The traditional “middle-man” distributor business model of buying in bulk and reselling at a mark-up is quickly becoming a thing of the past due to new technology and competition. Customers of distributors now can more easily remove what were once key links in the supply chain and cut costs simply by accessing potential suppliers via the Internet. They can enhance efficiencies and sustain relationships by working in the cloud. And businesses can opt to use one of the newer, larger players in the distribution market — like Amazon Supply — with incredible purchasing power, making it difficult for smaller distributors to keep up.
A New Way
Distributors who want to be competitive, particularly those feeding privately owned niche manufacturers, are becoming more of a value-added link. Many are adding services directly related to the product, such as repairs, fabrications, machining, etc. Services that do not change or modify the product, such as vendor/customer-managed inventory programs, product training, logistics and product pricing/marketing strategies across different geographies, are also adding value.
The trend to be more than a reseller is nationwide. According to a study conducted by the National Association of Wholesaler-Distributors, only 19% of distributors studied in 2008 said 5% or more of their revenue came from services provided to customers. That group of distributors rose to 44% in 2013 and is expected to jump to 75% by 2017, with 58% of them having service revenue make up 5% to 20% of total revenue.
To free up more time to add new services, distributors should be streamlining their other business activities that are important, such as outsourcing information technology or other business support activities, yet do not add direct value to their customers.
Financial and Business Implications
As distributors increase service offerings to customers, there are related items to consider:
- Tax opportunities. Distributors providing new services may enter into a contract manufacturing arrangement with customers and other third parties. Such arrangements could provide distributors with new tax incentives, such as the domestic production activities deduction.
- Consignment inventory. Consider whether the operating system is equipped to track consignment inventory; if the business agreements clearly state when the risk of loss is transferred; if all incremental costs surrounding the housing and transporting of consignment inventory have been factored into the profitability analysis; and if insurance needs will change.
- Recognition across new revenue streams. The revenue for some services may be easily recognized on a per-piece, -pound, -crate basis in the same manner as regular distribution activities. However, other services may require new policies and practices, such as revenue streams generated by services performed for a specified time when revenue would be recognized ratably or project-based work where revenue may be recognized based on the achievement of milestones.
While only covered at a high level in this post, the distribution industry is certainly changing. Adding services to a distributor’s offerings is one way among many to add value and become a more integrated part of its customers’ teams.
Contact a member of your service team for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.