Executive summary
As distribution companies face increasing challenges, leaders are looking for business growth and omnichannel opportunities that can provide stability. Technology is often part of the solution but, with thin margins and a long list of technology products, distributors need to make sure they pair the right flexible solution with a phased implementation to ensure continued success over time.
Ongoing changes are threatening profit margins in distribution and logistics. That’s pushing leaders to look for growth that will give their companies more stability.
“The industry has a ton of pricing pressures and a lot of other headwinds, so margins are really thin,” said Grant Thornton Transportation and Distribution Industry Head Russell Norris. “A lot of companies are now focused on grabbing market share, expanding and building top-line growth with the expectation that they can figure out the profitability down the road — they just want to get the top-line growth in place.”
Grant Thornton Business Consulting Managing Director Brad Hulbert agreed. “Growth is no longer optional for these companies. It's a strategic imperative, and I heard that loud and clear at a recent distribution conference where everybody was focused on how to grow — and how to do it in the right way.”
To grab market share and achieve top-line growth, distribution companies need to overcome some challenges that keep growing.
Growing challenges
The first challenge is the competition for workers. “Labor constraints are still a big factor in the warehousing and distribution market,” Hulbert said. “Companies are facing persistent labor shortages and high turnover.”
Hulbert added that facilities are another issue. “Space is at a premium, so being efficient with your space is hypercritical. Companies are looking for micro distribution centers that are automated and provide maximum throughput. Customers now expect that they can get everything in one to two days, so micro distribution centers are really starting to pop up around urban regions.”
When a distributor can meet these growing expectations, it becomes a partner of choice for manufacturers and retailers that are trying to build their business and meet the rising expectations for customer satisfaction.
Reverse logistics
Customers also want to return items quickly and efficiently, effectively reversing the traditional flow. “The ability to return — and return easily — is the consumer’s expectation,” Norris said. “If you don't solidify your process for that, you're going to get left behind. Your clients are going to use a distributor that's easier for their customers to do business with.”
In some markets, distributors essentially need to plan for two-way logistics. “A lot of distributors still don’t put enough focus on the reverse logistics side, including returns management,” said Grant Thornton Business Consulting Senior Manager Domenic Scavola. “It still tends to be very manual, since most automation solutions are not configured with returns in mind. It needs to be part of the core process, treating returns as normal receipt rather than a special case, once you get through return merchandise authorization processing.”
Inefficient return processes can affect the cash cycle as well, depending on when companies issue the return credit or authorize the return payment. “The quicker you can get the customer service piece of it handled, the faster you can get that cash back where it needs to be,” Scavola said. “Then, you can also get the product back in stock, if it's feasible.”
If distributors can overcome these growing challenges to build a fast and efficient two-way network, they can open the door to new client opportunities.
Omnichannel opportunities
“We’re seeing a large number of retailers that are starting to outsource fulfillment during peak seasons — like holiday seasons,” Hulbert said. These retailers might not want to invest in automation to process peak seasonal volumes internally. If you have that automation in place, then you could have the flexibility to form a lucrative omnichannel partnership.
“Some companies want to find a strategic partner that already has the base levels of automation to handle the peaks and valleys of their overall demand,” Hulbert said. “Automation helps them meet those demands without having to go out and hire 30 to 50 temporary warehouse workers for a couple of months. Since labor is already a challenge, finding labor for those peak seasons is a big concern for retailers.”
New businesses
Omnichannel partnerships are especially important for small startup retailers that are built on social media or other digital platforms. “The business might not be very mature, but it has a product — and sometimes a lot of people want that product in short order,” Scavola said. “The company needs to figure out distribution quickly. It’s not a core competency for these organizations, so they’re looking to outsource that piece to a reliable third party. If you’re very efficient and effective, and can absorb their volumes while keeping costs down, there's growth to be had for the distributor.”
New services
Distributors are even finding opportunities to move beyond their traditional role, as they shift to a hybrid model. Hulbert explained, “They’re starting to focus on how they can go beyond delivering goods to also provide added services, whether that’s installation, customization, kitting or any other value-add services.”
When companies build their capacity and diversify their offerings, they also expand their options for mergers and acquisitions. “Buyers are out there looking for distributors that have a base level of automation, so that they can then provide scalability — even scaling with an influx of capital,” Hulbert said. “Automation is an enabler that provides both stability and scalability.”
However, warehouse automation is a tool, not a solution — technology like automated storage and retrieval systems (AS/RS) must be planned, implemented and managed effectively in order to achieve the benefits that make it so attractive to distributors and their clients. This is especially true for distributors that want to be a flexible partner for a range of potential clients and services. To meet those needs, companies need flexible technology.
Flexible technology
When companies look at how to establish or upgrade their warehouse automation, they have a wealth of options.
“You might find one option that’s perfect for you right now — but, from a risk and supply chain resiliency perspective, it might actually make sense to go with an alternative that is slightly less efficient but offers a lot more flexibility to grow and scale with you,” Scavola said. “Sometimes we have clients that have invested in automation, like AS/RS, to maximize the cubic volume of their facility. However, if their products or order patterns change, that can become a problem.”
