Distributors: Increase your Valuation with…Technology?

Earlier this week I had lunch with a friend and business associate, Chris Rowen from VRA Partners.  VRA is an investment banking firm that works with distribution companies.  Seems strange to say, but true.  In this market where all the money seems to be flowing at cloud-this or SaaS-that (not that I'm complaining...plenty of people want to flow money to our SaaS), Chris and his firm are working with distributors to help them increase valuations, fund and market their businesses.

Often forgotten, but in my opinion critical to the American way of doing business, and that of many other countries, distributors continue to offer a very valuable service and continue survive and thrive in today's marketplace.  Some of the biggest companies in the marketplace, and some Fortune 500's you've never heard of are distributors...Ace Hardware, Henry Schein, Sysco and more.  But the smaller players drive value and make waves, and money in the marketplace as well.

Distribution is a tough game.  While manufacturers like Stanley Black & Decker (SWK), Johnson and Johnson (JNJ) and Kraft (KFT) thrive on 30-70% (yes, seventy percent) gross margins, their distribution partners fare far less well.  Depending on the market, distributors live on gross margins in the 10-30% range.  Today, distributor's gross margins are closer to the Net Income rates of manufacturers like Johnson and Johnson.

Knowing this you can see why Chris encourages distributors to embrace technology for improved performance and company valuation.  Labor is often one of the largest costs in any company, and technology enables more efficient and effective execution by your team.  Chris points specifically to supply chain technology for a very good reason as well.  The only investment that distributors make that even approaches labor is that made in their inventory.  In fact, inventory is the largest physical asset of nearly every distributor.  Enabling a company to optimize their investment in their life's blood in terms of sales, and largest capital expediture has benefits that we all understand.  It is virtually impossible to get these benefits without the science, best-practice guidance and processing power of supply chain technology.

Today's supply chain solutions provides such leverage in handling large data volumes, high-pressure sales environments and rapid decision cycles that it is employed in some form or fashion by nearly every distributor.  The cost and quality of that technology, along with the soundness of approach is what progressive distributors are looking to improve with new technology moves.  The best solutions employ proven principles for aligning inventory with demand and profit goals, assuring a goal-driven methodology that allows distributors to improve their business without a PhD. in mathematics.  Whether they are technology-enabled or not, there are proven principles that distributors can employ that level the playing field with their suppliers and help them get truly game-changing results:

1. Demand Management: Precisely understand your demand picture - Know the volume, trend, volatility and patterns in regard to how your customers buy from you.
2. Lead-Time Management: Always look ahead - Consider your lead-times.  If you have strong fundamentals, getting the quantity right is just fulfilling demand.  Managing your inventory better is about timing inventory properly.
3. Service and Safety Stock Management: Understand your customer service goals - How you meet customer demand defines you in the marketplace.  Reach the highest service you can afford...and not a dollar more.
4. Order Cycle Optimization: Cover demand, economically - Make sure you are buying enough to cover customer demand and taking advantage of the economics in your supply chain.
5. Replenishment: Replace inventory systematically, logically and consistently - Goals, facts and process should rule the day here.  Take emotion, conjecture and speculation out of it.
6. Special Demand and Order Management: Support exceptional demand and opportunities - Take advantage of opportunities to position your company better in the marketplace with promotional and profit opportunities.
7. Order Validity Management: And finally, make that order work - Meet the logistics constraints of your supplier or company to assure that the order is built to assure optimal service, and is fulfilled without unnecessary intervention.

These principles are a foundation for increased sales, reduced inventory exposure, and increased profit.  Specifically, the sixth principle enables distributors to gain economic advantage by optimally investing in price change opportunities.  Forward buying is a concept many know of in currency, but is applicable and particularly lucrative in purchasing inventory.  Any time the price of a product is about to change...be it up, or down...there is profit to be made.  In some distribution industries like foodservice, where margins are particularly tight, there would be virtually no net income without forward buying.  Many distributors today use their advanced technologies to take advantage of this internal margin generation opportunity, and the truly advanced have created an internal "machine" that produces truly remarkable contributions to the bottom-line.

There are many fine cases of companies that have increased their valuation by employing these seven proven principles.  Public companies like Henry Schein (HSIC) have continued to increase their net income rate, which can easily be seen in their results.  Still, private and smaller companies also increase their valuations by focusing on profit and by managing their largest asset as an investment.  It is no coincidence that the best distributors have advanced technologies, people and processes that minimize inventory while at the same time maximizing sales opportunities and profit capture.  If you're looking for more value...look at your shelves.

A special thanks to Chris Rowen for looking out for the under-appreciated distributor, and for his strong insight into how the marketplace values these companies today.