WHOLESALE DISTRIBUTION: HOW A
LOYALTY PROGRAM CAN HELP
June 2016
 Bryan Ball, Vice President and Group Director,
Supply Chain and Global Supply Management Practices
Report Highlights
p3
80% of wholesale
distributors say that
they are concerned
about the impact to
costs and
profitability with the
increase of B2C
orders.
p4
The leaders are more
than 2x as likely to
recognize that to
offset new
requirements they
must improve their
efficiency through
automation and
rethink how they are
managing their
resources.
p7
93% of Leaders have
the ability to
collaborate with
customers at a
strategic level.
This report will examine the challenges facing Wholesale
Distributors, and review how the business model requirements
have changed as a result of B2B and B2C Convergence, the
capabilities that the distributors have in place to address these
changes, and where performance gaps exist. Based on the
shortcomings we will point out how a loyalty program could in
fact improve performance and help distributors address many of
these challenges.
p8
77% of Leaders have
the ability to segment
their supply chain
based on customer
profile data.
Wholesale Distribution: How a Loyalty Program Can Help
2
Wholesale Distributors
are under siege from
several fronts and must
reinvent themselves in
order to compete in the
digital economy going
forward.
Wholesale Distributors are under siege from several fronts and
must reinvent themselves in order to compete in the digital
economy going forward. Many of these businesses were founded
on relationships that have grown based on the need for
distribution services as well as customer and supplier loyalty
over time. The channels that were clearly defined for years are
dynamically shifting due to the disruptive force of eCommerce
and its impact on the duties of wholesale distributors. They now
find themselves not only managing their B2B business, but their
own and their customers’ eCommerce initiatives as well.
Whether by choice or by force they are in the retail fulfillment
business as a result of these market changes, as discussed in our
research, B2B & B2C Convergence: A Call to Action. The question
is, how should wholesale distributors respond to the changes
and how does it affect their business model, which has been
stable and well-defined for decades?
Understanding the Changes in Wholesale Distribution
Before jumping to a solution it’s important to recognize what
distributors are now dealing with. The first realization is that
they are facing more challenging and complex fulfillment
requirements, as reported by 87% of distributors, who indicate
they see eCommerce and multi-channel or cross-channel
demand impacts. This is driving an increase in direct-tocustomer shipments - 61% have direct-to-home delivery models.
These fundamental business changes are resulting in some real
challenges at the planning and execution level (see sidebar
“Impacts of B2B/B2C Convergence”).
Convergence
Supporting B2B and B2C convergence impacts the distributor’s
labor and freight costs to fulfill the increasing shift to unit
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Wholesale Distribution: How a Loyalty Program Can Help
shipments from traditional bulk shipments. Adopting more
efficient warehouse processes and responding profitably to
these changes was the most-cited pressure (70% overall) for
managers looking to address the reduction of operating
expenses. Fifty percent of all companies, on average, seek to
“improve labor efficiency and workforce productivity by
reassessing management software” and 63% of the leaders are
improving throughput capacity.
Impacts of B2B/B2C
Convergence
•
•
Figure 1 highlights these critical areas of change that distributors
tackle within their day-to-day operations as a result of the
convergence and omni-channel fulfillment requirements.
•
Figure 1: Challenges Resulting from Convergence
•
•
80% of wholesale distributors say
that they are concerned about the
impact to costs and profitability
with the increase of B2C orders
Increase in order density and the
growth in B2C order types
Labor/shipping costs due to the
introduction of more split case
quantity fulfillment and parcel
delivery
Compression in the order-todelivery cycle time that comes
with matching same-day and 2day delivery for the new B2C
orders
Manual and special offline
processing as traditional B2B EDI
systems are supplanted by more
complex manual flows like
email/fax and phone orders
Source: Aberdeen Group, April 2016
At the heart of the matter is the requirement to take on multiple
channels for sales and logistics – all while trying to maintain
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Leader (top 30%)
Advantage
Versus less automated Followers
(remaining 70% of companies):
•
•
•
•
95.4% of orders delivered to
customers complete and ontime outbound vs 86.4%
94.6% of orders received from
inbound customers complete
and on-time vs 84.8%
-0.5% decrease in total landed
per unit costs in the past year
vs +8.5% increase
-7.5% decrease in the
frequency of out-of-stock
inventory in the past year vs
.9% increase
Wholesale Distribution: How a Loyalty Program Can Help
their original cost profile. The Leaders are 65% more likely to see
this challenge because they are out in front attempting to
address these issues (see sidebar for definition of Leaders). As a
result of the shift from bulk shipments to shipping single units to
end customers, there is an increase in SKU’s for packaging
options that must be managed in terms of inventory as well as
buying and stocking requirements - another added set of costs.
