Distribution 2009: Pricing is the catch as buyers, distributors come together
Distributors are providing purchasing with more goods and services than ever before. But, for buyers, it is still not enough.
By Susan Avery -- Purchasing, 4/30/2009 2:00:00 AM
Distributors once again earn high marks for performance from purchasing professionals.
In fact, it is the second year running that 94% of buyers responding to a new Purchasing survey say distributor suppliers are doing a good or excellent job.
A close examination of results of the survey finds that these purchasing pros are taking a more strategic approach to sourcing chemicals, electronic components, metals, office products and maintenance, repair and operations (MRO) items through distributors. As part of the strategic sourcing process, buyers have consolidated the supply base—even for MRO—and are sourcing more products and services through fewer suppliers. And, when asked where they see relationships with distributors heading, buyers say they are only going to grow stronger, with the suppliers taking on more responsibility for purchasing and inventory management activities in the years to come.
Typical is Jorge Garcia, a purchasing manager with Flexicore of Texas in Houston. "We minimized our distributor base and solidified relationships with those more apt and willing to partner and become part of our corporate vision," he says. "Thus, we are becoming increasingly more dependent on them to maintain an almost JIT [just in time] inventory program minimizing our expenditures and costs."
Tim Underhill, who as president of Strategic Business Solutions in College Station, Texas, spends time working with both buyers and distributors, says that on the production side, purchasing already has done a lot of consolidation and often buys direct goods from the manufacturer. "But, on the nonproduction side, interest in consolidating the supplier base recently has been phenomenal."
That's because companies are looking to further reduce costs in this down economy, he says, and buyers are being asked to do more with less. "If you're told to cut costs and staff, the reality is that you can't manage as many suppliers as you used to."
Still, when it comes to measuring supplier performance, nothing ever is as it appears. For despite the high marks buyers dole out to distributors, they still seem to have some problems with the suppliers.
One is price. "Distributors do not negotiate pricing with the changing market conditions of the products they offer," gripes one buyer who responded to the survey. A buyer in the Northeast, agrees. "In times of price increases, distributors simply pass on the increases as opposed to fighting for justification and/or elimination."
Distributor pricing has long been a point of contention with buyers. But it seemed to be less of an issue last year. Then, according to results of Purchasing's survey on distributor performance for 2008, buyers were more concerned with availability and cost issues. They were busy trying to get product out the door.
Again, the economy plays a role, helping shift buyer focus. In the months following Purchasing's release of its survey results last year, prices of commodities that go into products sold by distributors like steel skyrocketed. Figures available from Purchasing's subscription website purchasingdata.com show steel prices soaring 76% from the end of 2007 through August 2008.
As costs for commodities increased, manufacturers raised prices for the products they make and distributors passed the hikes onto buyers. Now that commodities costs have cooled, buyers expect that distributors will lower their prices as well. "It's a problem for distributors because it turns their products into a commodity," Underhill explains.
Meanwhile, availability still poses problems for buyers. "Distributors show an occasional lack of urgency in resolving critical supply issues," says one survey respondent. "My feeling is that the distributor may not have the understanding of what it means for production lines to be shut down due to absence of key materials."
Consolidation continues
A weighted average of 52% of all respondents' purchases are through distribution. Of that number, a weighted average of 34% of purchases are for direct materials. Respondents are responsible for about $15 million in spending annually.
In the past year, as the economy has slowed, buyers have worked harder at reducing the supply base to lower costs. In fact, survey respondents now do business with 12 suppliers. This figure is down from 15 suppliers one year ago.
Asked to compare purchasing activities of today with five years ago, 35% of respondents say they are purchasing more through distribution now. Another 41% say there's been no change in the volume they place with the suppliers.
A sourcing director in the Midwest has moved more business to distributor suppliers because they provide better customer service and inventory availability. "Distributors also have better order management capabilities that help reduce our procurement costs," he says. A buyer for an energy company says he's buying more through distribution because he's "streamlining the supply chain to seek volume purchasing."
Another reason respondents cite for the increase in business through distribution is sales growth at their companies.
As they consolidate the supply base, buyers are asking distributors to assume a new role within their companies. Fifty-four percent of survey respondents say their relationships with distributors have changed in the past year, with many saying they are working more closely with distributors and have formed a partnership relationship with them. They also say they expect more from the suppliers.
"We've partnered with a select few distributors to minimize the number of suppliers we do business with while maximizing inventory management opportunities," says a strategic sourcing manager in New England.
As a result of the buyer consolidation, distributors are offering more products, say 81% of respondents. Another 71% say the suppliers are offering more services. Most often buyers mention inventory services as a latest addition from distributors. Others say the suppliers are beefing up their technical service offerings.
What's more, a year from now, buyers expect little change in their relationships with distributors except that they will only get better. "We will rely on them for additional services, especially those activities that don't fit our capability or core expertise," says an indirect material contractor.
Best in class
Just 45% of respondents have a formal process for measuring performance of distributor suppliers. Yet, when asked to put performance of their distributor suppliers up against their manufacturer suppliers, 90% say distributors have an edge.
That's because of "a willingness to listen to the customer and focus on our needs," says an MRO buyer. A purchasing manager cites availability of "product and inventory management services" as reasons for giving a higher grade.
Where distributors come up short compared with manufacturers is in "communicating information from the manufacturer on process changes, plant shutdowns, changes to the supply chain, and supplying globally," says one respondent. Another adds that distributors may want to improve upon their knowledge of products and reaction time to changing markets. Plus "they don't negotiate prices well."
Still a majority (61%) consider their distributor suppliers to be exceptional or best in class. Overwhelmingly, good customer service is what puts them in this high echelon of supplier performance, they say.
"They go the extra mile on everything—products, support logistics, costs," says Stephen Davis, director of purchasing at Horizon Software International in Atlanta. "They will even come onsite to resolve issues if they can't resolve them at their level."
John Carvin, purchasing manager at Gross Mechanical Laboratories in Hanover, Md., ticks off reasons why his distributors are better than the rest: Continuous improvement to their service, range of products, pricing, addressing landed cost issues, speed of delivery and customer service.
The survey asked buyers to rate distributors in specific performance areas. Distributors perform well at customer service, range of products offered and relationships with manufacturer suppliers. Areas that need work are: handling of delivery and leadtime issues, technical support and e-commerce capability.
As a distributor adds products and services it becomes less of a specialist and more of a generalist, Underhill points out, helping to explain reasoning for distribution's low tech support scores. "As a generalist, a distributor has less capability to offer good technical support for all the products and services it offers."
What happens is buyers get price concessions from the consolidation and some help from distributors on inventory management but they lose technical support, he explains. "The value of that tech support depends on your role in the plant. If you're working the line and that bearing keeps breaking you need that technical support. Buyers have to look at what they are trying to cut and the long-term impact of their decisions."
He suggests "reducing the supply base where it makes sense and focusing on a few distributors for collaborating. That, to me, is a best practice."
And, if, as a buyer, "you want good collaboration to occur, collaborate first with your internal customers and even sometimes your company's external customers to gain a better handle on their requirements," he says.
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