Changing rules are a puzzle
Industrial distribution is hard to figure. While many distributors seem to be prospering, others have serious problems, some of which go back decades.
By James P. Morgan -- Purchasing, 5/6/2004 2:00:00 AM
How the problems of a few distributors affect the industry and those who buy through distribution is the subject of this year's report. The three-part story addresses the relationships that are changing the distribution business, how purchasers view the performance of their distributors and how those charged with running the business intend to meet distribution's future needs.
PART 1: THE BUSINESS
Many buyers and sellers in the distribution business have come to view the problems in the distribution industry in terms of a number of relationships that have gone wrong or are in need of adjustment. Dr. Michael E. Workman, industrial distribution expert and professor emeritus at Texas A&M's Industrial Distribution Program, links a number of relationship breakdowns to understanding many of the problems being experienced by the industrial distributors.
One of the least understood of these relationships, says Workman, has been the distributor's kinship with its manufacturer suppliers. Traditionally, this was a closer connection than even that of the distributor to the end user. The larger the percentage of a company's product that a distributor took to market, the closer the kinship, and the closer the kinship between the distributor and its supplier, the more likely a volatile buyer/distributor relationship.
In recent years, suggests Workman, this delicate balance has been changing. Communication between manufacturers and end users has been on the increase and this, in turn, has led to a drastic changing of the role of the distributor. "In many cases, the change has reached a point where the distributor's real customer has become its supplier." Typically, in this change of roles, the manufacturer supplier has made a contract or a deal with the end user and then contracted with a distributor to perform the details. In recent years, the distributor doesn't even do distribution, but is merely contract labor for the manufacturer.
New view of exclusive
Another factor in the changing relationship is the place of exclusive distribution. Over the years, manufacturers' use of distribution has been waving back and forth—from putting the distributor totally in charge of selling product, to downplaying exclusive distribution agreements, to an approach featuring a limited use of exclusive agreements. Much of the renewed interest in exclusive distribution appears to be among manufacturers. In simple terms, many are picking and choosing among distribution modes in order to get closer to the sale.
Often these actions entail deals in which distributors provide the functions of distribution, but not the selling of the product. They are using exclusive deals that don't really revolve around product exclusivity so much as functional exclusivity. Indeed, there currently is much uneasiness among industrial distributors that manufacturers are getting ready to take more of their distribution business directly to their ultimate customers.
Are these concerns real? The answer among economists in the field is "yes, but don't expect the functions of industrial distribution to disappear. Someone will have to do them, and many manufacturers who use distributors to sell and service their products readily admit they aren't good at selling product." In such cases, the distribution function will probably not change that much.
On the other hand, a number of manufacturers is actively planning to take back many of those marketing and selling functions performed by their distributors. Many plan to create brand preferences and demand, hire distributors to respond and react to that demand, and generally promote a new era that doesn't revolve so much around the old buy-hold-sell inventory mentality so much as it does a full supply chain sourcing tilt.
In this new model, the manufacturer helps to sell, the distributor helps the customer with sourcing problems and receiving helps with logistics related to the problem.
Big problem for smalls
While it may be comforting to know that the larger, more aggressive distributor still has a place in the business, what about the small, medium-sized, and highly specialized distributorships? The answer to that concern is a difficult one and also based on relationships. In fact, much distribution business is still based on personal relationships and, for many small distributors, this could be bad news.
It's bad news especially when considered in terms of the future of small distributors. Many heads of small distribution firms are emphatic about the premise that much higher levels of success occur whenever relationships move from the close personal relationships of small businesses to the business-to-business relationships of larger companies. With smaller customers, business-to-business relationships don't happen very well or often. But for the larger customer, notes Workman, such a move signals the potential for greater sales-driven business.
Pricing: A new model
Perhaps what is changing the fastest is the industry's approach to pricing on the part of distributors and their manufacturer-suppliers. There is perceptible movement from fixed pricing to a cost-plus mode. Under this mode, each service added tracks directly into the cost. Price of product is really not a factor. What do count are such things as the number of services performed, the number of transactions required, level of activity in the market, even the level of direct competition.