The Leaders are more than twice as likely to recognize that in
order to offset new requirements they must improve efficiency
through automation and rethink how they are managing and
deploying their resources. Automation is one of the key areas
where the Leaders are actively addressing the challenge and
recovering some of their costs, as discussed in our recent report,
Digital Economy in Wholesale: Customers, Suppliers & the
Workforce.
All of these changes are viewed as value-added services to the
Followers, who are not as far along in recognizing the changes
required. Leaders, however, are already engaged in dealing with
omni-channel issues and SKU proliferation through automation
and revamping their systems.
Changing Business Model
The net result of this upheaval is that wholesale distributors
recognize that they can no longer meet every challenge and be
all things to all customers. Distributors have seen their margins
shrink as their costs increase, all as a result of fighting hard to
hang on to their market share. But to compete with the likes of
Amazon, they may be absorbing the freight costs just to retain
the order. And the pressure continues to mount with same- or
next-day delivery being offered by eCommerce providers. A key
factor to assist in modifying your business model is to leverage
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Wholesale Distribution: How a Loyalty Program Can Help
the loyal relationships you have established over the years and
solve some of these business problems in new ways. This may
also mean leveraging their own suppliers and manufacturers in
ways they’ve not considered before. The bottom line is that
change is required and there are alternatives. Continuing to
operate with a “business as usual” approach is the mistake they
cannot afford to make.
Where and How Loyalty and Relationships Play a Role
For distributors, redefining the value of their longstanding
relationships through a formal loyalty program is a positive way
of quantifying and establishing that value. In our view, a basic
framework for a loyalty program consists of an attitudinal
(qualitative) component as well as a behavioral (quantifiable)
component. The attitudinal component involves a customer
advocating on their supplier’s behalf as reference or as an open
endorsement. It could be as simple as declaring openly to their
employees who their distributor is. The behavioral component is
much more quantifiable and typically tied to a desired
improvement such as growth, service or profitability.
 Read the full report,
“B2B and B2C
Convergence: A Call
to Action”
 Related Research
"Digital Economy in
Wholesale:
Customers, Suppliers
& the Workforce"
Historically, loyalty may have been based on the fundamentals
of both components, such as stocking the product, having it
available at a competitive price, and delivering it in a timely
manner. This fundamental model served both traditional
customers and suppliers who wanted a reliable distributor to
stock and make their product available.
Today, loyalty goes beyond the basics of pricing, stocking, and
delivery. While still important factors, establishing a loyalty
program in current market conditions enables distributors to
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Having the ability to
collaborate with
customers on a
strategic level comes
from the relationships
and longstanding
loyalties that exist in
wholesale distribution.
Wholesale Distribution: How a Loyalty Program Can Help
highlight where they offer differentiated support, the value that
support provides via program benefits, and how they might
partner further with their customers and suppliers to address the
new challenges they all face.
Segmenting the business to better understand the customer and
your relationship to them is one of the first steps in establishing
a loyalty program. Are they affected by the convergence issues
identified in Figure 1? If so, how? Are they aware? If convergence
does not come into play, then growth and volume or new
product introductions may be more important objectives. By
segmenting the business, and understanding the relationship, a
well-designed loyalty program can drive the desired behaviors.
Using the information gleaned from segmentation to design and
establish the loyalty program will help leverage the relationship
in the smartest way possible.
To effectively evaluate all the options, however, it’s important to
recognize the maturity level wholesale distributors have in place
when it comes to process capabilities and technology enablers
that determine their preparedness and agility in addressing
problems and building new initiatives. Approaching a loyalty
program with the intent of finding solutions may lead to an
evolved business model that identifies and leads them to new
opportunities they have never considered.
Capability Challenges for Distributors
We now consider the capabilities that distributors have in place
to address the changes in market requirements and deal with
them effectively. We look at it from the standpoint of recognizing
and managing the demand for their business, and then in terms
of the ability to identify the impacts on cost and profitability.
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Wholesale Distribution: How a Loyalty Program Can Help
Understanding and Managing the Demand for the Business
Figure 2 (page 8) highlights key processes involved in
interpreting business demand and the tools they have in place to
identify and pick up on the changes. Prior to the impacts driven
by convergence and omni-channel fulfillment, managing the
demand was a volumetric question, and the source of the input
was static. As we saw from Figure 1, that has clearly changed and
the challenge is managing across multiple sales and logistics
channels, which adds a significant level of complexity.
Having the ability to collaborate with customers on a strategic
level stems from the relationships and longstanding loyalties
that exist in wholesale distribution. All levels of maturity indicate
that this is a strength, but Leaders have a clear edge being 93%
more likely to have this in place, which is a strong indicator of
how important relationships and loyalties are in the wholesale
distributor business.
