Distribution businesses live and die by visibility.
How much inventory do we really have?
What did that product actually cost us?
When will the next shipment arrive?
Which orders are at risk?
Can the warehouse fulfill what sales just promised?
What happens if the one employee who knows the process is out of the office?
When those answers live across spreadsheets, accounting software, CRM systems, emails, and employee knowledge, even a growing distributor can find itself operating reactively.
In an episode of The ABCs of ERP & Beyond, Nirav Shah and Peter Nicholson discussed some of the most common pain points facing distribution companies and how an integrated ERP system can help address them.
The issues they covered are not limited to one type of distributor. They can affect companies in industrial distribution, ecommerce, automotive, aerospace, retail distribution, and many other segments.
Here are five of the biggest challenges.
Key Takeaways
Distributors should pay close attention to:
- Inventory accuracy and consistent item numbering
- True product costs and landed-cost visibility
- Supply-chain visibility across suppliers and customers
- Disconnected systems and sales channels
- Tribal knowledge that creates operational bottlenecks
An ERP system can help create one source of truth across inventory, purchasing, sales, financials, fulfillment, and reporting.
Watch the Full Podcast Episode
Want to hear the full conversation?
In this episode of The ABCs of ERP & Beyond, Nirav Shah and Peter Nicholson discuss five pain points facing distributors and how ERP can help companies create better visibility, stronger processes, and more reliable information.
Watch the full episode:
1. Inventory Management Problems
For a distributor, inventory is one of the most important assets on the balance sheet.
If inventory information is unreliable, problems spread quickly across the organization.
Sales may promise products that are not actually available.
Purchasing may order inventory the company already has.
Customer service may give customers conflicting answers.
Finance may struggle to trust inventory valuations.
Warehouse employees may spend time searching for products that exist under different item numbers.
One example discussed in the podcast involved a distributor using QuickBooks and Dynamics CRM.
The same physical product could exist under different part numbers in the two systems.
That created several problems.
Employees did not always know which item number to use.
The same product could appear under multiple records.
Inventory quantities could be split between those records.
When the company eventually migrated to ERP, the team had to consolidate and clean up the item structure.
This is more than a data-cleanup problem.
It can directly affect customers.
Imagine a customer asks whether you have five units available.
One system says you only have two.
Another item number representing the same physical product has three more.
The inventory exists, but the company cannot see it accurately.
That can mean a missed sale.
Standardize Item Numbers
Distributors should have clear rules governing how item numbers are created.
If employees can create new part numbers freely every time they cannot find an existing item, duplicate data becomes almost inevitable.
A strong item-number structure can make it easier to understand:
- Product categories
- Vendors
- Product types
- Variants
- Serialized inventory
- Warehouse quantities
The goal is not to make part numbers unnecessarily complicated.
The goal is consistency.
ERP systems give distributors the ability to maintain those records under one centralized structure rather than allowing each department to maintain its own version.
Accurate Inventory Helps Sales Too
Inventory accuracy is not only an operational issue.
It can also create sales opportunities.
If customer service knows exactly what is available, they may be able to tell a customer:
“You asked for three, but we have five available. Would you like all five?”
That becomes much harder when employees cannot trust inventory quantities.
Reliable inventory data helps distributors provide better customer service while also moving inventory faster.
2. Pricing and Margin Inaccuracies
A distributor can generate plenty of revenue and still lose margin without realizing it.
The problem often starts with product cost.
Many companies know what they paid their supplier.
But that is not necessarily the true cost of getting the product into inventory and ultimately into the customer’s hands.
Additional costs may include:
- Freight
- Fuel surcharges
- Duties
- Tariffs
- Brokerage
- Handling
- Warehousing
- Port fees
- Special delivery charges
- Other transportation costs
These costs make up part of what is commonly called landed cost.
If those costs are not properly allocated to inventory, the margin being reported on a sale may not be the real margin.
That creates a dangerous situation.
Sales may think a product is highly profitable when the actual margin is much lower.
Pricing decisions may be based on incomplete information.
Commission calculations may be distorted.
Management may believe certain products or customers are more profitable than they really are.
The Problem With Spreadsheet Margin Analysis
A common workaround is to calculate profitability in Excel.
That may work when the business is small.
But eventually the finance team becomes dependent on information coming from several other departments.
Someone has to send purchasing data.
Someone sends freight information.
Someone provides invoice data.
Someone updates inventory.
Then the accountant combines it.
If one source is incorrect or incomplete, the analysis is wrong.
ERP provides a better audit trail.
The company can follow a transaction from the purchase order through receipt, accounts payable, inventory, sales, and financial reporting.
That makes it much easier to understand where costs originated.
Know What Your Product Really Costs
Landed-cost functionality can help distributors allocate additional costs directly to inventory.
That provides a clearer picture of true unit cost.
