Digital Transformation … an Arms Race

Electrical distributors are faced with a number of challenges. There is the everyday challenge of fighting for business, with most in a “flat” market. There is the challenge to recruit talent. There is the challenge to ensure profitability. Perhaps one of the biggest challenges facing many is how to address the changing role, and the pace, of technology (which is now called digital.)

The largest of distributors are investing much. Sonepar talked about investing $1 billion euros (granted over 5 years) in addition to ongoing technology expenses. Rexel invests much. Graybar recently held a webinar for Mirakl to discuss their investment in that tool. An article in Digital Commerce 360 shared that Wesco is in the midst of a $500 million digital transformation plan.

Are We in an Arms Race?

Yes, distribution is becoming an arms race. The alternative is to double-down on relationships and service to build a moat around your business.

According to the NAED 2024 PAR report, reporting electrical distributors shared that their average IT investment is .9% of sales!

Granted that there are other technology expenses throughout a company via department specific investments / subscriptions that may increase the percentage, but … (and then again, only about one hundred distributors participated and it could be assumed that the industry percentage is lower with non-reporting distributors.)

Tech is expensive, which is also why a number of tech companies focus on distributors that are $250M or more in revenues. This also means others do not get exposed to other tools, or functionality.

Perhaps shared services models among non-competing distributors could evolve to address the funding discrepancy? Of some distributors will reinvest a portion of rebate funds and treat them as VC investments? Or other SaaS models will get created or ERP companies will make acquisitions and spread costs to increase adoption?

Speaking of Wesco

Slide from Wesco 2024 Investor Day Presentation

The Digital Commerce 360 article shared insights into Wesco’s “digital transformation.”

• Investments have been made into upgrading eCommerce, modernizing its supply chain and “other critical initiatives.”
  • They have integrated generative AI analytics and automation of order fulfillment processes.
  • The have also added technology to “improve working capital efficiency” (which probably means inventory management or ordering / reordering processes.)
  • A key element was the hiring of specialized tech talent
  • Due to the Anixter acquisition, and other subsequent acquisitions and perhaps some legacy issues, the company had to consolidate backend systems.
• To date the company has invested $270 mission out of its $500 million budget. This has been over 3 ½ years. This investment presumably, is in excess of its “standard” technology investments.
• Future initiatives are focused on AI and other “digital innovations”. It is unknown if its recent technology-oriented acquisitions (entroCIM and Storeroom Logix are part of this budget or funded differently as both companies were acquired by Wesco in Q2 according to their 2024 Q2 earnings call.)

Transformation is Evolutionary

While the term “digital transformation” is widely used, in reality it is a digital journey. It’s an evolutionary process. The only way it is “transformational” is if you left the business and came back in 3-5 years. Development, deployment, and adoption, let alone integrating it for regular utilization, takes time.

This does not mean “ignore it”, unless you have a short timeline (for employment or ownership.)

Leadership who are forward thinking should embrace digital and segment time and funding to ensure that they are moving along a digital path. And this could be a great way to involve future leadership and/or front-line people who will benefit from the tools.

And don’t get blinded by the investment levels. There are also tools that are low cost and beneficial, even if they are department-specific initiatives. The goal is ongoing investments, utilizing technology to make work easier / more efficient (and speaking of which, perhaps consider criteria to evaluate technology investments and develop your own definition of ROI.)

While the electrical distribution channel is in an arms race relative to technology investments, remember, there can be multiple ways to win a fight. The key is identifying your goal, developing a plan, having criteria to measure risk, being nimble, and executing.