Deep Dive: IoT for distributors

Can distributors help customers harness the power of the Internet of Things, creating wealth as a radical intermediary in the value chain?

Recently, I listened to a fascinating episode, IoT comes of age, on the McKinsey Podcast. Unless you are living under a rock, you probably know that IoT means the Internet of Things—a much-heralded and somewhat disappointing technology about improving our lives, work, supply chains, and markets through data created by sensors and intelligent products. The Internet of Things has powered innovation, mainly as new technologies have emerged to capture, share, analyze, and act on data. The podcast episode reports on new research shared as a McKinsey study, “IoT value set to accelerate through 2030: Where and how to capture it.” The podcast and report are essential reading for B2B innovators, especially those working to define the future of distribution. It’s not that either mentions distributors as vital to accelerating the Internet of Things. Distributors are not even mentioned in the podcast or the research. But, as I listened and learned, I found a common cause. Distributors are innovating their business models to provide game-changing customer experiences delivered by humans and powered by data.  The Internet of Things is a digital-age superhighway for data, which will usher in game-changing productivity gains and allow us all to better live our lives and do our work. The Internet of Things and distribution have something in common: both are attempting to leverage the power of data to help us all live our lives and do our work. But distributors have a problem: No one outside of distribution, and perhaps very few practitioners inside of it, expect distributors to drive radical change for customers, suppliers, our society, or the economy. I believe distributors can step up, and I start to make the case in this edition. In the first part, I review some findings from McKinsey’s excellent work and make a connection between the IoT and distribution. In the second part, I explore how distributors can overcome a crisis of ideas and, by doing so, step up on the global stage as radical intermediaries. I have only begun to plumb the depths of McKinsey’s research, so I look forward to more insights and analysis in future editions. I invite my readers to do the same: Listen and read McKinsey’s research, generate ideas, share them, and push for them. Big ideas need big plans. Let’s imagine that distributors can take over the Internet of Things and bend it to their will to become radical, unimagined intermediaries for what lies ahead in the digital age.

IoT, distributors, and the future of work

McKinsey’s podcast and research provide helpful information, starting with a practical working definition. From the podcast, I learned that the IoT is made possible by digital technology embedded in the physical world, often in vehicles and buildings, where we live and work. Those physical objects are connected to computers via digital network connections, and that’s the IoT. It’s that simple. I imagine the IoT as a virtual highway of data reporting on conditions in the real world, starting with products sold by distributors and manufacturers, and transported through wired and wireless means to computers. Data becomes information that feeds strategy, execution, planning, and operations. Along the way, data is loaded into spreadsheets and algorithms, parsed by human and artificial intelligence.

B2B innovators, especially distributors, may begin to imagine innovations with a mindset that the IoT is a modern highway in the digital age. Distributors benefited greatly when Eisenhower built the interstate highway system because they could now cover larger geographic territories, building warehouses and truck fleets to serve customers. Another utility, the analog telephone system, allowed distributors to communicate with customers, schedule sales calls, solve problems, take orders, and provide lasting value.

Distribution businesses grew in size and number. They became masters of inventory and logistics, the fundamental capabilities for adding value in the physical world by taking orders, delivering products, and optimizing customer operations. Today, the IoT puts data on the digital-age information highway, directing the physical flow of products and helping humans monitor and supervise operations. As it does so, the IoT is creating value in epic proportions, as estimated by McKinsey research. Three findings are particularly relevant for B2B innovators and the future of distribution:

The potential economic value that the IoT could unlock is large and growing. We estimate that by 2030, the IoT could enable $5.5 trillion to $12.6 trillion in value globally, including the value captured by consumers and customers of IoT products and services. [emphasis added]

The majority of value can be created in B2B applications. By 2030, about 65 percent of the IoT’s potential is estimated to be accounted for by B2B applications. But the value of B2C applications is growing quickly, spurred by faster-than-expected adoption of IoT solutions within the home. [emphasis added]

While the potential economic value of the IoT is considerable, capturing this value has proved challenging, particularly in B2B settings. Many enterprises have struggled to successfully transition from pilots to capture value at scale. We estimate the total value captured by the end of 2020 ($1.6 trillion), while considerable, to be in the lower end of the range of the scenarios we mapped out in 2015. [emphasis added]

Distributors are woefully and shamefully late as leaders or participants in the IoT. My evidence? A search of McKinsey’s substantial 90-page report shows that the word “distributor” is used on precisely ZERO occasions. The term “distribution” is used six times, but never to mean activities performed by distributors. In the podcast, supply chain issues are briefly discussed in the context of the current supply chain crisis. Transparency is offered as a solution, enabled by the IoT. I get this, and have written about similar perspectives here and here.

