May. 12, 2016
TopicsLogistics

Distribution Models for the Future

Success Factors for Chemical Distributors Include Complexity, Implementation

  • Guenther Eberhard, DistriConsultGuenther Eberhard, DistriConsult
  • Guenther Eberhard, DistriConsult
  • Chart 1
  • Chart 2

Distributors often see themselves in a central position within the chemicals (or polymers) value chain, as a bridge between supplier expectations and customer needs. This position brings with it the potential to add significant value for these two stakeholder groups and the distributor itself, but it also brings some challenges.

Distributors must always satisfy these sometimes opposing needs at reasonable cost and also generate a return for themselves, which allows for the continued investment in the business system and its infrastructure.

A Sandwich Position

Chemical distributors can sometimes feel they are caught in the middle between supplier expectations and customer needs. Suppliers use distributors to get market reach and access to customers they would otherwise not find — or reach at a reasonable “cost-to-serve” level. They expect the indirect channel to give them the necessary “capillarity” and their distributors to offer services around their products.

Distributors are expected to have their own technical service specialists and application laboratory facilities. Suppliers want their distributors to observe their often-stringent business standards, stipulating minimum order sizes, longish lead times and other logistics parameters. They also expect their distributors to be transparent, feeding them back customer and application specific information on the use of the products, so that they can maintain insights into technical and commercial needs of end-use customers and a connection with the marketplace.

And on the financial side of the business, distributors are expected to have robust financing, so that a supplier’s bills can be paid reliably within short payment terms.

Customers, on the other hand, expect local inventory of the broadest product portfolio possible, so they can call off product on short notice, often in ever-decreasing lot sizes. The product should come from reputable suppliers, must ideally be from just one single batch and have a long remaining shelf life upon shipment. Security of supply must be guaranteed at all times.

Distributors are expected to provide extended credit terms according to local business practices and ensure competitive pricing.

Technical capabilities and laboratory support are seen as a differentiator but rarely paid for explicitly.

Managing Complexity

The two sets of expectations are not always fully compatible. Regulatory requirements and the need to comply with industry standards and practices add another challenge. As a consequence, distributors must cope with a high level of complexity and manage it in a smart way, so that the cost of the business does not get out of hand.

As the requirements vary by application (i.e., industry sector), a certain level of specialization is often the case. Some distributors focus on life sciences, where a high level of regulatory expertise is needed. Others feel more at home in technical applications such as coatings, adhesives, sealants and elastomers (CASE), plastic additives or lubricants.

Unique local situations, needs, preferences and restrictions also come into play and often form a formidable hurdle or force a distributor to line up and execute business transactions in a particular way. Distribution, as seen from a customer perspective, is in essence a local business. Suppliers, on the other hand, more used to economies of scale, tend to favor all-encompassing solutions, sort of standardized to cover larger geographies.

Global Distribution!?

Then what is the best business approach to this, a global or at least pan-continental or a local setup? In our observation, a few large suppliers drive most of the pan-continental or even global approach. It is, at least to some extent, a matter of (supplier) company size and scope of activity. Some large distributors have responded to this. They view it as an opportunity for commercial differentiation from their (mostly smaller) local or regional competitors.

But even at large producers, different models do coexist. Dow Europe uses three rather distinct models to satisfy the needs of a multi-business unit (BU) enterprise:

  1. Country Leader (limited geography, many applications and Bus, respectively)
  2. Industry Specialist (broad geography, one application, few BUs)
  3. Pan-European Partner (broad geography, many applications, many BUs)

Why all these different models, when otherwise simplification is the name of the game so the benefits of a large-scale approach can be captured? Well, market needs and structures matter, too. And these may make it more beneficial to work with what is here termed “Country Leaders” or “Industry Specialists” for some geographies or at least some product lines (i.e., BUs), respectively.

DistriConsult has recently done an analysis of the top 30 distributors globally to assess their geographic coverage. This was based on figures published last year by ICIS (Fig.1). Two-thirds of the companies studied are active on one or two continents. Usually their home continent plus a selection of countries on another continent, where the company has over time developed historical links, often based on a common language. Another reason may be that it was attracted to these regions by higher growth rates and other perceived development opportunities overseas. Sometimes there is also a certain level of supplier push or customer pull, mostly along the lines of “you are doing such a great job for us in country ABC, can you not help us in country DEF as well?”

Materials And Processes

Particularly in the distribution of specialty chemicals, be it in the form of ingredients, additives or formulations, technical expertise increasingly goes beyond the product and its properties or functionality and performance. A competent distributor must also understand the design (or formulation) concept, which is behind his customer’s product and the process that is being used. Only when a sort of “systems approach” is being taken can the full performance be achieved — can a good cost-benefit balance be reached (Fig. 2).

This has a strong influence on how a distributor interacts with customers. Understanding their needs is essential. Customer management must be done systematically, and that is often a very local task.

Customer Management

Good customer management requires detailed insights into the needs of every customer and the resulting buying behavior. Their preferences can show a wide variation, which makes it sometimes difficult to group them into suitable segments. Market segmentation exercises, when set up properly, can be enlightening. But they can also be tedious. And if the resulting segmentation is too complex or the segments themselves are too small, the cost generated by a differentiated approach can outweigh the expected benefits by far.

Customers vary in size and importance: small customers, medium-sized customers, large customers and key accounts. And it is not just the key accounts that are important. Some small or medium-sized customers may be fast growing with their innovations and therefore become very relevant in the near future. One should also not forget former customers. Winning them back might be easier and more economical than developing entirely new customers.

Really knowing one’s customers well, understanding their business and needs, also helps when talking with suppliers. This type of insight into a market or an application is what many, if not all of them, are looking for, when they assess and select distribution partners. A key point here is that a lot of this has to be done on a point-of-use (i.e., local) level, because customer needs are different across locations or regions.

Implementation Matters Most

In our view, distribution is essentially a local business. Customers want distributors that understand the customers’ business. Going through a needs-based segmentation exercise can pay off nicely, as long as it is done properly and fragmentation is avoided. Real knowledge of one’s customers’ needs is a very valuable asset. That is what suppliers want to use and leverage when they select distributors as a channel-to-market.

Some suppliers take an increasingly global approach to their business and expect the same from their distribution partners. However, current evidence suggests that this approach is for the few big players, on both sides, as critical mass is an issue here. As with many other management initiatives, well-thought-out plans are a good starting point. However, success ultimately requires having good people in the company to take care of the implementation.

 

Contact

DistriConsult GmbH
Säntisstrasse 69C
8820 Wädenswil
Switzerland
Phone: +41 44 680 1431
Telefax: +41 44 680 1432

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