A new trend is emerging among distributors that could revolutionize the way purchasing managers buy.

Fee-based services factor large in many manufacturers' and distributors' strategies, according to a recent study by Frank Lynn & Associates Inc. Chicago. However, the study finds 49% of distribution customers reporting that none of their suppliers have talked with them about new fee-based services they might be planning to offer.

These findings and others are revealed in The Wholesale-Distribution Customer Speaks, a new book from the National Association of Wholesaler-Distributors (NAW) Distribution Research and Education Foundation (DREF). The book dives deeply into customer buying behaviors and expectations. It focuses on two trends that remain tops in the minds of distributor suppliers—fee-based services and online buying.

Fee-based services, explains Mark Dancer, principal, Frank Lynn & Associates and the book's author, are activities performed by a supplier for which customers pay. These services may be related to physical products (installation or customized delivery, for example), but the cost of the service is not included in the product mark up. Suppliers believe such services offer them potential to serve customers in new and better ways, while at the same time enhancing revenue opportunities.

Accountability and measured results are two of the biggest benefits buyers can expect from these services, says Dancer. "Today, products are pitched on their performance plus a promise of excellent support. Very often, this promise is more of a marketing ploy than a concrete commitment. Suppliers are saying, 'Buy from me because I'm better than the next guy.' When services are sold, however, everything changes. Buyers can customize the value-added activities they desire and link performance with specific business outcomes."

When products are sold, success is measured against the manufacturer's engineering specifications. However, when services are sold, success can be measured in the customer's terms—cost savings, trained people, productivity improvements, headcount reductions, delivery schedules, etc.

New service strategies may translate into vast changes—like airlines buying landings instead of tires. In this example, the supplier might provide tires as part of an overall service package that includes inspections, parts, repairs and replacement. But the overall fee structure is tied to landings, just as copiers are sold by usage. Under such an arrangement, Dancer says, "Promised results have more to do with asset management and employee productivity and less to do with traction and wear rates. The tire supplier (as service provider) becomes responsible for ensuring that product features translate into business advantages for the airlines, and success drops directly to the customer's bottom line."

Still, Dancer says few distributors are really pushing these types of services to buyers because they are only beginning to figure out which services actually resonate with customers. "They tend to start with an internal focus, attempting to sell what they know. It takes a while for most manufacturers and distributors to come around to asking customers what they need, and what they are willing to pay for."

It takes time because distributors and manufacturers are not service companies, he explains. Services demand a different business model with different cost structures, management practices, and customer satisfaction measures. Metrics shift toward billing rates and asset utilization and away from earns and turns. Further, a deeper knowledge of the customer's business is required and selling efforts may reach to new "deep carpet" buyers and senior management. These requirements challenge traditional product-focused relationship sellers.

Customers understand the potential benefits that services may offer. In fact, 60% say they are willing to buy services. However, willingness is not the same as readiness. There are barriers. For instance, employees may claim that certain services are within their job descriptions. In addition, budgets may be constrained because they are defined traditionally in terms of products, not services. Another stumbling block involves pricing of physical products. If current support such as technical or delivery are unbundled and sold as services, product pricing for standalone products will need adjustment.

Customers can lead the service trend—and there is a precedent for this, Dancer says. In the industrial market, large factories demanded that suppliers take over inventory management and procurement functions. Customers wanted to outsource these activities and they wanted demonstrated and guaranteed cost savings. Today, the service is called integrated supply. The market for integrated supply grew 26% per year between 1997 and 1999, according to another Frank Lynn & Associates study, to a level of $10.1 billion in 2000.

Purchasers who believe that fee-based services could factor into their company's buying and business strategies can start by sorting suppliers, looking for the best partners and potential service providers. Some questions to ask:

• Technology or application knowledge. Does the supplier hold a depth of knowledge that exceeds the experience of purchasing's internal customers? Is the supplier stronger than its competitors?
• Efficient and flexible logistics. Are the supplier's warehouse operations, transportation methods, and information systems state-of-the-art? Can they be tailored and customized? Will tracking metrics be available?
• Knowledge of the customer's business or applications. How well does the supplier know its customers' business? Can the supplier articulate customer goals? Can it translate actions to productivity or revenue gains?
• Management flexibility and vision. Is management vested and involved in the transition to a service company, or is the service pitch merely a sales initiative? Will the supplier change its business to better serve the customer's business?
• Ability to create and manage successful supply chain partnerships. If the supplier offering services is a manufacturer, how well will they integrate and manage the roles and responsibilities of their distributors? If the supplier offering services is a distributor, do they have access to deep technical support and the best possible pricing from their suppliers?

Of these criteria, the last is often overlooked and may be the most important, says Dancer. "Effective services are frequently collective efforts requiring diverse specialties not always resident in one company. That requires partnerships, seamlessly provided to the customer with one-stop accountability. In the rush to services, many a company's first instinct is to keep everything in-house, capturing all of revenue and profit opportunities. That approach can be short sighted, ultimately working to the customer's disadvantage."

Fee-based services can be large, but they first need traction. Leading suppliers and customers are stepping up, driving their own businesses forward and showing the way for others to follow. They offer the opportunity to improve the dialog between suppliers and customers, focusing efforts on driving real gains. If these gains hold up, services may become a standard way of doing business and help to drive the next wave of supply chain innovation and efficiency.

The Wholesale Distribution Customer Speaks, published by the NAW's Distribution Research and Educational Foundation (DREF), may be ordered through the NAW books Web site, www.nawpubs.org. A 5% discount applies to all online orders. Mark Dancer may be reached through Frank Lynn & Associates' Client Services Coordinator at 312-263-7888.