In the past 12-24 months, Workman says the industry has come through a period of performance enhancement where it was forced to take cost out of the business. Now, he says, the industry has re-entered a period of opportunity enhancement where it's creating new business or "revenue generation." Distributors are looking for new customers and new ways to serve old customers. From a production standpoint, buyers can expect to see a lot more innovation offered to customers and potential customers. Many distributors suggest that there will be more innovation moving to the market than has been visible in the past 5-6 years.
Today, says one industry spokesman, users have many more options to get product than ever was possible in the past. Manufacturers are in the process of presenting as many of those options as possible in hopes that the end user will bite on one or a few of those offerings. That's how many economists see parallel channels developing—whether it's e-commerce, catalog business, telephone-based business, local-owned inventory business, use of reps or use of non-competing distribution. In fact, the customer has so many options today that the product becomes less of a factor and the availability of that product becomes the primary factor.
Global relationships
Global distributor business competition also has become a hot issue over the past several years. The problems began when many large distributors went offshore for products and marketed them under their own private labels. Predictably, this new relationship began causing some extreme headaches when the offshore product line began to be competitive with their locally produced product lines. In some cases, the private label goods began diluting their own market share. To date, private branding has only really been effective among the very large distributors, and smaller companies can't do much about it.
Global sales, on the other hand, are becoming a growing source of business for large distributors. Early quality problems appear to be gradually disappearing. Especially noteworthy quality improvements have been achieved for parts from China involving metal removal, metalworking and electronic parts and components.
Perhaps the biggest global relationship problem currently is the pipeline. To assure on-time delivery of goods produced offshore, buyers still often need six months' delivery notice. If the market shifts or changes crop up between the time the order is entered and product is received, "Holy Ned" can follow.
PART 2: WHAT BUYERS SEE
As customers see it, business prospects for the distribution industry depend a great deal on performance. Distributors that add value to their business dealings will, for the most part, do well over the next 15-18 months. Still, there is a hard core of companies that will continue to struggle for another year at least.
Thus, along with some generally optimistic words about the health of the industry, there also is a stream of pessimism. Respondents to PURCHASING's annual distribution survey, for instance, are displaying some signs of unease—or at least signs of less than all-out satisfaction. In general terms, a very large number of distributors and their customers are concerned about an uneven level of service provided by many of the nation's distributors.
"Uneven" is the word many purchasers use. They are satisfied or reasonably satisfied with the level of service provided by their distributors. Many purchasing professionals, for instance, tend to agree with Dennis D. Brooks, international program manager for General Electric in Cincinnati, giving high marks to distributors for their work in introducing and pioneering the use of e-commerce tools in order fulfillment, in helping customers reduce inventory costs and in providing help in shortening order leadtimes. Other purchasing executives also have good things to say about their distributor suppliers. Ken Robison, purchasing manager for CMT, is impressed with improvements in inventory management turned in by some key distributors, while Donald R, Stancil, regional procurement director at Weyerhaeuser, reports improved integration with MRP (manufacturing resource planning) systems as the result of distributor efforts.
But along with all of the good things many purchasing executives have to say about their distributor suppliers, many also are displaying anxieties about them. At first glance, many of their complaints seem to be petty, poorly defined and/or tentative when compared with performance complaints of past years. Perhaps most important, an unusually large percentage of the complaints about performance appear to be aimed at smaller distributor suppliers.
In defense of distributors, one popular explanation of this strain of pessimism seems to be linked to recent buyer worries about the economic climate. Unfortunately, their worries seem to be coloring the truth about what's good and what's not so good about industrial distribution. In short, the worriers seem to be coloring perceptions about distributor performance and what they should be providing to customers.
Too much breast-beating
As a result, say a fair number of purchasing professionals, some pretty "dumb" things are being said about distribution, the economy and the purchasing profession. In a fit of pessimism, some purchasing executives are even changing some of their supplier selection priorities (see charts). To wit: Since 1999 price, quality, inventory, and on-time service have been moving down in the rankings of what buyers say they want from suppliers. For worriers this is a sure sign that the country is in deep decline. (What few of the worriers seem willing to admit is the possibility that current swings of the economy have been managed so competently that supplier selection criteria don't need to be applied so frantically.)
