling block has been distributors’ reluctance to collect and share demand data. Distributors are legitimately skeptical of sharing these data and suspicious that manufacturers will attempt to bypass the wholesale distribution channel. Few distributors wield as much channel power as the big box retailers, placing distributors in a much more vulnerable position. 

Distributors can take advantage of the demand-driven trend to build better forecasts, improve warehouse efficiency, and remain a preferred route to market for suppliers and customers. Demand-based forecasts allow a distributor to ensure that the right products are in stock at the right time in the correct quantities. Buying correctly increases operating cash flows by reducing excess inventory investments. Fewer out-of-date or obsolete products will remain in the warehouse, so that less inventory is eventually written off.

Both manufacturers and distributors will be able to manage their respective inventories better when demand-based information is shared. Manufacturers can improve production planning and achieve more stable production runs with more stable ordering patterns from distributors. Many manufacturers will want to go further and gain information to help them forecast, plan new product launches, or measure share on a market-by-market basis.

Demand-driven channels are especially valuable when supply is limited due to production problems or unexpectedly strong customer demand. In a demand-driven channel, scarce products can be allocated based on actual geographic demand patterns rather than historical distributor sales patterns. Distributors will lose the incentive to game a manufacturers’ product allocation system with phantom orders, so fewer customers or distributors are disadvantaged. The manufacturer receives forecasts based off of true demand, instead of channel orders, and can ramp up production appropriately.

Like many supply chain concepts, there is substantial hype surrounding the demand-driven concept. Demand-driven technology tools are most applicable when the downstream customer’s business enables reasonable forecasting of product usage, such as a manufacturer operating against a production schedule or a contractor working on a large building construction job. 

Other channels will take a long time to become demand driven. For instance, small residential contractors have short purchasing horizons geared toward the current job and day’s work. They need materials right away for pickup or same-day delivery.  Contractors tend to deal with only a few reliable suppliers who can be counted on to deliver a wide range of products with straightforward billing.

Here are a few steps for distributors who want to start taking advantage of demand-driven concepts:

• Learn from successful channels. In the pharmaceutical industry today, wholesalers continuously share order, inventory-to-sales, and shipment data with manufacturers. (See Building a lean supply chain.) A task force of manufacturing and distribution executives in the electrical products industry recently outlined the benefits and opportunities of sharing point-of-sale data. (See the National Association of Electrical Distributors whitepaper Recommended Best Practices: Collection of Point-of-Sales (POS) or Point-of-Transfer (POT) Data*)
• Recognize that customers’ economic condition limits the risk of data sharing. Distributors maintain local inventory and sales resources to service market demand, as well as carry credit for small, slow-paying, and frequently unreliable end customers. Few manufacturers want to take on these activities.
• Communicate the local service and fulfillment capabilities of wholesale distribution to manufacturers. Distributors will still provide fulfillment, sales support, and technical service to customers in most industries, regardless of the amount of demand data shared with manufacturers. Despite their supply chain prowess, retail home centers have had a less significant impact on wholesale distribution than many once feared. Similarly, The Home Depot has resorted to acquiring wholesale distribution companies in an effort to attract professional trade contractors.

Rather than being fearful, wholesale distribution executives should remain open to demand-driven supply chain ideas as a way to improve productivity and remain a cost-effective, relevant channel.