NOV. 01, 2020
A high-level look at distributors and wholesalers
When discussing organizations in a supply chain, the terms “distributors” and “wholesalers” are often used interchangeably. While distributors and wholesalers are similar in that they both exist in the supply chain between manufacturers and retailers, their roles are significantly different:
- Distributors work directly with manufacturers and often have exclusive territory through a contract with them. Through this contract, the distributor may sell product to specific wholesalers or retailers.
- One example is beverage distributors. They work with a bottling plant and have an exclusive territory of retailers. Distributors provide unique value, as they are able to deliver the exact amount of product a retailer wants. Without this partnership, retailers would have to buy in bulk and store that product at their business.1
- Wholesalers buy product directly from distributors, typically in high volumes. By buying in bulk, wholesalers often receive more favorable pricing and, in turn, are able to pass on savings directly to retailers.
- One example is building material wholesalers. They purchase lumber, shingles, siding and other materials in bulk and then sell smaller quantities to lumberyards.2
Distributors and wholesalers are covered or fall under the following NAICS codes:
Industry outlook and trends
According to the Bureau of Labor Statistics (BLS) and IBISWorld, there are:
5,936,200 people employed in wholesale trade3
815,185 businesses in wholesale trade4
Additionally, the industry is expected to see $11.15 trillion in revenue in 2020 and has experienced 1.4% annual growth over the past five years.3 Please note that all of these figures may have changed, and are likely to continue changing, due to market swings
Overall economic conditions
Wholesale distributors account for a huge portion5 (29%) of the United States’ gross domestic product. Still, wholesale distribution growth has slowed, and businesses continue to operate on relatively thin profit margins. In fact, a 2019 survey from the National Association of Wholesaler-Distributors estimates an average after-tax profit margin of just 1.8%.6
According to the BLS, the unemployment rate for wholesale trade in the United States is 3.1% as of early 2020. This is below the overall unemployment rate of 3.6%. Low unemployment will likely drive up employee wages overall.5 (Given market swings, these figures are likely to change frequently.)
In terms of available distribution and wholesaling jobs, common positions include forklift operators and commercial motor vehicle drivers. However, these positions have been difficult to fill, as there is an ongoing shortage of commercial motor vehicle drivers across several industries. There are a number of factors contributing to this shortage:
- Businesses are finding it difficult to recruit younger drivers. The average age of a driver is 46, and as more of the workforce nears retirement age, it’s going to be increasingly important for organizations to attract new talent.
- Organizations are struggling to attract and retain female drivers. Females make up only 6.6% of commercial motor vehicle drivers, and distributors and wholesalers need to find ways to market to this talent pool if they wish to fill open positions quickly.
- Historically, the lifestyle of commercial motor vehicle drivers has kept potential employees away from the industry. While distributor and wholesale drivers may not have to complete long, cross-country trips, they often work long hours behind the wheel. This can deter otherwise qualified candidates from applying for open positions.
Advancements in technology have streamlined distribution and wholesaling operations. Some examples include:
- Internet of things (IoT) — Organizations are leveraging IoT devices more than ever before. For instance, some distributors and wholesalers are installing sensors on individual pieces of equipment, which in turn promotes interconnectivity and easy access to real-time data. This can be especially useful when it comes to improving order fulfillment.7
- Alternative fuels — Fuel is a major cost driver for distributors and wholesalers that operate their own fleet. While compressed natural gas is more efficient and has been used in commercial motor vehicles for years, it has yet to be widely adopted. This is largely due to the upfront cost associated with switching from traditional diesel, which can be tens of thousands of dollars. Compressed natural gas is also not as available as diesel is, making it more difficult for businesses to make the change. Another alternative fuel trend relates to electric vehicles. As electric passenger vehicles become more common and accepted by the public, the technology is slowly making its way to commercial vehicles.8
- Automated vehicles — While the concept of automated vehicles has been around for years, there are still several years of development ahead before the technology is commercially viable. However, given the continued impact of the driver shortage, many organizations and industry leaders are pushing for the hastened development of automated vehicles.8
- Robotics and automation — Robots have been used in distribution and wholesale since the 1960s, so they’re not new. But advances are making them more affordable, efficient and versatile. As the labor shortage continues, expect robots to be used more prevalently.8
Insights on major lines of coverage
Exposures, precautions and lines of coverage that may apply to distributors and wholesalers.
