Distributor businesses are exposed to various wholesale risks. That’s because these companies traditionally have fewer customers that order large quantities. That’s why building good customer relationships is crucial in the wholesale sector. Managing risks is also important as even small problems can cause clients to opt for another distributor. If you’re interested in the topic of how to manage a wholesale business, you’re likely to find this article about wholesale risks and disadvantages useful. Make sure to also check our posts on topics like wholesale inventory management or how to become a wholesaler.
Key takeaway: There are many risks associated with having a wholesale distribution business. Like other companies, suppliers need to have a thorough wholesale risk management plan. From assessing and understanding the risks to having plans if disruptions or incidents occur can be the difference between a successful and ineffective business.
Main Business Risks for Wholesalers
As with any other business, wholesale companies are exposed to a variety of risks. Whether we’re talking about broadline suppliers or companies that specialize in certain products like wholesale coffee distributors, their risk management strategies should include different categories of scenarios and measures to overcome them. Here are the main types of wholesale risks for vendors.
- Supply chain risks. Disruptions in supply chains are among the main risks for wholesale vendors. They can lead to increased transportation costs or inadequate supply of goods.
- Financial risks. Many distributors are prone to cash flow management risks. That’s because large customers have more negotiating power and often use it to negotiate postponed payments for weeks or months in their wholesale purchase agreement contracts.
- Market risks. In times of economic uncertainty, there’s high price volatility and demand fluctuations. These risks can be hard to predict but an effective wholesale risk management strategy can prepare a distributor business for them.
- New trends. Vendors that specialize in selling trendy products are at risk of overstocking certain goods and not being able to sell them. New wholesale items to sell constantly hit the market and it can be difficult to predict their demand.
- Trade policies and regulations. Trade restrictions and tariffs can pose a serious threat to vendors that specialize in wholesale sales of imported products.
- Quality issues. One of the main efforts in wholesale risk management should be to focus on the quality of products. Wholesalers act as the middleman between producers and other businesses. If the quality of the products is compromised, customers might decide to skip the middleman altogether.
- Innovations and improvements of services. In addition to getting high-quality wholesale products, customers expect their distributors to offer various services and innovations. They can include solutions that automate ordering or wholesale billing software. Some wholesalers also offer training and equipment delivery & management for their customers.
- Sustainability. This is a risk that all businesses should consider when they create their risk management plans (check out our article on what is risk management). A growing number of companies aim to integrate eco-friendly practices into their business processes. That’s because they know that more and more customers look for businesses that are committed to sustainability. Furthermore, a lot of new legislation and regulations are aimed at green policies and businesses should prepare for them.
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How to Prepare for Wholesale Risks
Preparing for the different risks is based on the industry. In some sectors, supply chain disruptions can be normal and based on seasonality while in others they can be devastating. That’s why a wholesale risk management plan should be tailored to the company and its market of operations. Here are some of the things that can prepare your wholesale business for the major risks listed above.
- Research market trends and regulatory changes. The US is the biggest market in the world. As such, America is often a trend-setter and other countries and markets follow the trends here. However, fluctuations in demand can be predicted fairly successfully. The same is true for regulatory changes. Whether they are related to tariff wars or stricter sustainability regulations, the signs of legislation changes are usually seen more than a year prior.
- Diversification in markets and customers. In order to have a resilient wholesaling business, make sure you don’t depend on a small number of customers. Furthermore, you can expand your markets by partnering with shipping companies and delivering products not just to local businesses but to other states and countries.
- Focus on customer service, quality control, and reputation management. Good reputation and quality are often more important than pricing. Many businesses prefer to partner with wholesalers who offer them consistently high quality and good customer service compared to distributors who offer mildly lower prices.
- Develop good cash flow management and focus on proper inventory management. As we mentioned earlier, cash flow management can be a problem for businesses that offer wholesale products. That’s why it’s crucial to have good management in that field. Having robust inventory and minimizing losses due to poor inventory management can help increase profitability.
Frequently Asked Questions about Wholesale Risks
BlueCart offers a modern and innovative SaaS solution for wholesalers. With our help, B2B distributors can easily upload their products to an eCommerce catalog and their customers can have an easy time ordering goods. We also aim to offer useful advice to businesses in the wholesale industry and other sectors. Below you can find the answers to some of the commonly asked questions about the risks in wholesale.
What Are the Disadvantages of Selling Wholesale?
Low profit margins are considered to be one of the main disadvantages of the wholesale business model. They pose a serious risk to businesses that cannot easily increase their prices. Therefore, if a business experiences troubles due to supply chain disruptions or other factors, they have very little flexibility within their prices.
Another wholesale risk and disadvantage to this business model is that it depends a lot on relationship building. In order to have a successful distributor company, you need to invest a lot in building trust between your customers and your business. Companies aim to find suppliers that can be flexible with their MOQ (minimum order quantities), offer fast delivery, and have a wide catalog of products.
How Wholesalers Can Achieve Business Continuity Planning?
If a business is able to continue its operations and deliver products or services at pre-defined acceptable levels after an incident, then it has good business continuity. In order to achieve it, companies need to be prepared with a thorough risk management plan. The plan should include steps for major risks such as price volatility, market fluctuations, and supply chain disruptions. A wholesale distribution business should also be ready for operational risks like technology failures or product quality issues. Preparing for different scenarios and stress testing can show companies where they lack preparedness and help them achieve business resilience.
What Is Wholesale Risk Management Framework?
A risk management framework (RMF) provides a structured process that integrates different security layers of risk management into other business processes. The National Institute for Standards and Technology has published a federal government guideline that can help entities better understand the different risks and prepare for them.
A wholesale risk management framework is not much different from a guideline for other businesses and institutions. The main components of such a framework are:
- Risk identification;
- Risk measurement and assessment;
- Risk mitigation;
- Risk reporting and monitoring;
- Risk governance.