I believe distributors should be quoted in every conversation about supply chain issues. Distributors are customers of the global supply chain, of course, but they are much more. Distributors are the value-creating end of the supply chain. The tip of the spear that, through innovation, is leading the supply chain not just to deliver physical products against a customer-defined schedule with efficiency and resiliency, but to sheppard those products to users and consumers. Distributors are reinventing their business models to provide game-changing customer experiences. Distributors are offering new services powered by data. Data-based services are the future of distribution, and distributors must step up to become stewards of the IoT.

If the supply chain of the future is to run on data provided by the IoT, distributors are in a position to leverage that data to create new value for customers. The tell is in the bolded words in my excerpt from McKinsey’s report above, especially as noted that, “by 2030, about 65 percent of the IoT’s potential is estimated to be accounted for by B2B applications.” But B2B is a tough nut to crack because business customer needs are complex, requiring scale and creativity for solutions. That’s what distributors do every day. It’s in every distributor’s DNA. In the podcast, they observe that even as the technology powering the Internet of Things has accelerated, the way that companies work has not kept up. As B2B innovators, serving customers where they live and work, distributors are on the front lines of where the future of work is happening. By harnessing the Internet of Things, distributors can be more. By helping customers do work differently, distributors are not shaped by the future of work; distributors are the future of work.

Distributors must overcome a crisis of ideas

To become stewards of the Internet of Things, designing new applications and hurrying adoption, distributor leaders need to fix a fundamental problem. As explained in an earlier edition, distributors are the victims of best practices. When it comes to change, best practices are about catching up by copying one’s supposed betters, and best practices are following, not leading. In another edition, I argued that design thinking is an essential innovation process for distributors because design thinking is all about ideas. In that edition, I drew insights and inspirations from an article on the MIT Ideas Made to Matter series, “Design thinking, explained,” by Rebecca Linke:

Design thinking starts with ideas and follows through with creativity, collaboration, confirmation, and conversion. But nothing is possible without ideas. Ideas matter. Ideas are powerful because they capture imaginations and call for progress. Accepting the dominion of ideas is essential for implementing the practice of design thinking. As explained at the start of Linke’s article: “Coming up with an idea is easy. Coming up with the right one takes work. With design thinking, throwing out what you think you know and starting from scratch opens up all kinds of possibilities.”

Distributors are suffering from a crisis of ideas. To help kick start a conversation about ideas and how distributors may help accelerate progress and innovations for customers through the IoT, I offer three ideas below.

Idea #1: Add value to data, not products

As intermediaries in the value chain, distributors' business models are constrained on both ends—by manufacturers’ channel policies, programs, and pricing and by customers’ price-centric, risk-averse buying behavior. In one of my very first newsletter editions, I argued that data has agency and will upend the traditional partnership between manufacturers and distributors, setting distributors free to innovate:

In the digital age, every business and business partner will run on data. This is undeniably true for the traditional value chain of manufacturers and distributors. At its best, the value chain operates as a collaboration of partners with dissimilar business models to achieve a shared goal—serving customers with integrated products and services. However, the formal arrangement that codifies the partnership is stuck in the past, reflecting long-held assumptions about business models and capabilities. Manufacturers and distributors are pursuing innovations without an understanding of how shared customer data, collected by manufacturers and distributors, can create mutual benefit and reinvigorate the partnership. Absent plans for collaborative data, the traditional value chain will become less relevant for serving customer needs.

My first idea is that distributors can lead by changing the words used to describe the value they create. The idea that a distributor’s most fundamental role is to add value to manufacturers’ products must be demolished. As the Internet of Things helps businesses—all businesses—run on data, distributors must redefine their role around the primacy of data and away from the dominion of physical products.