Omni-channel fulfillment
is more about inventory
positioning than volume,
and when it comes to
service, not having the
visibility and/or the tools
to see the tradeoffs puts
the Followers at a
disadvantage if they
plan to take on the omnichannel challenge.
The ability to understand the tradeoffs between service level and
inventory investment is a clear differentiator and huge
advantage for the Leaders, who are 83% more likely to have the
capability in place.
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 Read the full report,
“What has Changed in
Wholesale Distribution:
2015 & Beyond”
 Related Research
"Operational
Readiness for B2B and
B2C Convergence: Are
You Prepared?"
Wholesale Distribution: How a Loyalty Program Can Help
Figure 2: Managing and Planning the Business
93%
Ability to collaborate with the
customer on a strategic level
63%
Ability to better understand
tradeoffs between service
level and inventory
investment
86%
47%
Ability to segment the
demand forecasts based on
key product-customer
characteristics
Leaders
73%
Followers
43%
0%
20%
40%
60%
80%
Percentage of Respondents n=162
100%
Source: Aberdeen Group, April 2016
Omni-channel fulfillment is more about inventory positioning
than volume, and when it comes to service, not having the
visibility and/or tools to see the tradeoffs puts the Followers at a
competitive disadvantage. The lack of segmentation capabilities
shown by the majority of the Followers also prevents them from
properly determining the breakdown of volume by channel to
the level where they can allocate inventory more effectively.
Less than half of the Followers (70% of all respondents) have the
operating capabilities to determine and plan for demand by
channel. This highlights that even though relationships may be
strong, with the exception of the Leaders, the majority of
distributors are not equipped to properly manage the challenges
of convergence.
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Wholesale Distribution: How a Loyalty Program Can Help
9
Room for Improvement
Figure 3 further confirms the challenges facing distributors when
it comes to properly identifying and allocating costs effectively
to determine profitability.
Figure 3: Cost Tracking and Allocation Capability
Ability to segment supply chain
based on customer profile data
-1.93x
77%
40%
71%
Event tracking- 1.61x
44%
Tracking actual total landed
cost as shipment / order
progresses - 1.54x
57%
37%
Online visibility into accrued
supply chain costs - 1.09x
48%
44%
Cost-to-Serve modeling at item
/ product / customer level 3.5x
35%
Leaders
Followers
10%
0%
20%
40%
60%
80%
Percentage of Respondents n=135
The Leaders are better
equipped to deal with
the changes, but even
they don’t have all the
pieces in place when it
comes to cost-to-serve
information to
determine profitability
in all of their channels
and for all their products
and customers.
100%
Source: Aberdeen Group, April 2016
The Leaders are in position to segment the supply chain with
customer profile data, tracking and monitoring events
effectively, and tracking total landed costs as an order
progresses, but even they fall under 50% when it comes to
visibility into accrued costs. Cost-to-serve modeling at the item,
product, and customer level is at 35%, which points out that
even the Leaders are struggling to properly identify their true
costs in an omni-channel environment.
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A loyalty program can
also act as an enabler
to help identify where
opportunities exist,
through use of
analytics, to attribute
and allocate costs in a
basic program that
were previously
unrecognized.
Wholesale Distribution: How a Loyalty Program Can Help
The Followers are below 50% in every area of costing, and at
10%, are barely in the game when it comes to cost-to-serve. The
net result is that wholesale distributors are facing the disruptive
force of eCommerce, which has resulted in the convergence of
B2B and B2C workflows and customer fulfillment. The Leaders
are better equipped to deal with the changes, but even they
don’t have all the pieces in place when it comes to cost-to-serve
information and profit visibility in all of their channels for all of
their products and customers. The bottom line is that wholesale
distribution is under extreme pressure and needs to leverage all
means possible to identify and hold on to their market share.
That may mean a shift or change to their business model to
minimize the disruptive segments they might currently be
supporting.
The one area of strength reported by both Leaders and Followers
is their ability to collaborate at the strategic level with their
customers as shown in Figure 2, which has been built on
relationships and loyalty over time. A loyalty program can be
used as the catalyst to begin leveraging those relationships in a
smarter, more impactful way.
Loyalty Program: How It Works
Distributors need to realize they are not in this alone. The
customers they have historically supplied and the manufacturers
that they have represented have a vested interest in their
success. A program of some kind may already exist to create
incentives for growth. The specifics may vary, but providing a
benefit for a level of performance is the key behind a basic
incentive program. Many of these options could be in place in
part or in whole, but realize that every distributor is considering
these options as well. A formal loyalty program can go much
further than having the ability to track, monitor, and provide
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Wholesale Distribution: How a Loyalty Program Can Help
analytics for basic incentive programs. Some other options that
are often identified and considered in formal loyalty programs
that support both attitudinal and behavioral components are:
•
Exclusive, targeted promotions
•
Exclusive access
•
Rewards catalogs accumulating points
•
Product knowledge/training
•
Event attendance
•
Access to/support for distribution options (for example,
ship direct-to-store or earn same day delivery for being a
top-tier loyal customer)
•
Business line of credit
•
Supplier access to customers
A loyalty program can also act as an enabler to help identify
opportunities, and through the use of analytics, better attribute
and allocate previously unrecognized costs.