“Whatever you’re investing in needs to allow you to pivot if customer demand changes, or some other piece of your business changes,” Norris said.
“Too often, we see companies buy a product before they really assess their needs and understand if it’s really going to be beneficial for them," Norris said. "It may be great for another company, but that doesn’t mean it will work for you. You really need a technology assessment at the front end, to understand what your needs are and how to find the right product for those needs — so you can go into the project with an open mindset.”
Common needs in distribution
After you prioritize your issues, you can consider solutions that apply flexible technology to dynamically improve warehouse operations — or, to optimize carrier selection and freight costs, route deliveries, reduce last-mile delivery expenses and more.
Whether you are addressing warehouse automation alone, or other issues throughout the distribution cycle, you need to stay focused on your goals as you consider your technology options.
“On the automation side, there are a lot of products out there, and every year it seems like there are more options, more capabilities, more acronyms,” Scavola said. “The important thing is to understand your own product portfolio — the physical size, characteristics and handling requirements are one factor. Your order profiles, volumes, and customer requirements are another. The factors are different for every organization, and that will drive wildly different solutions. Two very different solutions could be the perfect answer for two different businesses.”
Your perfect solution will likely change over time as your business or customers evolve. That’s why it’s important to think in terms of flexible technology — and to think beyond the initial implementation, to how you will adapt the solution and maintain success over time.
Successful approaches
As your needs change, so should your solutions — even if it’s just a matter of adjusting or further implementing a technology solution that you already have in place.
Often, distributors have technology that they aren’t using effectively. “I see it all the time — not just across automation, but with any large transformation,” Hulbert said. “Companies implement the minimum viable product and then expect to come back to it in the future, but they never do.”
A solution’s advanced capabilities are often the reason to select it over other options — but, if companies never implement those advanced capabilities, they never get the benefit that justified the selection and the cost.
“I think the best way to avoid that is by having a phased implementation roadmap,” Hulbert said. An implementation roadmap gives you a timeline of when you will implement the minimum viable product, followed by realistic timing and accountability for implementing subsequent capabilities along with when and how to re-evaluate and reconfigure the solution in the future.
To maintain long-term success, you need a long-term plan. “Have a strong foundation in a three- to five-year strategic plan,” Hulbert advised. “Start with where you want your organization to go in five years and 10 years. Build your automation plan and journey toward that."
"Year over year, make sure that the infrastructure is going to be able to fulfill your demand," Hulbert said. "Understand your technology landscape, core processes and overall SKU portfolio — and how that might change or how much variability there is. Typically, companies start with pick, pack and ship, then continue to evolve and expand from there, so have a firm North Star or strategic direction. That is really the starting point for understanding the business case behind automation: Where does it make sense?”
Norris added, “Margins are so thin that you have little room for error. So, if you don't have a plan in place, you can get sideways really quick.” Your plan needs to consider both your long-term goals and your immediate needs in order to make a real change.
Real change
To achieve change while maintaining daily operations, ensure that each phase in your plan accounts for real-world contingencies. “If you’re installing something and continuing regular operations under one roof at the same time, that’s a lot going on,” Scavola said. “You need a proper transition process, where you can still meet customer expectations while this is happening. Have an implementation plan with contingencies in place to handle the unexpected — I’ve seen many clients struggle with that.”
Planning must include more than just the technology. “The biggest challenge isn’t necessarily the technology, but driving the actual transformation across the organization,” Hulbert said. “That requires changes in process, data and culture. Culture is one of the hardest things to change.”
When companies fail at this larger transformation, they can end up with siloed deployments that only complete a solution in one area, or they can struggle to replicate success from one area or site to other locations. “People don’t spend enough time really thinking through the change management aspect and all that's required to go from a manual process to a hyper-automated process," Hulbert said.
Scavola agreed, “We do a lot of assessments where we find end users who are relying on manual workarounds to do their job instead of using the automation that leadership invested in. You need to loop in middle management, or a team that's close to the daily operations, to make them aware of what’s possible and what is coming on the phased development roadmap."
"Get some upward feedback," Scavola said. "Sometimes, decisions are made at such a high level that companies buy a product, implement only 20% of it, and then forget about the other 80%. The employees who are actually using this product every day don’t even know that the 80% is available.”
“Have a robust group of people on the project team, to encompass the actual automation journey — people who are doing the work, the supervisors, the next level up, to get the full perspective on what's actually happening and how this will integrate for long-term success,” Hulbert said. “That also improves their empowerment to drive change across the organization.”
“You have to get the right level of involvement, and the right mindset from leadership, to invest not only in the solution but also in helping your people to learn it and to use it the right way, so that the solution can be effective,” Norris said.
Contacts:
Head of Transportation & Distribution Industry
Grant Thornton Advisors LLC
Principal, Tax Services
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