New DREF reportsends stern warning
Study outlinesnew trends facing distribution
By John R Johnson -- Industrial Distribution, 11/1/1998
Six years ago, the Facing the Forces of Change series of reports from Arthur Andersen and the Distribution Research and Education Foundation warned that relationships between manufacturers and distributors were in serious trouble. In 1995, the report documented best practices and potential downfalls for distributors who didn't pay attention to them.This month, the latest Facing the Forces of Change report spells more gloom for distributors. Those who ignore new concepts like electronic commerce, strategic alliances, supply chain integration, and globalization may be faced with serious survival issues in the future.
"The trends [presented in previous studies] are still continuing, and if that isn't bad enough, we've identified four additional trends that are big issues; we feel they will have the most significant impact on distribution in terms of change in the next five years," says Rick Prohammer, a partner with Arthur Andersen and assistant director of its wholesale distribution program.
"This study has the potential to be more discomforting than those in the past because it deals with issues coming from outside that are going to impact distribution. The 1995 study didn't have the word Internet anywhere to be found, but that trend has popped up in a big way. The level of risk and the potential level of rewards both continue to go up, and these trends accelerate both [possibilities]. Either you take advantage of e-commerce or it passes you buy."
Certainly, the subjects covered in the last two reports are still viable and need to be addressed continually. However, Prohammer says the latest study outlines the areas most likely to impact the distribution channel the greatest in the next three years. Possessing the most chance for impact is electronic commerce, defined in the study by the growing variety of ways to do business -- including EDI -- that can all be enabled by Internet technology.
How real is the Internet challenge to distributors? Consider that in 1997, General Electric purchased $1 billion in supplies via the Net, and expects to save $500 million over the next three years through online purchasing. By 2002, GE plans to buy $5 billion electronically. Also by 2002, total U.S. business-to-business Internet sales are expected to be $327 billion.
"E-commerce obviously changes all the rules of the game," says Prohammer, "from fearing everything from people being able to enter your market without a physical presence to sheer disintermediation, where the distributor is taken out of the chain through doing business electronically. Those are the threats, but by the same token it's an opportunity if you're participating in the channel to reach new customers."
Just as the Internet provides opportunities, so too do strategic alliances. And, unlike in the past, we're not just talking about alliances with other distributors. Witness W.W. Grainger, which has unveiled alliances with software firms Perot Systems and Requisite Technology, Inc. in recent months, in an effort to bolster its electronic commerce presence.
More than 80 percent of distributors expect to be involved in some type of alliance by 2003, while almost half (46 percent) agree that strategic alliances will dominate distribution in the future. Reasons for forming an alliance, according to the report, include: the threat of disintermediation; increased foreign competition or the opportunity to expand to overseas markets; escalating costs of product development and marketing; erosion of sustainable competitive advantage; declining product and service lifecycles; slower sales growth; flat or declining margins; responding to a competitors movement into alliances; the ability to sell to regional or national accounts; securing more favorable prices from suppliers; customer demands for lower costs or improved service; and the desire to perform integrated supply for customers.
"Strategic alliances ... in one way it's the anti-consolidation trend," says Prohammer, "the way for smaller distributors to look bigger and stay independent but achieve enough concentration of business that they can turn the power of the spectrum more in their favor by leveraging their product offering."
Prohammer notes that most alliances are product based now, but in many cases may come to be skill based, like the Grainger/Perot Systems agreement. "[Perot] doesn't distribute anything, but the nature of alliance is they establish Grainger's e-commerce strategy and rather than be paid like buying a computer system, they set it up to take part of revenue as business is conducted," he says.
Chapter three in the DREF report is devoted to supply chain integration, and the cost efficiencies to be gained from streamlining the channel. While some of the material was covered in the last study, Prohammer notes that many distributors haven't been forced to address supply chain issues because business conditions have been so good over the last few years.
With any downturn, however, many may feel compelled to pay attention to the channel. As usual, there are some discrepancies between manufacturers and distributors. While both sides agree that manufacturers need the marketing assistance and value-added services provided by distributors, the good news stops there. Fifty-four percent of distributors say they are doing a good job performing marketing functions, but only 19 percent of manufacturers agree with that.
Globalization is the subject of chapter four. Distributors polled in the study say Mexico has the strongest expansion possibilities. However, the report addresses globalization as not only selling outside of North America, but distributing products made from around the world.
In the 1995 DREF report, distributors indicated that only 10 percent of their total sales were of products from outside the U. S., and predicted that sales of globally sourced products would grow to 18 percent by 2000. However, this report indicates that already 20 percent of sales come from products manufactured in foreign countries.
"Most people's previous position was that the distributor that is a strong and large enough player will go global, but the more significant impact is the added influx of competitors into domestic markets in North America," says Prohammer. "Will the influx of competitors into North American markets utilize existing distribution networks, or will they build their own and bypass distributors? Distributors can either be ambassadors of that product into the market and capture market share, or lose market share to foreign-sourced product."
Jeffrey Winkel, president of Seals Inc. in Lenexa, Kans., and a panelist for the NAW/DREF report, says the report serves as a warning bell to distributors that sell redundant products and do not differentiate themselves with services. "Only the nimble will survive" in five years, he says. Winkel says that several years ago, for example, his company took a hard look at its mission and defined itself as an equipment reliability provider, rather than just a seller of seals.
"By redefining ourselves as an equipment reliability [company], we found the way to grow is not by having another line of gasket materials," he says.
Doug Young, president of HVAC distributor Behler-Young, says distributors need to pay attention to the report.
"Who can predict the future, but it's all plausible," says Young. "It's a continuation along the same general theme of the past DREF reports. For somebody who ignores the trends in the Facing of Forces studies, [they] could be in sorry shape."
Beginning in January, ID will examine each chapter of the new DREF report. For more information on Facing the Forces of Change, contact NAW at 202-872-0885.
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