Daniel Fritsch September 1 2016 4 min read What's in this article? Hardware Distribution Industry Overview Industry Challenges Overcoming Challenges How to Get Started Hardware Distribution Industry Overview Operators in the hardware distribution industry are responsible for the purchase and distribution of hardware items for use in building construction and renovation. Items are purchased directly from the manufacturer or OEM before being sold to building firms for use in general construction tasks such as framing, roofing, bricklaying, tiling, floor installation and much more. A large part of the hardware industry involves the sales of fasteners such as nuts, bolts screws, nails, clips and ties, etc; fasteners account for just below half of the total industry sales. The growth rates and trends of this industry closely mirror those of general construction: the revenue stream is reliant on there being enough construction projects to generate demand. As such, the industry has grown at a rate of 4.8 percent over the last five years owing to a resurgence in the construction and home improvement markets with continued growth projected through 2021. The industry also draws in a revenue of $61bn, which is split between the North American, European and emerging markets. As well as fastener distributors, the industry also includes those supplying power and hand tools along with general cutlery such as knives and saw blades and plumbing and heating equipment. (Source) Industry Challenges Distributors face a number of challenges in the hardware distribution industry. This is especially the case for non-established businesses looking to break into the market. Here are a few of the key difficulties that the industry presents: 1. Concentration and Competition: While there are many hardware wholesalers competing in the market, the hardware industry tends to be concentrated among a few key brands, and these account for the overwhelming proportion of market share. As a result, these few companies draw most of the revenue in the sector, and less established companies are left competing for the remaining revenue. This leads to a catch-22 situation where smaller companies have little spare capital to promote their brand, leading to their products being overlooked. Tighter margins make it difficult for smaller distributors to post profits as price squeezing can lead to many smaller business being forced out. Smaller and mid sized companies can utilize inventory optimization tools like EazyStock to identify areas in their inventory storage model where costs can be liquidated, freeing up cash flow for investment into sales and marketing promotions. More cash flow means a healthier, more competitive business. 2. Inventory Optimization: Inventory Optimization is the process of perfectly balancing inventory levels to meet actual customer demand over a period of time. This requires buyers and procurement specialists to order exactly what they need, when they need it and at the exact quantity demanded. Easier said than done… Inventory Optimization software is designed to take the guess work out of buying processes. Tools like EazyStock work alongside ERP systems to create leaner inventories, while also advising buyers with accurate forecasts for product lines that have high demand and require high safety stock levels. On the flip side, with such a highly concentrated industry, there is a risk that certain product lines will fail to sell; this can dramatically damage profits for small to medium sized businesses. Here is where it begins to feel like a high wire balancing act. Distribution businesses need to avoid overstocking at all costs, while at the same time avoid stock outages that can irreparably damage the brand over time. Accurate demand forecasting and an optimized inventory can help to maintain profitability while the company builds positive brand-awareness. 3. Seasonality: Both the construction industry and hardware distribution industry are directly impacted by seasonal variances and trends. Newer commercial and residential construction sites require mild weather conditions and will result in projects being closed or shut down during inclement seasons which impacts demand for supplies. Conversely, the demand for HVAC and plumbing supplies will increase during colder, more harsh seasons. Failure to take seasonality into account when managing inventory purchasing is a leading indicator of cost increases and can lead to costly stock outages or excess stock situations depending on the time of the year. Overcoming Challenges While the challenges in hardware distribution are moderate for small to medium-sized businesses, they are not insurmountable. Here are two key solutions to the challenges: Brand Awareness and Diversification: Profit margins are narrow in hardware distribution, so there is little scope for competitive pricing in the industry. The smaller wholesaler should look to set their products apart from their competitors by supplying a better product or offering a product that fulfills a unique role. Similarly, a reputation for reliability can attract a core base of loyal customers who help the company win new business through word of mouth and referral marketing. Optimal supply chain management can lead to high levels of customer satisfaction, helping to achieve this goal. Taking Advantage of Market Conditions: Where there is a concentrated market, a sudden upswing in market conditions is the best time to grow the business. Owing to the increase in available revenue, the current construction boom provides the perfect opportunity to expand. The current expansion of the construction industry provides opportunities to explore little-exploited niches in the market. This aids brand diversification by allowing the smaller distributor to expand in their own areas of expertise without having to compete directly with better-known brands with greater economies of scale. They will then be able to divert capital towards marketing their brand and gaining additional market share. How to Get Started Mid market distributors that seek to capitalize on larger shares of the market, a need for optimized inventory, and seasonality optimization are the easiest ways to gain a competitive edge. It is easy to feel overwhelmed with trying to figure out how to best organize and run your supply network and purchasing management. Concerning the second strategy mentioned, namely the inventory optimization, you might want to have a look at the guide below. It is specifically targeted to small and mid-sized businesses and tells you how to buy smarter, plan faster and service better by using an adequate inventory optimization solution: Share Daniel Fritsch September 1 2016 4 min read Sign up for the EazyStock Newsletter Stay on Top of the Latest News, Trends, Tips, and Best Practices for Supply Chain Management, Inventory Optimization, Replenishment & Purchasing, and Demand Forecasting with Our EazyStock Newsletter.