Some of the worriers' questions will begin to be answered over the next few months. Meanwhile, these areas of unease need to be monitored and addressed by purchasing professionals all along the supply chain:
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Prices.Ironically, distributor pricing is attracting the greatest amount of attention from buying executives these days. The irony is that while pricing often is reflected in lower item pricing from manufacturers in economic downturns, the same often is not true of goods sold by distributors. Distributor pricing, especially that on non-production items, tends to be more rigid than manufacturer pricing in periods of economic change. As a result, many purchasing executives report that their firms are experiencing serious cost squeezes.
"I don't know whether they're unable or unwilling to fight price increases," says the buyer for a small valve maker in Houston, but "it's been open season for the past few months." On many items, says the president of a small New Jersey electronics firm, "price and availability have nagged at us all year and forced us into a serious cost squeeze." Many purchasing managers go further in suggesting that their distributor suppliers are not fighting hard enough to keep prices in line.
In a fair number of instances, buyers suggest that most of the pricing problems they are facing fall into the leverage category—big companies fight price hikes, small companies don't have the clout and don't try. According to a purchasing manager at a pump maker in Mansfield, Ohio, her biggest problems with distributors is "they're not manufacturers. We can oppose price increases by manufacturers and often win. But with distributors (especially small ones) it's another story. They'll usually pass price increases along to us and tell us they can't do anything about it." -
Availability. The assistant administrator for an Ohio transportation company is typical of many purchasing executives who complain about back-ordering. "With business down, I would expect fast service. Instead, many distributors seem to be reducing their inventories." The materials manager for a New England toolmaker suggests that availability problems are spilling over into a number of supply management areas—e.g., "inventory, minimum quality standards, returned products and newly imposed shipping charges."
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Delivery. Missed and late deliveries seem to be nagging buyers in many parts of the country. "They need to meet delivery dates better," says the manager of information technology and materials contracts at Bechtel Bettis Inc. A fair number of buyers indicate that missed deliveries and badly handled deliveries have been edging higher since the summer of 2001. A purchasing agent at Hamer Inc., for example, reports instances where distributor personnel appear to be mishandling information about time of delivery and also failing to acknowledge purchase orders.
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Technical assistance. "Invariably, I have to call the manufacturer 'for real help'—especially on steel products," says the purchasing agent for a roller producing company in northern Illinois. In many cases, buyers say, the problem can be traced to the steamy labor market at the end of the 1990s. Good sales help got hired away and many firms found themselves unable to train replacements fast enough. In many distributorships, trained sales help is still at a premium.
In addition, a number of buyers are not so sure that lack of knowledgeable sales help is all the result of unplanned circumstances. For instance, the purchasing agent at a Minneapolis capital equipment maker, suggests that some distributors who used to provide large amounts of technical assistance free—or at relatively low cost—are now selling product knowledge. -
Communication. For many purchasing executives, the biggest problem area in dealing with distributors is more a matter of communication than technical assistance.
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Damage. Compared with past years, minimization of damaged shipments has shown significant improvement. Still, many buyers list damage, returns and getting the right kind of special packaging among the biggest problems they have in dealing with distributors. A number of buyers complain that despite long-term improvement in damage control, there has been a fairly sharp increase in problems over the past several years.
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Cost control. Many purchasing executives also complain that distributors are not doing enough to hold the line on costs. The purchasing manager for a Massachusetts capital equipment company, for instance, cites "poorly trained inside sales contacts, inadequate order processing systems, terrible phone systems and lack of customer skills," for recent poor showings in controlling costs related to buying from distributors.
PART 3: WHAT'S AHEAD
According to a report entitled Facing the Forces of Change. The Road to Opportunity, the industrial distribution industry appears to be getting ready for some major changes.
The report, a prodigious piece of research just released by the National Association of Wholesale Distributors (NAW) and its Distribution-Research and Education Foundation (DREF), is a good-news bad-news document on the future of distribution in America. And although it covers consumer goods as well as industrial, the report is comprehensive enough to provide significant insights into the world of industrial distribution and what likely lies ahead.
According to Adam J. Fein, president of Pembroke Consulting, Philadelphia, and head of the research team conducting the study, the traditional ways distributors make money and grow are about to be rewritten. They will be achieved through a "combination of external forces of change and strategic responses."
New values on info
Buyers, he says, will be more confrontational and demand (and get) real-time service and instant information from distributors (or manufacturers). In many cases, distribution's perceived value of information will be significantly challenged and eroded as buyers simply refuse to pay the costs of distributors' outside sales forces. The NAW-DREF team report indicates that it also expects to see buyers increasingly relying on sophisticated sourcing initiatives and using new technology tools such as online reverse auctions.
