Distribution Report 2008: Buyers say product availability trumps price
It may be too early to call it a trend, but purchasing is shifting its view of distribution. Buyers now look to industrial distributors to provide a wealth of technical expertise, and they come down hard on those that don’t deliver.
By Susan Avery -- Purchasing, 5/8/2008 6:00:00 AM
Purchasing professionals have changed their thinking about distribution and supplier performance.
Every year at about this time Purchasing surveys its readers on their relationships with distributor suppliers. In recent years, as costs of such commodities as steel, chemicals and plastics skyrocketed, buyers judged distributors mainly on their pricing policies.
To distributors it appeared purchasing wanted it all: The right product delivered on time at a competitive price. They kept up their side of the bargain for the most part, and survey respondents consistently gave the suppliers high grades in many key performance areas.
Now buyers want more. Results of Purchasing’s distribution performance survey for 2008 show respondents are taking a new look at the suppliers. In their eyes, distributors still perform well on most accounts. In fact, 84% say distributor performance is good or excellent. No one says distributors are doing a bad job.
This time, however, purchasing is using a new, tougher set of measures. As one example, buyers now give more weight to availability and total cost criteria when selecting suppliers to provide plants with nonproduction goods and services. This is new. For the past two years, price came out on top as a key factor in the qualification process for suppliers of nonproduction goods and services.
Anecdotal evidence also shows price playing a less important role when purchasers are asked to list problems they have with distributors. In years past it was one of buyers’ biggest peeves with the suppliers. But now distribution’s relationship with its suppliers, the manufacturers, or the lack thereof, is considered by many survey respondents as a huge shortcoming. Other areas with which buyers have issue with distribution are product availability and lack of technical knowledge. Both are related to distribution’s relationships with its suppliers. Price/cost issues this year rank fourth on buyers’ problems list.
A materials manager in the Midwest says her biggest beef with distributors is “a lack of technical knowledge for the products they are selling as well as weakness in communication between producers and customers.”
Another respondent who asked for anonymity says that he sometimes has to refer to manufacturers himself for technical support. This, he says, “leads to delays.” Still another says he has “to go through a lot of red tape when there is a warranty issue to work out.”
A buyer in the south adds that “gathering manufacturer data like end-of-life list would be the weakness in the supply chain.”
Crunching the numbers and examining how purchasing grades distribution’s performance reveals that nearly one third of purchasing professionals responding to the survey say the suppliers do a fair job at managing their relationships with manufacturers. As for technical service, 9% say distribution does poorly at providing purchasing with this important assistance. Just 3% give distribution an excellent grade in this area.
Comparing these scores with those purchasing doles out to distribution for customer service and product availability finds more than a quarter of respondents say performance is excellent in these areas (26% for customer service, 27% for range of products). Not one buyer gives the suppliers a poor score in either area.
More strategic
Distributors, for the most part, appear to be on the same page as purchasing and seem to understand their value to their customers. According to results of Industrial Distribution magazine’s 61st annual survey of distributor operations, respondents say product availability (36%) and technical support (20%) are two big reasons customers do business with distributors. Delivery time (9%), relationships (9%) and price are other big, although less important, reasons. Just 3% say engineering capabilities is why purchasing looks to distribution to provide plants with goods and services. Industrial Distribution and Purchasing are both published by Reed Business Information.
Results of the survey also show that smaller-sized distributors may do a better job at providing customers with technical support and service, a source purchasing pros may want to seek out if these qualities are especially important to them. Purchasing tends to look to distributor companies with annual sales of less than $20 million for technical support (29%) and service (16%) rather than distributor companies with annual sales of more than $20 million (16% and 6%, respectively), according to results of the survey. For product availability, it’s a better bet for purchasing to go to a larger (43%) rather than smaller (29%) distributor.
Distributors recognize that purchasing comes to them for engineering capability; 64% provide such services to customers. Slightly more than that (66%) plan to continue to offer engineering services during the next three years.
And distributors seem to continue to fare well with buyers: Eighty-one percent of those responding to the survey saw an increase in sales in 2006. Another 79% expect more gains in 2007.
Perhaps respondents to Purchasing’s survey are changing their mindset about distribution and distribution performance because the purchasing function, and MRO buying in particular, is starting to become more strategic, explains Dale P. Flanders who, as director of global MRO procurement for Accenture in Albany, N.Y., spends a lot of his time with purchasing professionals.
As he sees it, purchasing’s role is becoming broader. “One huge trend is that procurement is being asked to look at the entire value chain for MRO so it has a more complete view of what the business is trying to accomplish,” he says. The value chain for MRO consists of such nonprocurement activities as inventory and storeroom management, warranty management and demand management.
“In turn, procurement is taking that view and translating it into what they expect from MRO suppliers,” he says. “They are looking to these suppliers to provide more complete business solutions. When they partner with distributors they absolutely expect them to reach out and engage the manufacturers and make sure the manufacturers are providing technical support and expertise.”
Results of another recent survey by Purchasing to which an overwhelming number of readers responded show purchasing professionals believe this to be the case as well: Eighty-eight percent said MRO buying is more strategic than it was even as recently as five years ago. There’s evidence to back up the statement. Seventy-three percent say they now partner with suppliers, while 43% have adopted Lean manufacturing practices and 31% have embraced technology as a way to streamline internal processes. Another 19% is now sourcing MRO items globally and 10% have outsourced the buying process.
