Industry reacts to Lynn 'road map'
By Staff -- Industrial Distribution, 2/1/1998
Chicago, Ill.--Last November, consultant Frank Lynn presented the results of a study titled "An Assessment of Significant Impending Changes in the Economics of the Industrial Channel Marketing System,'' commissioned by the American Supply & Machinery Manufacturer's Assn. and the Industrial Distribution Assn.Jack Meizlish, president of Columbus, Ohio-based Buckeye Industrial, and president of I.D.A., re-ferred to Lynn's study as "on target," calling the work an "alarm clock" and a "road map" for distributors and manufacturers to follow.
Looking ahead, Lynn's report 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.
Although Mark Fuller, president of Refco Inc., agreed with most of the Lynn study, he did disagree on Lynn's point © regarding the declining need for large amounts of customer-focused inventory and the subsequent reduction in the gross profit dollar return.
"This goes in the exact opposite direction of what I am seeing in my market," says Fuller. "We focus on tool cribs and our large end users are after inventory reduction themselves and expect either consigned inventory on-site or focused inventory at our warehouses. Bottom line is that I don't see much of an ability to reduce my inventory dollars in the next three to four years. You must also take into account that we sell a large volume of customer specific one-of-a-kind specials that we must inventory to cover indeterminate lead-times."
David Merkel, marketing manager for Harrington Hoists based in Manheim, Pa. says distributors and manufacturers need to take heed of the world economy as the real drivers of change, noting that there are a lot of global ramifications not being considered, such as the current financial crisis in Asia.
"There are a lot of good things going on right now in our industry," says Merkel, "but it's going to be technology, world events and economic issues that are going to transform the industry. These are the things that impact change right to the manufacturing of product. These are the drivers which will dictate whether the distributor is part of the pipeline or a financial buffer for today's accounting systems.''
Lynn's predictions also included the development of a two-step channel structure, in which large master distributors will sell to integrated suppliers, smaller distributors, their own branches and catalog houses.
Fuller is not so sure two-step distribution can work. He says, "There are already examples of master distributors like Reynolds and David Queller; however, they often do not preclude the purchasing of product from the manufacturers they represent and inventory for. We buy at a lower price. Now if a manufacturer outsources his warehouse operations to another company, I do not see that as a cost that the distributor will bear but a change in philosophy by that manufacturer to cut internal costs and outsource for less. I believe that the manufacturer will continue to bear that cost. If UPS or Ogden is the operator of that warehouse I do not consider it to be a master distribution."
According to Lynn, this two-step channel conflict will be the most prominent problem. He 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.
Merkel is cautious about two-step distribution, saying, "I don't think people look at third party folks -- some of the big integrators -- as being the ultimate in cost reduction. It seems to me that they add as much cost as they reduce, they just move it around the plate. In another five or six years, these integrators may not exist in the same manner. It's easier to say there will be two-step distribution than to actually do it. Manufacturers have a desire to control product. I don't think they want integrators telling them what to do.''
Fuller adds, "Only time will tell. The small distributor may very well end up buying from large distributors in the future. I will be as surprised as anyone if Refco...is buying primary lines from a master distributor and paying that cost."
Meizlish concludes, "I thought it was very interesting that most of the comments relating to the Lynn study are about the master distributor and cost structure issues. I consider his comments about the need for technical training and product knowledge to be a much greater issue for distributors and manufacturers."
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