Making Strides
Distributors give customers' purchasing agents decent marks, but say there is room for progress
By Victoria Fraza -- Industrial Distribution, 10/1/1999
DISTRIBUTORS DO A GOOD JOB, BUT THERE'S STILL ROOM FOR IMPROVEMENT. That's according to a survey conducted earlier this year by Purchasing magazine, a sister publication of Industrial Distribution.The survey queried Purchasing readers nationwide on the performance of their distributor suppliers. And on the surface, things look good. Ninety-three percent of the purchasing managers responding to the survey rate distributors' performance as good or excellent. A closer look, however, reveals some problems. In follow-up interviews, respondents told Purchasing that some distributors are not as committed to relationships as many buyers would like. Buyers, according to the survey, are looking for distributors committed to long-term relationships in which they take on more of the responsibility of managing activities up and down the supply chain. The problem is, buyers say "some distributors simply are not up to the task," Purchasing reports.
The survey prompted ID to turn the tables and ask distributors to take a look at the purchasing agents they deal with on a regular basis. Over the summer, we surveyed nearly 200 readers and asked them to evaluate the performance of their customers' purchasing agents/buyers. The results show that a communication gap may be at the heart of the problem. In this age-old relationship, neither side thinks the other understands cost issues and how to charge for value-added services -- things both sides agree are an important part of the equation. And while distributors give buyers decent marks, they say there is still room for improvement, as well.
A key finding in the Purchasing survey is that distributors do not understand cost issues. Purchasing agents complain that "distributors don't have a clear understanding of what it takes to price the services they are increasingly being asked to provide." Distributors, on the other hand, say that while many purchasing agents recognize the value distributors offer, they are often unwilling to pay for it.
According to our survey, 63 percent of distributors say buyers recognize the value they bring to the table; but just 43 percent say those buyers are willing to pay for it. Further complicating the problem, respondents say buyers don't understand the costs associated with running a distributorship and therefore do not understand the costs attached to the increasing array of services distributors are asked to provide. Fifty-seven percent of distributors say that buyers' understanding of how distributors work is good or excellent -- the rest give them fair or poor marks. And when asked what buyers could do to improve their relationships with distributors, the responses ran like this:
- Understand that service and technical support are very important. It's OK to pay a little more to get these things.
- Understand that we are in business to make money and need to make a profit in order to continue to serve them.
- Understand "total cost" instead of "cheapest price."
- Realize that price isn't everything; that you have to pay for knowledge, service and inventory.
Todd Loftis, president of Tools & Metals, Inc., a cutting tool distributor based in Fort Worth, Texas, says the situation often places distributors in the role of educator. Not only must they teach customers what it takes to run a distributorship, but they must also show that overall process savings mean more to the bottom line than simple price reductions.
"Five percent off the cost of the product is nothing compared to how much money you could save if we give you all these services," Loftis explains. "That's the key. Process savings is where all the money is."
While some customers understand those issues, there is a fundamental problem that stands in the way for many -- an adversarial relationship between their procurement and engineering departments. Loftis, who worked in procurement for a defense contractor before getting into distribution, knows the situation all too well.
"A lot of it has to do with the fact that neither one of them understands the constraints the other has," Loftis says. "What has to happen at some point in time is, someone in the top level positions has to put the two together."
Many distributors agree, explaining that users at the customer level are often ignorant of product costs, while those in procurement have little knowledge of what they are buying. That makes it difficult for distributors who must try to satisfy both parties.
"I don't think companies take the time to educate their buyers in regard to the products they are buying," says Jay Montague, president of Atlantic Tool Systems in Hawthorne, N.J. "In some cases, these guys have no idea what they need. Engineers, plant people understand better."
Still, many distributors say it all boils down to price. And that's what frustrates Doug Levereaux, vice president of Spartan Industrial Supply in Spartanburg, S.C. He says the situation has gotten worse in the last five to 10 years with the advent of mega-distributors and catalog houses. He says his firm -- which does between $5 and $10 million a year -- is often called on to engineer a project but loses the sale when the customer decides to shop on price.
"They want all the service, but they want the catalog price," says Levereaux. "And then when something goes wrong, we're the first ones they call."
Indeed, when asked what is most important to the buyers they deal with, distributors listed price as number one. In order of importance, on-time delivery, quality, service, total cost, inventory carried, product knowledge, reputation, and e-commerce capability followed suit.
Asking for more
Thirty-nine percent of distributors say their buyers are making purchases electronically today -- 30 percent via EDI and just 10 percent via the Internet. However, Purchasing's survey revealed that e-commerce capability is on the bottom of most buyers' lists of key services. More traditional services are taking precedence when it comes to adding value and streamlining the supply chain.
For instance, 72 percent of respondents say buyers are asking them for more technical support and training. More importantly, 58 percent say that buyers are outsourcing functions such as inventory management, order processing, and training/education to their distributor suppliers. Other services distributors are being asked to handle include: purchasing, kitting and assembling, packaging, quality control, and supplier selection.
The Purchasing survey reveals that outsourcing to distributors is gaining in popularity. Thirty-six percent of buyers say they are asking distributors to perform inventory management and order placement functions. What's more, 90 percent of purchasing agents rate distributors' performance in those areas as good or excellent.
"We're a value-added company, that's the only way we can stay in business in this market," says Montague, whose company covers the New York City area. "Our strategy is to give the customer the most value and when it's not realized, pack our bags and move on."
To see the results of Purchasing magazine's survey, visit www.purchasing.com, click on the search icon, then click on the May 6, 1999, issue. To participate in an ongoing discussion of this topic, go to the "Online Exclusives" section of ID's Web site, click on "Discussion Forums" then "Purchasing Strategy Source."
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