And once you know the true unit cost, you can make better decisions about:
- Pricing
- Discounts
- Sales commissions
- Product profitability
- Customer profitability
- Vendor negotiations
If costs have gone up but pricing has not changed, margin may be shrinking without anyone realizing it.
Good data makes that visible.
3. Lack of Supply-Chain Visibility
Distributors rely on other companies.
Suppliers.
Freight carriers.
Third-party processors.
Customers.
Marketplace operators.
That makes supply-chain visibility extremely important.
If a supplier is late, how quickly will your team know?
If a shipment gets delayed, can customer service see it?
Can purchasing see changes in vendor lead times?
Can customers see the status of their orders?
Without connected systems, many distributors operate reactively.
Someone discovers a problem only after a customer calls asking where their order is.
At that point, the company is already behind.
Move From Reactive to Proactive
ERP can extend beyond internal operations.
Companies can connect suppliers and customers through technologies such as:
- EDI
- Vendor portals
- Customer portals
- Shipping integrations
- Ecommerce integrations
- Automated notifications
For example, a supplier could update a delayed delivery through a vendor portal.
That information can flow into ERP.
Purchasing sees the delay.
Planning understands the impact.
Customer service sees which customer orders are affected.
The company can contact the customer before the customer has to call.
That is a very different customer experience.
As Peter points out in the conversation, once the customer has to chase you for the update, you have already lost some ground in that relationship.
Visibility gives the distributor a chance to get ahead of the problem.
4. Disconnected Systems and Sales Channels
Many distributors do not operate through one channel anymore.
They may sell through:
- A traditional sales team
- A company website
- Shopify
- Amazon
- eBay
- Customer portals
- EDI
- Wholesale accounts
- Multiple physical locations
Each channel creates data.
Orders.
Customers.
Inventory.
Pricing.
Returns.
Fulfillment information.
If each channel operates independently, management has to analyze them separately.
That becomes difficult very quickly.
An integrated ERP can bring those different channels together.
Instead of looking at five individual systems, the business can see one consolidated picture.
Which channel is selling the most?
Where are margins strongest?
Which products need replenishment?
Which marketplace is underperforming?
Where should marketing dollars go?
Which customers are growing?
The answers become easier when data is centralized.
One Source of Truth
Centralization is one of the biggest advantages of ERP for distribution.
Sales, purchasing, inventory, finance, and fulfillment are no longer working from different versions of reality.
They are all working from the same source.
That is especially important as customer expectations become faster.
Customers increasingly expect accurate inventory information and quick fulfillment.
A distributor cannot consistently operate at that speed if employees need to reconcile multiple spreadsheets and systems before shipping an order.
5. Too Much Tribal Knowledge
Some businesses run because their systems are good.
Others run because a few employees know how everything works.
That second model is dangerous.
If only one person knows how a certain process works, the business depends on that person being available.
What happens when they:
- Take vacation
- Get sick
- Leave the company
- Retire
- Move into another role
The knowledge walks out with them.
Maybe they maintained an Excel file nobody else understands.
Maybe they know which customer gets special pricing.
Maybe they know how to interpret a confusing item-number system.
Maybe everyone waits for them to send a report.
That is tribal knowledge.
And it creates bottlenecks.
Get Knowledge Out of People’s Heads
The goal is not to make employees less valuable.
It is the opposite.
Employees should spend their time making decisions, solving problems, and improving the business rather than acting as human databases.
Processes should be documented and built into systems.
A good test is simple:
Could another trained employee follow the process without needing the person who created it?
If the answer is no, the business may be too dependent on tribal knowledge.
ERP can help standardize those processes.
Instead of asking:
“Who knows the answer?”
employees can ask:
“Where is the information?”
And the answer should increasingly be:
“In the system.”
ERP Helps Distributors Become More Proactive
All five of these challenges are connected.
Bad inventory data affects purchasing.
Bad purchasing data affects cost.
Bad cost data affects pricing.
Poor supply-chain visibility affects customer service.
Disconnected systems create duplicate work.
Tribal knowledge keeps information trapped inside departments and individual employees.
The bigger the distributor becomes, the harder it is to manage these problems manually.
ERP creates a foundation for bringing them together.
Inventory.
Purchasing.
Sales.
Finance.
Warehousing.
Customers.
Vendors.
Reporting.
When those areas share a common system, businesses can spend less time reconciling information and more time acting on it.
That is the real opportunity.
Moving from reactive operations to proactive management.
Talk to an ERP Expert
If inventory inaccuracies, disconnected systems, margin problems, or supply-chain visibility are becoming harder to manage, it may be time to evaluate whether your current systems can support the next stage of growth.
AdCirrus ERP can help you evaluate your distribution processes, identify bottlenecks, and determine whether an ERP platform such as Microsoft Dynamics 365 Business Central or Acumatica is the right fit.
Talk to an ERP expert:
