Aligning working capital with customer needs is crucial for distributor success in today’s volatile and uncertain market. Rather than waiting for a return to more predictable conditions, distributors must adapt their capabilities to the current environment.

A vital aspect of this adaptation involves improving demand planning processes to manage variability and better meet customer and supplier needs. A granular approach to forecast adjustment during revenue decline can help you better understand demand shifts and adjust for variability in the face of unpredictable demand and signals from customers and suppliers. As businesses adapt and markets shift, these teams should fulfill emerging demand without stretching working capital needs. 

Rapid Response to Demand Disruptions 

Revenue fluctuations have made distributors’ inventory movement highly unpredictable. During periods of economic adjustment, demand signals for certain businesses can become unclear, resurfacing at varying degrees as markets stabilize. 

Without established processes, panic-driven decisions often ensue, resulting in across-the-board purchasing cuts rather than nuanced responses. As a result, distributors may scramble to fulfill customer orders once demand recovers, discovering that their purchasing processes need to be more agile to resume optimal operations quickly. 

Here are five critical actions you should take to align your working capital with customer needs: 

1. Segment Demand Disruption 
 
Identify and categorize the different types of demand disruptions your business is facing. This could include sudden spikes in demand for certain products, complete drops in demand for others, or more subtle shifts in customer purchasing patterns. By segmenting these disruptions, you can develop tailored strategies for each segment, allowing for more precise and effective demand planning. 

For example, one industrial distributor faced an overall decrease in aggregate demand. They observed that while their cutting tools category was down by 59%, the safety category had jumped 118%, with other categories falling somewhere in between. The distributor measured the change in sales against the same period in the prior year, segmenting items into three groups:  
 
- Surge (sales increasing more than 10%) 
- Slump (sales dropping more than 10%)  
- Static (all other items) 
 
2. Adjust for Demand Variability 
 
With demand continuing to fluctuate unpredictably, building flexibility into your demand planning is essential. This might involve using advanced forecasting tools and techniques that can handle high variability, such as machine learning algorithms or scenario planning. Tools like Inventory FOCUS+, which provides a 360° view of your inventory mix, can help you anticipate changes in demand and make real-time adjustments in your inventory and supply chain strategies accordingly. 

For instance, the distributor above modified their forecasting approach for managing ‘surge’ and ‘slump’ items. They contacted their top customers to segment their end-customer business and contacted strategic suppliers to ensure supply capacity. They also changed their forecasting bucket from monthly to weekly for selected items to closely follow changing demand. 
 
3. Account for Supply Variability 
 
Many distributors diligently collect and integrate customer information but are less inclined to update and include supplier information in their planning.  

For example, they have purchase order information to measure actual lead time but use promised lead times to plan their safety stock. Purchasing systems rely on this information to determine the right amount of buffer stock. 

Not accounting for supply disruptions could result in poor manufacturer-distributor communications and disappointed customers. On the other hand, integrating recent, relevant data from suppliers allows you to catch and adjust for disruption more swiftly. Supplier FOCUS+, allows you to integrate real-time supplier data, ensuring that stock levels and lead times are more accurate and aligned with reality.   

An HVAC distributor with 27 locations segmented ‘surge’ and ‘slump’ items by location and identified 19 corresponding suppliers when they experienced a supply disruption. They then shared weekly demand information by location with those suppliers and updated their system with more realistic lead times every week. This helped them meet core customer needs and earned them better payment terms as none of their regional competitors approached suppliers so systematically. 

 4. Align Working Capital to Customer Mix 
 
Traditionally, lenders have placed a cap on distributors' working capital. In the current market, it’s easy to focus too much on these limits and not enough on opportunities to strategically realign your working capital by taking a closer look at the customer mix. 
 
An industrial distributor recently noted two significant shifts in its customer mix. The distributor shipped products to 392 medical, healthcare, and hospital customers who had purchased little to no product from them in the past. 
 
They also observed a 28% increase in e-commerce customers’ traffic. Seeing these shifts in their customer portfolio, the distributor examined the items purchased to determine additional working capital investment and classified the demand mix before making additional inventory investment. 
 
5. Put on Your Trifocals 
 
Distributors’ business models are built to meet core customer needs by supplying profitable products from strategic suppliers. These three lenses—core customers, strategic suppliers, and profitable products—are critical to filter the signal from noise. The Fusion Analytics tool provides a comprehensive view of these areas, ensuring you can make informed decisions even in a volatile market with little time to respond.   
 
Often, distributors build silos across functions, leading to narrow vision. For example, a purchasing team might discontinue an item or product category based on turns or other metrics without considering the mix of customers buying those items. At challenging times, such silo-driven decisions can cost you customer loyalty and healthy financial returns. 
 
Over the years, a building materials distributor has systematically built three critical analytics—item, customer, and supplier stratifications. Throughout recent market fluctuations, they used these analytics as an anchor to quickly make critical, data-driven decisions about redeploying working capital, allocating shortage products, obtaining extended supplier terms, and acquiring new customers across multiple channels. 
 
Cut Through the Noise 
 
Managing demand planning (and resulting working capital and customer experience) is a deciding factor in how well and quickly you recover and thrive in a volatile market. By following these five steps and utilizing mission-critical, plug-in scorecards, you can maintain clarity and stay ahead of competitors. Conversely, firms that delay thinking and acting on these opportunities may need to catch up. 

If you’re ready to take control of your inventory and demand planning, contact us today to learn how we can help transform your operations.