- General storage — Property exposures vary depending on the products that distributors and wholesalers store. Some products may have a very low fire risk, while others (e.g., lumber, plastics and chemicals) carry higher risks. It should also be noted that disorganized storage practices and poor housekeeping can increase a business’s fire risks
- Precautions: Products should be stored neatly using the appropriate racks or storage systems. Should a fire start, automatic sprinkler systems can keep it in check until the fire department arrives. Sprinkler systems must be designed for the hazard class, maintained, inspected and kept on at all times.
- Material handling equipment — Distributors and wholesalers commonly use powered industrial trucks or forklifts to move product into storage and onto trucks. Power sources, such as propane, for these types of equipment can create fire and explosion hazards that businesses should be aware of.
- Precautions: Proper storage of fuel and batteries is critical. Propane should be stored outdoors, and truck batteries should be kept in a well-ventilated area. Above all, employees should be trained on refueling procedures.
- Theft — Depending on the product, theft can be a major concern for distributors and wholesalers.
- Precautions: A full security system, including cameras, fences and alarms, should be considered. It’s also important for distributors and wholesalers to have an inventory tracking system to help track lost product and prevent employee theft.
- Dependent properties — Distributors and wholesalers rely on other businesses to supply materials and drive sales. Because of this, they are especially vulnerable if one of these dependent properties experiences a property loss and must suspend operations.9
- Precautions: Distributors and wholesalers should identify their dependent properties and understand how a loss at that business would affect their operations. They should also conduct a risk assessment of the dependent properties to better understand the risk and what can be done to reduce it. Additionally, a broader business continuity plan should be in place in the event that a dependent property suspends operations.
- Injury risks – Workers’ compensation exposures vary greatly depending on the products being distributed. In general, unsafe material handling is one of the top concerns for distributors and wholesalers, as it creates significant musculoskeletal injury exposures. If a business performs hand delivery, this can compound injury risks, as stairs and other hazards can increase the likelihood of an accident. Material handling equipment (e.g., a forklift) is also a major workers’ compensation exposure. Due to the size and power of this equipment, it can cause serious injury or death.
- Precautions: Businesses should use the appropriate material handling equipment and techniques for each task at hand. Equipment should be well maintained, and employees should be trained on its proper use. When possible, businesses should avoid manual material handling.
- Commercial motor vehicles – Typically, distributors and wholesalers have significant commercial automobile exposures. Not only are most products delivered via commercial motor vehicles, but personnel may use passenger vehicles to complete their daily duties. Distributors and wholesalers could oversee a fleet that includes small box trucks, tractor-trailers and similar types of vehicles. Notably, distributors and wholesalers typically operate in a set territory, so the radius of operations is often limited. However, businesses may cross state lines when delivering product, which can create additional compliance concerns.
- Precautions: Distributors and wholesalers operating a commercial motor vehicle fleet need to ensure that drivers have valid licenses and acceptable driving records with regard to violations and accidents. Additionally, they should consider using GPS and telematics with their fleets to monitor unsafe behaviors. Above all, drivers should be trained on defensive driving techniques.
- Passenger vehicles – For distributors and wholesalers, passenger vehicles can create a number of exposures, as they may or may not be owned by the company.
- Precautions: Distributors and wholesalers should ensure that all drivers have valid licenses and acceptable driving records with regard to violations and accidents. Above all, drivers should be trained on defensive driving techniques. For drivers using their own vehicles for company purposes, the company should ensure that adequate insurance is in place.
- Products liability – Distributors and wholesalers can have significant product liability exposures. This is particularly true for those that import to the United States, as this often makes them the party responsible for any defects or similar product issues.
- Precautions: Distributors and wholesalers should determine whether the manufacturers they work with have adequate insurance and quality controls in place.
- Premises – Generally, premises liability is not a major exposure for most distributors and wholesalers unless they give tours or allow customers to pick up product from their facilities.
- Precautions: If tours are given on the premises or customers are allowed to pick up products from facilities, premises liability should be evaluated.
Recommended lines of coverage: general liability, product liability, umbrella/excess liability, business interruption, equipment breakdown, crime, inland marine, property, workers’ compensation and commercial auto