In addition to some of the fundamental approaches, now is the
time to rethink where truly differentiated, value- added services
will make a difference in a way that minimizes the costs to
support them, or that can be quantified to provide the best bang
for the buck for the investment in a service.
Tradeoff for Distributors to Consider
Being able to segment the business by item/customer and
channel is the starting point for establishing where value-added
services can make a difference, and where the pain exists. The
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Wholesale Distribution: How a Loyalty Program Can Help
business model is changing as a result of convergence, and
identifying where those changes have occurred is the key.
Pricing and service might both be factors if the desired behavior
is to drive more volume for a product or customer. Offering an
incentive for growth, or targeted promotions to drive new
business must be well measured and documented.
On the service side, should the business try to handle direct
customer shipments for all channels and products? And if so, can
they afford to absorb the freight and ship next-day or even sameday? Every distributor needs to make their own determination,
and some customers or segments will warrant the commitment
to take on the specific challenge. For example, does it protect a
large segment of business or market share by offering direct
customer shipments?
A longstanding customer that constitutes a large segment of
revenue may be worth that support. But even then the
parameters and conditions should be well-defined. It may be
only next-day or second-day service and not same-day, or it may
be for only certain branded product segments. Likewise, does
the extra service support a brand or unique product that needs
the market coverage in order to continue the relationship? As a
stocking distributor, supporting large product segments and
brands may be the primary reason for the distributor’s existence.
However, that does not mean all suppliers/manufacturers
should get the same treatment. Handling “one off” requests may
have been feasible, but when 61% indicate they have direct-tocustomer delivery models, that option should be at a premium.
The engagement criteria must be clear. Since handling
eCommerce requirements and omni-channel fulfillment is the
key driver behind increased costs, these evaluations should be
reviewed against the established policies of a loyalty program.
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Wholesale Distribution: How a Loyalty Program Can Help
The loyalty program in this case can become an enabler to
initiating the discussion with customers and/or manufacturers,
which may result in very tailored services or solutions. For
example, in certain zip codes where a direct shipment is
involved, it might be best for the manufacturer/supplier to
handle the order, rather than the distributor.
There are many tradeoffs to consider, but having a formal loyalty
program that can track, monitor, and flag exceptions — along
with the supporting analytics to measure the cost-to-serve and
effectiveness of policies that are really loyalty-driven issues —
can be a game changer as well as a catalyst for categorizing and
defining services up front through better segmentation. It can
also better capture their true cost-to-serve through improved
tracking and attribution of costs to understand profitability.
In some cases, a loyalty program may be used to reshape
relationships for certain products or markets by creating limits
for service in areas that are not strategic, and possibly
unprofitable. The discussion with customers, manufacturers,
and suppliers on pain points may generate more creative
approaches that benefit the entire value chain. loyalty comes
from the commitment to work together and formally defining it.
For the distributor, it moves the discussion from “business as
usual” across the board to “business that supports and rewards
the loyalty of our customers and suppliers.”
Key Takeaways and Recommendations
Wholesale distributors must undergo change in order to survive
in the digital economy. The changes fostered by the convergence
of B2B and B2C have chipped away at the traditional channels to
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Wholesale Distribution: How a Loyalty Program Can Help
the point where distributors are serving an omni-channel
marketplace by design or by force. Even the Leaders are
challenged to address these issues, and need to pick and choose
where and how they will fight to maintain and grow their
business.
Establishing a formal loyalty program can provide a mechanism
to encourage and reward the behavior and loyalty of the
customers, manufacturers, and suppliers the distributor chooses
to support. A loyalty program framework can also help
distributors allocate their costs to quickly recognize where
opportunities and unprofitable situations exist. Wholesale
distributors need to shift their business model and change their
approach in order to survive. Establishing a strong loyalty
program may be the catalyst that helps them through these
changing times.
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Wholesale Distribution: How a Loyalty Program Can Help
15
For more information on this or other research topics, please visit www.aberdeen.com.
Related Research
Profitable Omni-Channel Fulfillment: Enterprise
Wide Labor; January 2016
B2B and B2C Convergence: A Call to Action; July
2014
Digital Economy in Wholesale: Customers,
Suppliers & the Workforce; September 2015
What has Changed in Wholesale Distribution: 2015
& Beyond; February 2015
Author: Bryan Ball, Vice President and Group Director, Supply Chain and Global Supply Management
Practices ([email protected])
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