Under Pressure
As competition floods the market, traditional fluid power distributors fight back
By Victoria Fraza -- Industrial Distribution, 3/1/1998
When a group of fluid power distributors in the Southeast started talking about forming an alliance two years ago, it was strictly a pro-active move. They figured that by pooling their resources they could reduce redundancies and improve logistics systems within their own companies. The Southeast Alliance was formalized just six months ago and is still in the beginning stages, but members say once the program is up and running they will be able to compete more effectively with the large national and regional distributors encroaching on the fluid power market.The group's timing couldn't be better. The fluid power industry is one of the last industrial distribution categories still dominated by mid-sized independent distributors. But the competition is coming on strong and those distributors are going to have to work hard to protect that existence. Large catalog houses are adding more and more fluid power products to their inventories. In addition, traditional power transmission giants like Applied Industrial Technologies are adding fluid power to their product mixes as a way to round out their services. Last year alone, Applied acquired two fluid power distributorships: Air & Hydraulics Engineering, Inc. in Birmingham, Ala. and Atlanta, Ga. and Power Hydraulics, Inc. of Chicago. Another PT giant, Motion Industries, has long been a source of competition in the fluid power market.
All the competition makes for a tense environment -- but one in which many independent companies are beginning to take action. Mary Connor, executive director of the Fluid Power Distributors' Assn., says that while the majority of her members have between $10 and $20 million in sales and fewer than 50 employees, those companies are beginning to pull together to offer integrated supply-like services to customers. Jim Alexander, FPDA's president and also president of Orton Industries in Doraville, Ga. is one such member. Alexander's firm joined the iPower consortium three years ago and is also a member of the Southeast Alliance.
Alexander says fluid power distributors need to be creative in order to preserve their status in the industry -- by developing inventory sharing programs, alliances and consortiums. While distributors like Orton Industries are providing technical support for a variety of fluid power products and applications, they are losing sales on commodity-type items to the national chains who have more resources and better logistics systems. To make matters worse, some of those large distributors are starting to provide more and more on the service side of the equation.
"We've got to make sure our head's out of the sand," says Alexander. "The fluid power distributors and manufacturers have to partner and communicate to resolve issues on an ongoing basis. The change is happening fast and gaining momentum."
The rate of change is certainly a motivating factor behind the Southeast Alliance. And it's also the catalyst for numerous other fluid power companies around the country to find creative and innovative ways to compete. An increase in sub-assembly work, forging into the electronics market and developing technologies comparable to the "big guys" are just a few ways fluid power distributors are gaining market share and growing their businesses.
Aligning for success
The Southeast Alliance is comprised of seven fluid power distributorships: Applied Fluid Power of Virginia; Fluid Power Products of Kentucky; Orton Industries in Georgia; Southern Fluidpower of Tennessee; Carolina Fluidair of South Carolina; Marco Fluid Power of Florida; and Powermotion in Alabama. An inventory-sharing program will tie the group together.
In late January, members were in the process of installing software that will link the companies so each member has access to the other's inventory. If one of Orton's customers needs a product that Applied Fluid Power has, for example, an Orton employee can have that item shipped directly to his customer from Applied Fluid Power's warehouse -- complete with an Orton packing slip. The system will improve logistics and reduce inventory carrying costs at the same time.
Frank Kish, president of Applied Fluid Power, notes that the members of the Southeast Alliance have some common denominators -- such as the same suppliers -- yet are not competitors. While there are still aspects of the agreement to be worked out (such as which company will specialize in which area) Kish is confident the program will be successful.
"We're joining forces to manage our inventory correctly,'' says Kish. "We can now have a large inventory and be able to provide quick customer service that the giants can't."
Though only connected through inventory and the sharing of best practices, the seven distributors have combined annual sales of $70 million.
While alliances can be fruitful for many companies, they are not for everyone. In a survey of more than 100 members, FPDA found that almost 52 percent had no plans to join an alliance in the near future. (FPDA referred to alliances as formal agreements to conduct integrated supply programs with other distributors.) The remainder was either already involved in an alliance, in the process of developing one, or planning to seek one. Adding new products, searching out new markets and offering new programs and services to customers are more common ways for traditional fluid power houses to compete in the changing channel. These techniques are especially useful for distributors in the Northeast, according to leaders at Sprague Air Controls of Hingham, Mass.
One of the toughest parts of being a fluid power distributor in New England, says Sprague president Paul Gunn, is that the market is not growing. Sprague traditionally services the light manufacturing industry -- customers like Polaroid, Gillette and Texas Instruments -- but in recent years the region has lost more manufacturing than it has gained. As a result, companies like Sprague must constantly look to expand business with existing customers and search for new markets. New England's electronics market is a strong source of business and the growing biotechnology industry is a possible source of new income.
One way Sprague is reaching out to customers -- old and new -- is by opening branches that focus on replacement hose and connector business. Known as the Parker-store concept, the branches are Parker-Hannifin franchises that act as one-stop shops for the manufacturer's fluid connector products. Gunn has opened two such stores to date -- one in Quincy, Mass. and another in Manchester, N.H.
Another way to reach out to customers, of course, is through value-added services. And the fastest-growing service, according to fluid power distributors across the country, is sub-assembly work. That work is the main area of growth at Sprague, as it is at Flex Enterprises in Victor, N.Y. Linda Murphy, CEO of Flex Enterprises, says her company does anywhere between 150,000 and 200,000 sub-assemblies per month. She went from just a couple of employees in that department a few years ago to enough to staff two shifts today.
"There's really only one way to compete [with large distributors and integrated supply]," says Murphy. "And that's finding niche markets and adding value."
Murphy adds, however, that joining an alliance or consortium is also something her company is interested in.
Enter overseas competitors
Complicating matters is the number of overseas companies -- especially in the pneumatic business -- looking to get a piece of the U.S. market. Gunn points out that there are a number of overseas manufacturers who make a wide variety of products and are looking to expand into the U.S. The problem for distributors like him, says Gunn, is that they often can't take on foreign manufacturers' products because they already represent competing lines. Because the overseas manufacturers won't allow U.S. distributors to pick and choose the lines they want to carry, distributors miss out on the opportunity.
This can also be a problem for large U.S. companies looking to expand their manufacturing capabilities. The reality is, however, that this becomes the distributor's problem because manufacturers can seek alternate ways of going to market -- in some cases going direct to the customer. Gunn points to one overseas manufacturer member of FPDA as an example. Though the company does sell through distribution, he says it has invested heavily in its sales force in order to go direct -- and has been successful in capturing a significant piece of the market.
"There is a whole series of companies that have to be looking at the marketplace here and thinking about how to penetrate it," says Gunn. "I can't distribute their lines because I already carry competing lines and if I agree to carry all their lines, then I become a company house. And I want to remain independent."
It's a tough position -- and one that Gunn predicts will make for an interesting situation to watch over the next 10 to 15 years.
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