Distributors’ future role, which is unfolding now, is to add value to data, not products. Distributors are highly skilled at leveraging data to run their operations efficiently and optimize margins. From this day forward, distributors must gain access to data from the Internet of Things through new data-centric partnerships with manufacturers and customers and help both ends of the value chain use that data better.

Distributors can do this not only because they are skilled data wranglers, but because their business model includes horizontal visibility in a vertical supply chain. In their everyday operations, distributors see how a wide range of products and brands perform across an equally wide range of customer applications, segments, and communities.

Idea #2: Be the captain of the supply chain

Distributors know that disruptors seek opportunities by targeting customer dissatisfaction with status quo service and then work to displace or defeat distributors to become the customer’s preferred source. Disruptors are predators in this battle for survival, and distributors are prey. But distributors can change the battlefield by focusing on customers with an advantage: existing trusted relationships. And the place to start is with large customers.

In B2B, large customers often drive change in upstream channels by setting exact specifications for how they want to be served. Large customers have the sophistication to know what technology offers and the scale to demand investments from distributors and manufacturers (their suppliers). If suppliers want to keep that business, they must bend to the will of large customers.

Frustrated with supply chain shortages and a lack of resiliency, large customers demand more from suppliers. In a quick take edition, I shared a contract put out by a huge supply chain customer, the U.S. Navy, and explored implications for the future of distribution:

It turns out the U.S. Navy is building a blockchain-enabled logistics tool to manage medical inventory at home and abroad. Supply chain breakdowns during COVID-19 constitute a significant motivator. The Navy’s goal is to achieve “true just-in-time delivery of essential products such as blood and plasma.” Key features [demanded by the Navy as a large and powerful customer] include:

•  Real-time inventory tracking

• Expiration and consumable monitoring

• Modular API integrations

• Cold-chain/product quality verification

• EHR/ERP Integration

• Real-time demand prediction and supply planning

• Cross-hospital load balancing of supplies

My second idea is to lead by coopting this list, taking it to manufacturers, vendors, marketplaces, digital startups, and more. By doing so, distributors act as agents of customers, not manufacturers. The goal is to build visibility into supply chain specifications that must be delivered and enabled by the IoT. Distributors must demand that technology vendors create new software, applications, and platforms to allow the services above. Distributors must demand that manufacturers change their channel programs and policies to support a supply chain designed not to create demand for their products, but rather to create value through data. As reported in Distribution Leans In, distributors must accept the idea that they are not intermediaries in the value chain but that they lead from the center of commerce:

As an intermediary that stocks inventory and serves demand, distributors are constrained in the value they offer and the margins they earn. But by helping our society and economy get through the pandemic, distributors can claim a larger role. Distribution is where governments, suppliers, customers, workers, communities and more come together to get business done.

This idea is huge, and it will take time and power to make it happen. Today, our representative government is motivated to address the supply chain crisis. Distributors may work collectively through their industry associations to lobby elected officials and enlist their support. As an industry, distribution may also seek a common cause with the tech sector. In another edition, I reported on a call for the venture community to harness the power of startups to solve big problems and work with the government to drive change. I suggested that a better partnership might be one with distributors, as businesspeople are more inclined to change the status quo intentionally:

I have long wondered if the distribution industry might find common cause with the community of tech founders, startup companies, and venture investors. And so, I was intrigued when Andreesen Horowitz launched a practice to solve critical problems and rebuild American dynamism, with goals explained in its investment thesis:

The American Dynamism practice invests in founders and companies that support the national interest, including but not limited to aerospace, defense, public safety, education, housing, supply chain, industrials, and manufacturing. We believe that mission-driven and civic-minded founders often build companies that transcend verticals and business models in their quest to solve critical national problems. These companies view government as a customer, competitor, or key stakeholder—and the success of these companies supports the flourishing of all Americans. Dynamic companies exist in all 50 states, as there is no center of gravity for solving America’s biggest problems.

Ideas #3: Bootstrap the Internet of Distribution (IoD)

As much as I might like, distributors cannot take over the Internet of Things’ leadership. I propose a tactical alternative: Invent and advocate a new concept, the Internet of Distribution. There are already rumblings in some corners of distribution to promote what might be called “asset sharing” among distributors. The most common example is inventory. Distributors have always bought and sold inventory to other distributors as necessary when lacking stock to meet a customer’s order or to serve a new customer location outside of the distributor’s warehouse network.

