Distribution 2007: Price is still king
Results of Purchasing's annual survey of distributor performance show buyers still consider price their top priority, and that they think their distributors are doing a good job. But it also shows technical service is important too, and some distributors fall short there.
By Susan Avery -- Purchasing, 5/3/2007 2:00:00 AM
In the realm of buyer/distributor relationships, price is still king. But technical service is the crown prince.
That's one of the conclusions from the most recent Purchasing survey of distributor performance. And the conclusion dovetails neatly with findings from Industrial Distribution's most recent survey of its distributor readers. Industrial Distribution and Purchasing are both published by Reed Business Information.
Buyers say they expect their distributor suppliers to provide them with the lowest prices and the highest service levels. And, separately, distributors say, yes, buyers are pressing them to provide more information especially on pricing justification and value-added services.
Moreover, buyers say their distributors need to beef up their efforts in technical support. Only 14% of buyers say their suppliers do an excellent job in providing tech service.
Still, for the most part, distributors are meeting buyers' expectations. Of buyers responding to Purchasing's annual survey of distributor performance, 96% say the suppliers are doing a good or excellent job. None say performance is poor.
A procurement director from the Midwest responding to the survey says, "Our distributors are Fortune 100 companies. Their services, technology and manufacturer partners are cutting-edge. They have all we need in terms of current and future services. No problems."
Likewise, a technical buyer in the South says his company's distributors excel at responsiveness and value-added customer service. "Outside sales reps or technical field engineers troubleshoot and make recommendations. They work hard to earn and maintain the business."
The majority (87%) of purchasing professionals responding to the survey are buying more through distribution than they did five years ago, and they expect this trend to continue. And, buyers are looking to distributors to provide an increasing number and variety of products and services. These services include vendor managed inventory (VMI), consignment inventory, re-stock supply agreements and outsourcing arrangements.
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Price has become increasingly more important to buyers in recent years. During the supplier selection process for nonproduction materials, purchasers rate price higher than any other quality they consider. On a scale of 1–10, with 10 being the most important, purchasers rate price 7.7. Last year, this figure was 6.9. The year before, it was 5.8. At first glance, it appears that price is taking on new significance because of rising costs of such raw materials as metals and energy, which are used to make MRO items.
Availability, service and technical assistance also are becoming more important to buyers when they select a distributor. According to results of Purchasing's survey, buyers rated availability 6.8 in 2007. Last year, it was 6.5 and the year before, it was 4.6. Service rates a 6.2 this year. In 2006, it was 5.9, and in 2005, it was 4.4. While meriting a 3.9 with respondents this year, technical assistance was 1.9 in 2006 and 3.7 in 2005. Total cost remains at 5.9 two years in a row. In 2005, it was 4.4.
A vice president of purchasing for a steel company in the Midwest gets to the point when asked about his biggest problems with distribution: "A lack of real technical knowledge."
A senior buyer in the South begs to differ. His company's "current distributors are very good at offering technical assistance to plants and getting their suppliers involved where necessary."
One thing most buyers agree on, however, is that distributors are good at customer service. Ninety-two percent of respondents rated their distributors' customer service good or excellent. Only 8% said it's fair.
Always low prices
In his work with distributors, D. Bruce Merrifield Jr., president of Merrifield Consulting Group in Chapel Hill, N.C., keeps an eye on their relationships with customers and suppliers. He doesn't find results of Purchasing's survey surprising, pointing out that they do, in fact, reveal several trends that are occurring within the distribution industry.
Merrifield says that industrial purchasers are looking to distributors for Wal-Mart like pricing on most of the commodity items they regularly buy. They don't want or expect technical support and service from distributors for these items, which is probably why distributors say they are offering fewer fee-based services such as set-up and installation, fabrication, kitting, tool-crib management and extended warranties.
But, for the rest of the buy, purchasers look to distributors to provide technical support and service. By unbundling services from a product's price, buyers can purchase many of the commodity items they routinely require for their plants from distributors at everyday low prices. And distributors can charge buyers a fee for the services they do want. Merrifield points to Best Buy and its Geek Squad of technical experts who help customers with service issues that arise with the products they purchase through the retailer as an example of how this works.
Specialty distributors are more likely to charge for such services as installations, training, fabrication and technical support, while general line businesses are not bundling their on-site storage, consigned inventory and inventory management offerings.
