What's in store?

By Staff -- Industrial Distribution, 1/1/1998

Jack Dannemiller

Chief Executive Officer and President

Applied Industrial Technologies

Cleveland, Ohio

"Clearly, the industrial distribution industry will continue to consolidate as customers require MRO suppliers that are stronger and more resourceful than ever, and better able to deliver added value. Going forward, as we already are seeing, distributors need to develop significant levels of intellectual capital related to the products they sell and industries they serve -- and refine the methods used for transferring knowledge and technical understanding to customers.

"Meanwhile, customers rightfully will be expecting that their distributors be able to supply a larger number of products, to do it faster and with sophisticated logistics systems, and at competitive prices.

"Size is an important factor in a distributor's ability to satisfy the needs of customers who, in turn, will be working harder to meet the demands of their customers and shareholders. So expect the consolidation trend to continue -- and the number of mergers and acquisitions to accelerate -- as a natural part of the process of building stronger and more successful partnerships with customers.''

Scott Parrish

President

Parrish-Keith-Simmons, Inc.

Nashville, Tenn.

"Mergers and acquisitions will create a few mega-distributors who will dominate the national and global marketplace as it relates to convenience buyers (catalog buyers) and integrated supply. Mergers will strengthen the need for small, flexible, product-focused, brand-loyal, technically competent distributors. These niche players will provide the local product expertise, acting as a tier-two supplier to the integrators or as a factory agent/subcontractor to fill a void in the manufacturers' area of product application and after-sale service.

"Flexibility, inherent in small distributors, will allow for dramatic changes in organizational structure, necessary to serve the diverse requirements of being a "value-added'' distributor of the next millennium. The mid-sized distributor will disappear as they are acquired by the global distribution units, or they get closed down by family ownership unwilling to face the rapidly changing channel.''

Andrew B. Shearer

President

Shearer Industrial Supply Co. (A division of the Industrial Distribution Group)

York, Pa.

"The consolidation of the industrial distribution channel will provide fewer but more capable and efficient choices for manufacturers and customers, which supports the trend of our customers narrowing their supplier base.''

Jim Thompson

CEO

Vallen Corp.

Houston, Tex.

"I think the consolidations in the distribution industry will lower the cost of operating, en-hance the product offering and allow the distribution channel to offer a better solution as a lower cost provider to the industrial marketplace.''

Ron Cory

President

The Ross-Willoughby Co.

Columbus, Ohio

"In our view, the effect of mergers and acquisitions on the MRO procurement process of the future will be significantly different than the process as we know it today. In general, technology will drive a model that will bring change to the procurement process.

"It is important to bear in mind that there is a spectrum of sophistication among MRO buyers which has a direct relationship to the size of the companies involved. By that I mean, larger consumers will have a more progressive set of strategies and expectations and will likely drive the process toward automation and technical advances. Smaller MRO users will gravitate toward catalog houses with the medium sized users opting for traditional suppliers for the majority of their purchases.

Dan Perry

President and General Manager

Milwaukee Electric Tool Co.

Brookfield, Wis.

"For the merging distributor or group of distributors, the merger could enhance their value to the end user and enable them to be more competitive nationally. Others will look into joining marketing groups or buying consortiums to leverage their buying power and their competitive advantage for national contracts. Some manufacturers may have to alter their distribution and sales policies. Ultimately, customers will continue to drive the business and the products they buy will be those that offer the best selection in terms of quality, performance and value.''

John Davis

American Saw & Manufacturing Co.

East Longmeadow, Mass.

"It looks as if the current wave of mergers and acquisitions will continue. Without this, we probably will see the number of distributors shrink. In theory, this should bring about savings in the channel from economies of scale.''

Dick Payne

Safety Socket Screw Corp.

"The result of mergers and acquisitions is generally consolidation. Consolidation generally drives down redundancy and costs, and better utilizes resources. Manufacturers and distributors will look for ways to take costs out of the channel of distribution. Inventory costs will be challenged as being too great. Expectations will be to have it available when needed. Greater emphasis will be placed on using computer technology for timely communications and processing information, both within organizations and between manufacturer and distributor. The selling process will use technology to better inform, answer questions and understand customers' needs and issues.''