Some buying groups and industry associations are working toward making inventory pooling a standard practice, enabled by policies and programs, and perhaps by creating a platform business. The benefits would include improved customer service levels, lower inventory carrying costs for individual distributors, and improved value chain efficiency. And if distributors can get their heads around sharing inventory, they might expand the concept to share trucks, rental equipment, repair facilities, knowledge and expertise, and more. Essentially, these innovations are a radical approach for asset sharing, which might strengthen distributors against the twin threat of disruption and disintermediation.

In Deep Dive: Going radical, I argued for what I have come to know is a “10X” innovation strategy, often attributed to Elon Musk, as an advocate for pursuing big ideas. The idea is that realistic goals hold back progress, and thinking bigger is better. The pursuit of radical ideas is more likely to create success, even if the radical outcomes are not fully achieved. I explained my view that distributors should seek to act as radical intermediaries as:

I’m a big fan of Apple products, but I’m a massive fan of Steve Jobs. As a channel strategist, I am awe of how Jobs led Apple to disrupt an industry with radical innovations that blended physical and non-physical products while offering a radically new customer experience. I’m talking about delivering music on the iPod and, later, iPhone. So when I noticed this article on MIT Sloan Management School’s Ideas Made to Matter series, I dug in. I was reminded of Jobs’ attributes and experiences, and about how he fought long and hard to implement his ideas. To me, Apple is a consumer-first company, even though businesses use its products as well. Jobs was perhaps the greatest B2C innovator ever. I wonder where his counterpart is in B2B? Will the “Steve Jobs” of distribution emerge? Is it possible to imagine radical B2B innovations that wrap products and services together, creating value through a combination of experiences in the virtual and physical worlds? Is anyone trying? This edition suggests four radical ideas for transforming distribution, all based on my investigations and ongoing conversations with B2B innovators.

My third idea is that distributors must become radicals if they embrace the Internet of Things, pushing its adoption forward and reaping the rewards through game-changing revenue growth and profits. In a way, I am arguing for a new theory of achieving scale through consolidation, powered by private equity investments. In the existing frame, private equity firms gain a return on their investment by improving the performance of underperforming distributors and rolling them up into large-scale consolidators. Consolidators lock in productivity gains by transferring acquired companies' businesses to more state-of-the-art technology platforms. The effect is a double whammy—underperforming operations perform better, and through scale, the level of achievable performance is raised ever higher.

But there is a problem. Distributor technology platforms, including ERP, CRM, e-commerce, and so on, are designed to work with distributor data. As things stand, distributors do not have access to IoT data created at customer locations and used there or piped directly to the manufacturers of the intelligent equipment that generated the data. What if an entirely new class of technology platforms were created to allow distributors to access IoT data and deploy that data to create value for customers and suppliers? In this idea, the value created through traditional distributor consolidation might expand 10X or more.

In the U.S., distribution is a $7 trillion sector, accounting for about one-third of the overall economy. As noted above, McKinsey estimates that by 2030, the IoT could enable $5.5 trillion to $12.6 trillion in value globally. By becoming radical intermediaries, distributors might not only achieve incredible growth in the United States as providers of data-enabled services powered by the Internet of Distribution, but distributors might also break free of today’s product-centric business models and become a radical and global force for change.

Join our community by asking questions

As I’ve written my first 60 newsletter editions and discussed my observations with leaders, innovators, and entrepreneurs, I have arrived at a statement to shape the future of distribution: The future of B2B is collaboration and integration to serve the customer’s customer better. Reading this edition, I find that this observation is very much aligned with the promise and future of the Internet of Things. With this in mind, I suggest five questions to help push a conversation ahead:

• Can you look at your innovations and define them as new collaborations and integrations with customers to better serve their customers?

• Are you harnessing data and human intelligence to drive your collaborative and integrated innovations?

• Can you turbocharge and accelerate what you think is possible by tapping into the Internet of Things?

• How will you gain access to IoT data, and what technologies do you need to harness its potential?

• Imagine that you have answered the four questions above. What will your business, value chain, and markets look like in a future where distributors have embraced and enhanced the Internet of Things?

As always, please share your comments, ideas, experiences, and direction below. Don’t be a stranger. Click here to schedule a call or send me a note at mark.dancer@n4bi.com.