Another strategy distributors can use: providing services free to those customers that contribute to the distributor's operating profit. While these customers may not be a distributor's biggest, they tend to be purchasing professionals with a good understanding of their transaction costs and have streamlined the buying process. Doing business with them is less costly for distributors.
While studying their costs of operation, distributors too have learned a thing or two about pricing the products they sell, Merrifield adds. Commodity-type items that purchasing operations can buy through just about any channel, continue to carry a low price. For items unique, or exclusive, to the distributor, they charge more. "Retail has figured this out," he says. "It's something purchasing professionals can expect to see more of from the industrial channels."
Consolidation may mean less service
Results of Purchasing's survey show that while buyers may have some issues with the suppliers, they still plan to purchase more through them. One respondent, Eugene F. Brieck, director of purchasing at Ash Grove Cement Co., in Overland Park, Kans., and a member of Purchasing's All-Star MRO Buy team for 2005, says: "We have weeded out the weaker distributors and have awarded that business to the strong distributors that can support us over our large company."
Brieck is not alone. A senior supply chain analyst says she plans to make relationships with current distributor suppliers better in the next 12 months while "eliminating those few we do not need." A third respondent says distributors that "offer better service will get a larger share of our business."
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Seventy-two percent of distributors responding to Industrial Distribution's survey agree that buyers are selectively trimming the number of distributors from whom they purchase. They say such actions by purchasing help make them more competitive, which is good for the supply chain as a whole. Distributor respondents also say their role today is more about fulfilling orders and less about helping customers with brand or product decisions.
Again this makes sense to Bruce Merrifield. He sees this trend playing out in some purchasers in consolidating their buy looking to move the business to manufacturer suppliers to gain full advantage of price discounts and rebates.
"We are constantly challenging the system of distribution," says Randy Clark, senior strategic buyer of MRO and packaging, Volvo Group Non-Automotive Purchasing, Greensboro, N.C., and a member of Purchasing's MRO All-Star Buy team for 2006. "Why deal with a 'middle man' when you can deal direct?"
Another survey respondent, Jeffrey Stone, vice president at Grain Processing Corp. in Muscatine, Iowa, says in the next year his company will be moving toward more third-party agreements with both distributors and manufacturers.
Savvy purchasing pros have not forgotten the role of distribution and are not entirely eliminating the middle man. "When you bypass the distributor unwittingly the buyer and the manufacturer will have to pick up the functions the distributor was doing and they will do them far less efficiently," says Merrifield. Instead, they place their purchases with the manufacturer and get the lower price that's associated with volume buys—and they pay a fee to a distributor to fulfill their orders and track the purchases. Forward-thinking distributors, he says, are embracing this trend.
Still, purchasing's move to consolidate buying across a company with many locations may prove challenging to buyers at the plant sites. Not only will the plants balk at what they perceive to be higher prices, they may still turn to local distributors in emergencies.
Moving plant purchases to big, national distributors eventually forces smaller, independent distributors to close up shop, due to the lack of business. As this occurs, the plants may notice a decline in service levels. "Many big national players are not as good at retaining branch managers who are great at retaining great service people," Merrifield says. Plant buyers will become frustrated when they use the independents first as they charge higher prices for the services they provide, and later, as they disappear.
| 2007 | 2006 | 2005 | |
| Source: Purchasing survey | |||
| Price | 7.7 | 6.9 | 5.8 |
| Availability | 6.8 | 6.5 | 4.6 |
| Quality | 6.5 | 7.8 | 7.2 |
| Service | 6.2 | 5.2 | 5.7 |
| Total cost | 5.9 | 5.9 | 4.4 |
| Ease of doing business | 4.0 | 3.3 | NA |
| Inventory assistance | 3.7 | 2.1 | 3.6 |
| Technical assistance | 3.1 | 1.9 | 3.7 |
| Emergency assistance | 2.8 | 1.3 | NA |
| Brands carried | 2.4 | 3.0 | NA |
| 2007 | 2006 | 2005 | |
| Source: Purchasing survey | |||
| Quality | 7.6 | 8.3 | 7.8 |
| Availability | 7.6 | 6.8 | 5.7 |
| Price | 6.8 | 6.4 | 6.8 |
| Total cost | 5.7 | 6.2 | 5.8 |
| Service | 5.6 | 4.4 | 5.1 |
| Technical assistance | 2.6 | 2.4 | 3.1 |
| Delivery | 6.3 | NA | NA |
| Inventory assistance | 2.5 | 1.8 | 3.6 |
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