Dave Merkel

National Sales Manager

Harrington Hoists

Manheim, Pa.

"This activity is long overdue. Mergers and acquisitions are like a large forest fire which can create fresh, new virgin forests after the underbrush is burnt away and composted. Stronger, more creative firms will emerge and seasoned management will be available to young firms at attractive salaries.

"Regional wars and international economic issues over raw materials will dictate the place of production, distribution methodology, source of material, stage of product completion and appropriate structure of the new channels. In the long haul, mergers and acquisitions will have little to do with the methods employed in selling industrial products. This current activity will be a non-event in the course of time.''

Question: How do you think the distributor/manufacturer relationship will play out in the coming years?

Dannemiller:

"I believe the relationship between distributors and manufacturers will get stronger. We need each other, and we will benefit mutually from working in tandem.

"In many cases, national distributors such as Applied already are among the largest single customers of leading manufacturing firms. Importantly, we as distributors add value to the MRO products we sell, and we help translate component technologies to customers' operations based on an intimate familiarity that a manufacturer would find hard to duplicate. Remember that Applied alone serves more than 125,000 individual customers through our network of 400-plus locations. Without distributors like us, manufacturers would find it difficult to apply their technologies on the front lines of industry.

"In today's competitive environment, every company is finding that it pays to focus on what it does best, and to rely on strong partners to do what they do best. Manufacturers understand what highly competent distributors such as Applied bring to the table, and we expect they will be relying on us even more in the future.''

Parrish:

"The distributor/manufacturer relationship faces turbulent times as manufacturers struggle with increasing demands placed on them by the mega-distributors along with diminished brand/ product loyalty caused by the end user gaining a disproportionate share of power in the supply chain.

"Manufacturers will come to terms with volume purchasers and turn to value-added distributors to represent their interests, both as a sales agent and as a product specialist. Many small distributors will begin to function as a traditional "manufacturers' rep agency,'' thus lowering the redundancies in the sales and product application channel. Many value-added distributors will actually support the mega-distributors' efforts at the end-user level as they relate to technical application issues. Compensation to the value-added distributor by the manufacturer for such support will come from outside the traditional "gross margin'' pool, most likely on a direct compensation basis.''

Shearer:

"Distributor alliances will shift from the manufacturer to the customer. The customer will define what product lines the distributor will provide based on improved efficiencies and reduction of costs, rather than who that distributor represents.''

Thompson:

"Some of the acquisitions will cause some challenges in the distributor/ manufacturer relationship. However, I think the relationship between those parties will become stronger as they better understand each other's business. That will be accomplished through industrial distribution schools where manufacturers and distributors alike are learning more about operating in the future marketplace.

"I think the distributor/manufacturer relationship is going to eliminate redundancies in the future and perhaps find ways of sharing people, sales forces, costs, etc. I'm not sure those things have been fully developed at this time, but I think new ideas will emerge.''

Cory:

"From our perspective, the industry will continue to consolidate over the next few years with players becoming much larger and, thereby, presenting a different set of issues for manufacturers.

"While we don't profess to fully understand how this will play out, our feeling is that the manufacturer will draw closer to their larger players, leaning more towards a master distributor strategy.

"Additionally, things such as vendor managed inventory, consignment strategies, functional discounts and other methods that are attuned to distributor support will follow. Distributors need to become more aware and sensitive to the manufacturer's issues and needs as they may see a need to adopt a "go direct'' strategy to maintain market share, particularly within their own large end users.''

Perry:

"There is no doubt that integrated supply will impact relationships between manufacturers and distributors. We see integrated supply continuing to grow into the new millennium and become more common with the larger end users. The key to success in this arena is to be the low cost logistics distributor and the ultimate service provider. Many of our distributors will not be able to participate due to capital restraints and limited inventory. And a number of manufacturers will have to make some difficult decisions with regard to their sales and distribution policies. For example, a large end user previously buying brand X decides to award a contract to a single source integrator and authorizes the integrator to recommend or substitute an alternate brand.''

Davis:

"The distributor/manufacturer relationship will have some challenging times as we move forward. The marketplace is demanding that both eliminate non-value-added costs. Some manufacturers and some distributors will be up for this challenge; some will not. Those that are not will not survive.''