Logistics companies, according to the report, also are expected to play a more important role in distribution as they go head-to-head with distributors for control of the supply chain. In addition, the report appears to see logistics firms as alternatives to traditional distribution modes. In fact, the report notes that alternative channels are now providing options and service levels that differ radically from those provided by traditional distributors. Over time, this will contribute to a general chipping away at distributors' longstanding share of channel sales.
Selective strategies
Suppliers to the distribution industry, says Fein, will also play an important role in distribution's change as they begin shifting away from open distribution policies and move to more selective strategies in response to greater use of national contracts and more aggressive contract management.
As orders move online, notes Fein, manufacturers will be better able to evaluate the cost effectiveness of their distribution channels. Manufacturers under product pricing pressure from both imports and domestic competition have identified services as an important weapon in distribution's fight for market share. Most plan to build their own design and research activities and offer fee-based services directly to end users—with or without their distributors.
Strategies to watch
As Fein sees it, there are many strategies that distributors of all stripes probably need to adopt. Of the many, he appears to pay special attention to four that buyers, distributors, manufacturing suppliers, and end users should watch carefully for clues to the future of distribution. They are:
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Customer self-service.Buyers will need to perform more of the pre-sales and transactional activity that typically has been handled by distributors—such as information gathering, price/availability queries, technical support, and order placement.
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Strategic sourcing.Distributors will need to follow a three-step process for reducing purchasing costs by limiting the ability of local buyers to choose brand and supplier. Sourcing initiatives will aim at countering the field-level sales and marketing effort of distributor sales reps trying to influence local buying decisions. According to Fein, online reverse auctions are here to stay and their use will continue to grow.
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Fee-based services and pricing.Distributors need to charge fees separate from product costs. This strategy promises profitability, but can be risky as well if distribution fails to convince buyers to pay. As Fein sees it, "customers will accept fees, but slowly."
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Leveraging technology.Warehouse infrastructure and logistics companies need to offer unbundled supply chain solutions to distributors and customers. Distributors will need to be competitive and treat logistics companies as viable alternatives to distribution.
The top 50 industrial distributors
1. W.W. Grainger, Inc.
Lake Forest, Ill.
Sales: $4.64 billion
Locations: 576
www.grainger.com
2. Graybar Electric Co., Inc.
St. Louis, Mo.
Sales: $3.9 billion
Locations: 263
www.graybar.com
3. WESCO International Inc.
Pittsburgh, Pa.
Sales: $3.3 billion
Locations: 350
www.wescodist.com
4. Hughes Supply, Inc.
Orlando, Fla.
Sales: $3.07 billion
Locations: 450
www.hughessupply.com
5. Rexel
Saint-Laurent, Quebec
Sales: $2.97 billion
Locations: 1050
www.rexel.com
6. Anixter Inc.
Skokie, Ill.
Sales: $2.52 billion
Locations: 142
www.anixter.com
7. GE Supply
Shelton, Conn.
Sales: $2.47 billion
Locations: 150
www.gesupply.com
8. Motion Industries
Birmingham, Ala.
Sales: $2.25 billion
Locations: 504
www.motionindustries.com
9. Airgas, Inc.
Radnor, Pa.
Sales: $1.79 billion
Locations: 800
www.airgas.com
10. Hagemeyer NA Holdings, Inc.
Charleston, S.C.
Sales: $1.54 billion
Locations: 440
www.hagemeyerna.com
11. Applied Industrial
Technologies
Cleveland, Ohio
Sales: $1.45 billion
Locations: 407
www.appliedindustrial.com
12. Sonepar USA
Berwyn, Pa.
Sales: $1.37 billion
Locations: 174
www.sonepar-usa.com
13. Ferguson Enterprises, Inc.
Newport News, Va.
Sales: $1.07 billion
Locations: 725
www.ferguson.com
14. Fastenal Co.
Winona, Minn.
Sales: $905 million
Locations: 1,169
www.fastenal.com
15. Wilson Industries
Houston, Texas
Sales: $900 million
Locations: 160
www.wilsononline.com
16. McJunkin Corp.
Charleston, W.Va.
