MRO purchasing plays role in reshaping the distribution channel
By Susan Avery -- Purchasing, 5/20/1999
As the researchers of NAW's latest Facing the Forces of Change report see it, there are four trends reshaping the distribution channel--electronic commerce, strategic alliances, supply chain integration, and globalization--and purchasing managers are playing a big role in each of them.The National Association of Wholesaler Distributors' Distribution Research & Education Foundation (dref) recently published the report, the fifth in the Facing the Forces of Change series.
The researchers, Arthur Anderson LLP, view each of the trends as a potential opportunity or challenge to wholesaler distributors. They presented the findings, garnered through panel discussions of wholesalers and manufacturer suppliers, at NAW's annual meeting held recently in Washington, D.C. Among the findings:
* Electronic commerce. For wholesaler distributors who have traditionally focused on the physical movement and storage of goods, e-commerce will require a shift in thinking. Wholesalers will need to anticipate customer needs for information and provide it in a logically structured, user-friendly way. They will need to explore with their customers what they consider the next generation of value-added services--24-hour online order entry, electronic funds transfer, real-time inventory and order status checks, and comparative product information.
By performing such efficiency-improving activities as taking orders online, distributors will help to change the role of the salesperson to relationship builder. Already, some distributors have used e-commerce to reach up and down the supply chain to take on new functions for suppliers and customers.
Most distributors, however, have not even begun to climb the electronic commerce learning curve. One in four of those serving on the panel cites a lack of resources as a constraint. A similar number indicate a lack of knowledge is holding them back. Fifteen percent indicate that their existing systems prevent them from beginning on the electronic commerce path.
* Strategic alliances. Strategic alliances can be as simple as two wholesaler distributors presenting themselves as one company to provide complementary products to one or more customers--or as complex as groups of different types of companies that can radically change a market or distribution channel. In addition, distributors can form alliances with third parties such as logistics or information-management firms.
MRO distributors are leading the industry in this area, driven by powerful customers who seek to reduce transaction costs by consolidating their sources of supply. This trend is expected to grow into the non-industrial lines of trade as a way of entering new markets or expanding product selection for existing ones. Failing to form alliances may expose wholesale distributors to competitive threats from those who do and close off relatively quick, economical, and powerful access to new growth opportunities.
One-third of the panelists have formed strategic alliances; more than 40% indicate that they will enter one by 2003. Almost half agree that strategic alliances will dominate the industry in the future. Wholesalers who have not formed one to date will need to learn how to operate more flexibly and how to conceive, form, and manage alliances.
Strategic alliances can be a challenge to manage and hold together over the long term. But as companies gain more experience in forming and maintaining strategic alliances, they are likely to succeed for longer periods of time. Alliances whose partners have inherent cultural and operational similarities seem to achieve longer-term satisfaction.
Panelists see lack of control once an alliance is formed as the major barrier to its success, followed by problems caused by different corporate cultures. These are serious concerns, but risks could be minimized by addressing the issues when establishing the alliance. Issues of control are unlikely to arise if alliance partners understand the way each does business.
* Supply chain integration. Supply chain integration looks at costs accrued by the entire channel as it moves product to market and uses such techniques as activity-based management to help identify and eliminate redundancy. The goal is to create closer, shorter links between production and consumption by removing unnecessary processes.
Panelists agree that nearly one-quarter of the costs in the channel are redundant. Wholesaler distributors must not only ensure that the supply chain to which they belong survives, but also take a leadership role to ensure that they remain a vital link in the chain. They must be able to quantitatively prove their value to channel partners.
Panelists also agree that inventory holding costs and selling costs are the leading source of channel redundancies. Transaction costs and logistics costs represent another tier of related channel cost redundancies.
Panelists recognize that current channel performance is mediocre. They see themselves performing best at ensuring predictable deliveries and poor at communicating electronically with suppliers and customers. Over the next five years, they expect channel efficiency to improve in several areas, including responding to demand without increasing inventory, communicating market and customer needs, reducing transportation costs, decreasing manufacturing cycle times, and communicating electronically with customers and suppliers.
One of the greatest challenges wholesalers face is demonstrating their value in the channel. Suppliers don't agree that wholesaler distributors have proven their value to their channel partners--only 45% say so. They also say that wholesalers could lose market share to alternate channel formats.
* Globalization. Few wholesalers have considered the possibility of competition from foreign distributors or from U.S. distributors in strategic alliances with offshore suppliers.
Wholesalers report that 29% of their suppliers manufacture products outside North America and project that 41% will do so by 2003. Distributors that provide MRO supplies to manufacturers risk losing this business if plants move offshore. The move by some customers may offer distributors opportunity to follow their trading partners into new markets.
Lack of market knowledge is perceived by wholesalers as the main barrier to conducting business in global markets. Customers in global markets and the characteristics they value in a product or service can vary significantly from those valued by customers in the U.S. Wholesalers also cite inability to manage across great distances and their lack of an established global infrastructure as barriers to entry.
For more information, contact NAW at (202) 872-0885 or pubs@nawd.org.
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