Payne:

"There will be definite opportunity for new relationships to develop. They will develop and be successful as new ways are established to lower transactional costs, reduce inventory costs, improve communications and use electronic commerce. These new relationships will have some different characteristics, such as faceless, timely electronic communications, which are dependent upon accurate information.''

Merkel:

"The swing will be away from a distributorship/end-user partnership to a manufacturer/end-user relationship with the distributor functioning in his true and legitimate role of a middleman. Distribution does not have the same driver to be in business as a manufacturer or vendor, therefore it is difficult for an integrator to position itself as an extension of either party."

Question: What role will the Internet play in industrial distribution at the turn of the century?

Dannemiller:

"We continue to look at the Internet and related technology as an important potential opportunity for Applied and other distributors. At this point, the Internet is not well accepted as a routine business practice in specifying or purchasing the types of products we sell. But we expect the rapid pace of Internet development to continue, and our company will be paying close attention.

"We currently use the Internet to post and communicate routine information about our company and the products we sell. A little further down the road -- once online security systems are a bit more mature -- the Internet will become a standard format for processing and tracking orders.''

Parrish:

"The Internet and electronic commerce will play an integral role in the changes facing the industrial channel supply. In fact, the changes cannot occur without electronic commerce, the framework which supports the total integrated effort of the manufacturer, mega-distributor, and value-added distributor to supply the end user's needs on an instantaneous, global basis. Simply stated, electronic commerce is the vehicle by which we survive the changes ahead in distribution.''

Shearer:

"I believe the Internet will be a huge source of information and communication which will be used to conduct business and exchange information with current customers. But I do not believe there will be a tremendous amount of electronic commerce with new customers.''

Thompson:

"I think 1999 is the big year for the Internet to become a player. [Use of the Internet] is going to be driven by the customer, requiring distribution to take out additional channel costs by using the Internet based on the customer's choice of doing business.

"There will be large customers that want to do business in that arena and smaller customers will follow suit in a similar way. The Internet will also be an industry-specific page for quick spot-purchases. I think when it comes into play, it will be because people are becoming more comfortable with technology and because the Internet will have a faster speed. It's a time and productivity issue.''

Cory:

"It is our view that the Internet will play a major role. The sheer convenience of specifying and buying off the Internet will dictate that it will impact the distribution business in a significant way. Today, people are specifying, shopping, and buying automobiles on it and are not limited to dealing with their local dealer (distributor). If you can buy a car on the Internet, you can probably buy just about anything.''

Perry:

"We believe electronic commerce has the potential to reduce costs in the channel. It will be used initially as an information channel, then as a selling channel if pricing issues can be resolved. Initially it will impact low-support/commodity products and has the potential to increase [price shopping] and margin pressure. Electronic commerce is being used today quite successfully in more retail-oriented businesses. To think that electronic commerce will not surface as a viable network to market, promote and sell industrial MRO products is either wishful thinking or a major disappointment.''

Davis:

"The Internet will play an important role as we move into the next century. It will act as the information highway, which will give end users more and more choices in procurement. As in the past, those manufacturers and distributors who can best meet the needs of customers will prosper.''

Payne:

"Use of the Internet in industrial distribution is very much in an infancy stage but it will grow up quickly as it has in other distribution industries, e.g. electronics, medicine, to name a few. The bad experience with Industry.Net (Nets Inc.) was not a good beginning. Improvements in software capabilities to handle and secure information transfer will rapidly drive Internet use. Major associations, ASMMA, I.D.A., NFDA, etc., recognize the need for electronic commerce and must take a leadership role to help their membership become informed and educated in the use of this technology. This alone will foster use of the Internet as a communications tool, and a way to process orders, advise when new shipments are made, pay invoices and transfer funds. "

Merkel:

"The Internet is too immature to play a dominant role in industrial distribution by the end of the century. Neither vendors, distributors or end users know how to make effective use of this "transitional information highway.'' It will be the next generational highway that will impact distribution early in the 21st century. The stage will be set for a vast expansion of electronic commerce for non-critical components.''