Sales: $805 million
Locations: 135
www.mcjunkin.com
17. MSC Industrial Direct Co., Inc.
Melville, N.Y.
Sales: $794 million
Locations: 96]
www.mscdirect.com
18. Interline Brands
Moorestown, N.J
Sales: $640 million
Locations: 60
www.wilmar.com
19. Wurth Industrial USA
Kunzelsau, Germany
Sales: $614.8 million
Locations: 102
www.wurth.com
20. Crescent Electric Supply Co.
East Dubuque, Ill.
Sales: $605 million
Locations: 114
www.cesco.com
21. McNaughton McKay Electric Co.
Madison Heights, Mich.
Sales: $500 million
Locations: 26
www.mc-mc.com
22. Industrial Distribution Group
Atlanta, Ga.
Sales: $493 million
Locations: 52
www.idglink.com
23. Noland Co.
Newport News, Va.
Sales: $488.7 million
Locations: 98
www.noland.com
24. Kaman Industrial
Technologies
Windsor, Conn.
Sales: $477.2 million
Locations: 171
www.kamandirect.com
25. Red Man Pipe & Supply
Tulsa, Okla.
Sales: $403.1 million
Locations: 72
www.red-man.com
26. Lawson Products, Inc.
Des Plaines, Ill.
Sales: $387.5 million
Locations: 17
www.lawsonproducts.com
27. Barnes Distribution
Cleveland, Ohio
Sales: $382.7 million
Locations: 36
www.barnesdistribution.com
28. White Cap Industries, Inc.
Costa Mesa, Calif.
Sales: $380 million
Locations: 60
www.whitecapdirect.com
29. F.W. Webb
Burlington, Mass.
Sales: $360 million
Locations: 63
www.fwwebb.com
30. Communications Supply Co.
Carol Stream, Ill.
Sales: $352 million
Locations: 30
www.gocsc.com
31. Meritage, Inc.
Santa Fe Springs, Calif.
Sales: $328 million
Locations: 31
www.meitageinc.com
32. USFlow Corp.
Grand Rapids, Mich.
Sales: $300 billion
Locations: 50
www.usflow.com
33. BDI
Cleveland, Ohio
Sales: $260 million
Locations: 124
www.bdi-usa.com
34. Strategic Distribution, Inc.
Bensalem, Pa.
Sales: $253.6 million
Locations: 57
www.isacs.com
35. Turtle & Hughes
Linden, N.J.
Sales: $250 million
Locations: 12
www.turtle.com
36. Edgen Corp.
Baton Rouge, La.
Sales: $225 million
Locations: 20
www.edgencorp.com
37. J&L Industrial Supply
Livonia, Mich.
Sales: $200.3 million
Locations: 14
www.jlindustrial.com
38. Production Tool Supply
Warren, Mich.
Sales: $198.3 million
Locations: 19
www.ptsxpress.com
39. Precision Industries
Omaha, Neb.
Sales: $185 million
Locations: 110
www.precisionind.com
40. Sears Industrial Sales
Hoffman Estates, Ill.
Sales: $170 million
Locations: 9
www.commercial.sears.com
41. DXP Enterprises
Houston, Texas
Sales: $148.1 million
Locations: 37
www.dxpe.com
42. R.S. Hughes Co., Inc.
Sunnyvale, Calif.
Sales: $141 million
Locations: 35
www.rshughes.com
43. Harrington Industrial Plastics
Chino, Calif.
Sales: $135 million
Locations: 40
www.harringtonplastics.com
44. National Welders Supply Co.
Charlotte, N.C.
Sales: $128 million
Locations: 45
www.nwsco.com
45. Dillon Supply Co.
Raleigh, S.C.
Sales: $122 million
Locations: 22
www.dillonsupply.com
46. FCX Performance
Columbus, Ohio
Sales: $120 million
Locations: 21
www.fcxperformance.com
47. IBT, Inc.
Merriam, Kans.
Sales: $119 million
Locations: 4
www.ibtinc.com
48. Bossard U.S.
Hampton, N.H.
Sales: $118 million
Locations: 25
www.bossard.com
49. Kinecor
St. Laurent, Quebec
Sales: $118 million
Locations: 65
www.kinecor.com
50. Indoff
St. Louis, Mo.
Sales: $112.5 million
www.indoff.com
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