A roadmap to the 21st century
A study commisioned by ASMMA and I.D.A. evaluates the industrial channel and predicts where the business is headed
By Victoria Fraza -- Industrial Distribution, 1/1/1998
Early last year, the staffs at the American Supply & Machinery Manufacturer's Assn. and the Industrial Distribution Assn. commissioned a survey on the impending changes in the distribution channel. The goal was to evaluate where the industrial distribution channel is and where it is going -- and to ultimately provide distributors and manufacturers with a roadmap into the 21st century.That's exactly what consultant Frank Lynn did at the ASMMA/I.D.A. Fall Convention in Chicago last November. Lynn presented the results of his study, titled "An Assessment of Significant Impending Changes in the Economics of the Industrial Channel Marketing System,'' to a packed hotel ballroom on the second day of the convention.
The study was aimed at typical I.D.A. and ASMMA companies -- small to medium-sized firms. Among the shocking statistics Lynn threw at the audience was that distributors have lost roughly $9 billion in business to catalog houses and integrated suppliers in recent years. Lynn, president of Frank Lynn and Associates, predicts the development of a two-step channel structure, in which large master distributors will sell to integrated suppliers, I.D.A. distributors, their own branches, and catalog houses.
Lynn's prevailing message was that the channel will continue to change and distributor and manufacturer survival will depend on their ability to adapt to that change.
"The issue is not change,'' Lynn warned attendees, "but how we react to change.''
The report was divided into two parts: what his company found and what the results mean for the future of industrial distribution. The results were straightforward:
* Traditional distributors are behind in working on internal processes to increase efficiencies in their business.
* They're also behind in developing the processes and services that their customers are looking for.
* They are behind on implementing the technology needed to support both of those functions.
* Distributors trail in all areas as compared to their integrated supply counterparts and manufacturing partners.
"Traditional'' distributors, to Lynn, are non-integrated suppliers, non-catalog houses, who look at themselves as companies that add value for the customer. In predicting what's ahead for those distributors, Lynn broke the value-added distributor's business into two segments: inventory support, and selling and product support. Looking ahead, Lynn said distributors will be required to provide less inventory support to customers over the next five to seven years, indicating that 60 percent of the value -- or 75 percent of the profit -- traditional distributors now enjoy will be gone.
Lynn explained that the transactional cost of selling and receiving inventory is going to go down. What's more, manufacturers can get products to distributors much more quickly than just a few years ago, so there is no need to carry and turn over a large inventory anymore.
Consequently, Lynn said distributors would need to make up for that lost revenue by increasing business on the sales and product support side. A main way distributors can do that, he said, is by charging for services they currently give away. Service revenue will be the salvation of the I.D.A. channel in the long run, he said, because of the high profit margins that go along with it. It is not unusual for companies to get up to 20 percent margins on services, he said, adding that this is already done in other industries.
Lynn noted that distributors and manufacturers will have to work together to develop service packages for customers. He also noted another important change coming on the product side of the business -- the advent of more technical products. He said many manufacturers are worried that distributors are not investing in the technological sophistication needed to support those products. That will continue to be a problem in the years ahead.
Another issue facing traditional -- and especially smaller -- distributors in the future will be deciding what to do with cash flow. Lynn said distributors must invest cash flow back into their businesses, first improving processes and then focusing on product support.
Lynn's report also touched on issues concerning manufacturers. Key findings were:
* Manufacturers will have to move from volume discount structures to activity-based discount structures.
* Manufacturers will begin (some have already begun) to reward distributors who invest in technology -- and penalize those who don't.
* They will demand point-of-sale data from their distributors.
* Channel conflict will become an increasing area of concern for manufacturers.
* They will have to look at providing technical support via hotlines.
The channel conflict issue will be the most prominent problem. Lynn explained that manufacturers know they have to do business with integrated suppliers and catalog houses, but they are concerned about how that reality will affect their relationships with other distributors.
The emergence of technical support hotlines will be another major issue, especially for small and mid-sized manufacturers who don't have the resources to implement them. Lynn noted that in many other industries, distribution firms offer technical support via hotlines, which is a possibility in the industrial channel, as well.
Perhaps the biggest change Lynn and his associates see for the entire channel is the emergence of what they term "two-step distribution.'' If integrated supply continues, as we know it, integrators will want to do business with more and more large distributors. Those large distributors will become "logistics distributors'' (or master distributors) who will then sell to other resellers -- local or regional distributors, catalog houses, etc. Local or regional distributors will not need to carry any inventory because they can receive products from the logistics distributor overnight. Lynn said this would be the most efficient way of doing business in the future -- and the most advantageous for all involved.
"To do this requires size,'' Lynn said, adding that a master distributor will have to have annual sales in excess of $500 million. He went on to predict that those distributors "will be the source of inventory for I.D.A. distributors.''
While all the challenges Lynn described will be tough for both distributors and manufacturers to face, he said just getting through the next five to seven years will be a challenge in itself. Nonetheless, he urged those in attendance to stop studying change and start implementing it.
"Nobody likes change,'' he explained. "But we haven't figured out another way to make progress.''
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