Not all about MRO
Purchasing mails its survey to a random sample of its readership, and queries respondents on their relationships with distributors that provide metals, chemicals, electronic components and other goods and services in addition to MRO. Asked about kinds of products they purchase through distribution, MRO is the category respondents mention most frequently.
Be it MRO, metals, chemicals or electronics, purchasing operations are relying more on distributor suppliers to provide their companies’ plants with goods and services. Twenty-nine percent of survey respondents say they purchase more than 70% of their requirements through distribution. Of the total buy, roughly 70-80% of it goes to production goods and services.
More important, 53% of respondents to the 2008 survey say they are buying more through distribution today than five years ago. And they look to distribution to provide their companies with more products (68%) and more services (70%). Both of these figures are a bit higher than they were in 2007: 63% and 65%, respectively. This is keeping with trends that show purchasing consolidating its supplier base.
To keep up with increasing customer demands, 57% of respondents to the Industrial Distribution survey say they are expanding their product lines. That’s up from 51% last year and 42% in 2004.
When choosing distributors to provide production materials, purchasing pros responding to the survey say quality is atop their list of selection criteria. It’s a little less important than it was in 2007, but still comes out ahead of delivery, availability and price. What’s taking on more importance to production buyers this year is technical assistance, which has become more significant to nonproduction buyers as well.
Overall, survey respondents are satisfied with performance of distributor suppliers. Eighty-four percent say they do a good or excellent job. Compared with manufacturers, distributors tend to fare a little better. Thirty-two percent say distributors outperform manufacturers. Another 59% say performance is the same.
Disheartening is the number of respondents who say they have a formal process for rating supplier performance. Fifty-nine percent say they do not have such a system in place.
One who does is J. Michael Chaple, director of purchasing for Dolby Laboratories in Brisbane, Calif. Chaple says his team measures on-time delivery, PPV (purchase price variance), quality and customer service. “Then we combine ratings to arrive at a total weighted score/ranking.”
Likewise David Staples, senior buyer with Sony Chemicals Corp. of America in Mount Pleasant, Pa., “polls managers and key persons cross-functionally on such metrics as cost, delivery, quality and performance.”
Asked what they like most about their distributor suppliers, service and product availability come out on top of the list. Respondents to Purchasing’s survey a year ago gave a similar reply. They liked distributor capability at providing service and inventory/availability. Appearing on the list for the first time this year is distribution’s e-commerce capability.
Gloria Mushinski, purchasing manager at Pennsylvania Machine Works in Ashton, Pa., says the benefit of doing business electronically with distributors is “You don’t have to wait for answers or get caught in voicemail hell!”
Seventy-three percent of respondents use the Internet to do business with distributors. Specifically, they get quotes, conduct transactions and find new suppliers/research suppliers.
How distributors really rate
In addition to anecdotal evidence of distributor performance, Purchasing last year began asking survey respondents to rate the suppliers in six key areas: customer service, relationships with manufacturers, technical support, handling of delivery issues, range of products and geographic range of service.
In most areas, buyers are fairly consistent in how they dole out grades. For customer service, 26% of respondents give distributors an excellent rating. This figure is the same as in 2007. Twelve percent say they are excellent at handling delivery issues: again the same as last year.
Distributor performance slipped a little in providing technical support. Three percent say it’s excellent this year; 4% said so last year. Relationships with manufacturers took a bigger hit. This year, 15% say distributors perform at an excellent level in this area. Last year, 20% said it was the case.
Distributors improved a bit at providing customers with a range of products. In 2008, 27% say the suppliers are doing an excellent job in this area. Last year, 24% said the same thing. And they got better at geographical range of service. Seventeen percent say it’s an excellent quality in their distributor suppliers in 2008. In 2007, the figure was 12%.
| 2008 | 2007 | 2006 | |
| Source: Purchasing survey | |||
| Availability | 7.4 | 6.8 | 6.5 |
| Total cost | 5.8 | 5.9 | 5.9 |
| Quality | 5.6 | 6.5 | 7.8 |
| Price | 5.4 | 7.7 | 6.9 |
| Service | 5.1 | 6.2 | 5.2 |
| Technical assistance | 4.3 | 3.1 | 1.9 |
| Ease of doing business | 3.9 | 4.0 | 3.3 |
| Emergency assistance | 3.0 | 2.8 | 1.3 |
| Inventory assistance | 2.4 | 3.7 | 2.1 |
| Brands carried | 1.7 | 2.4 | 3.0 |
| 2008 | 2007 | 2006 | |
| Source: Purchasing survey | |||
| Quality | 7.3 | 7.6 | 8.3 |
| Delivery | 6.9 | 6.3 | NA |
| Availability | 6.7 | 7.6 | 6.8 |
| Price | 6.4 | 6.8 | 6.4 |
| Total cost | 5.5 | 5.7 | 6.2 |
| Service | 4.6 | 5.6 | 4.4 |
| Technical assistance | 2.9 | 2.6 | 2.4 |
| Inventory assistance | 2.0 | 2.5 | 1.8 |
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