The search for a supply team
In the supply channel of the future, companies must work together to satisfy the end user
By Steve Epner -- Industrial Distribution, 12/1/1999
Once again, the doomsayers are predicting the end of distribution. They believe that distributors will finally be eliminated from the supply channel. It will not be accomplished by some "underground" conspiracy of manufacturers trying to go direct, however. This time, the end is predicted to be coming at the hands of the Internet and electronic commerce. Some are convinced that manufacturers will openly sell directly to their end customers. Guess what? They already can -- and do.Over the years, the process of distribution has changed. Any time the business environment has been altered, distributors have had to keep up. Distribution is alive and kicking.
Today, the new electronically connected society is again forcing changes in the way product gets from its creation to its ultimate user. Successful companies will survive, but the distributors of tomorrow will not look like they did last year.
Technology has created new opportunities, functions, and capabilities that we have never had before. Learning to use them will cause some evolutionary -- and many revolutionary -- changes in the way distribution works. To meet the demands of the new economy, distributors will have to work more closely with other companies in the channel -- forming not a supply chain, but a "supply team."
A history of competition
It is already easy to see that there are competitors for traditional distribution functions. Companies such as UPS, Federal Express and other delivery/logistics operations are able to provide cost-effective delivery services. Only in very special circumstances can a regional (or even national) distributor compete in terms of capability, coverage or cost.
Bonded warehouses and public distribution centers are more efficient than the inventory management operations within most distribution companies, and have the ability to send packages with distributors names on them. The customer never knows it didn't come directly from your building.
Credit management and collection, another traditional activity, is undergoing revolutionary change. When was the last time someone really collected all of the full interest earned on all late payments? Most distributors are willing to "crack" with just one call from a customer who mentions a competitor's name. Guess what? Organizations like VISA and American Express are getting into the game. They know how to manage credit, and make a profit doing it.
The business model has to change. The traditional supply chain environment has many inherent problems. It is made up of independent links, and the weakest link determines the strength of the whole chain. Yet each link works to become stronger, even if that means breaking an adjacent link. There is also a problem of communication. Only adjacent links are connected. And where they do connect there is often friction as they rub each other the wrong way. This is not a model for success in the future.
It will not be possible for independent links to survive as they have in the past. From providing raw materials to the final delivery of finished goods, companies will have to work together to meet the demands of a "real time" economy. In order to survive, distributors must replace the supply chain with the supply team.
The most viable business model for the new century is a team of tightly integrated businesses that work together to service the customer. Members of the team add value or they are not asked to join. Companies that provide warehousing, logistics and credit management are all valuable, if non-traditional, members of the team.
Future success requires team players with a high degree of trust in each other and a willingness to share information. This means everyone on the team knows the customers, what they are paying and the terms of the sale. Everyone understands the costs of manufacturing, warehousing and back office operations.
Sophisticated customers are learning that low price is no longer a measure of best value. Value in the new world of business comes from delivering the right product, without the need to inspect it, on time, in the right quantity and packaged for ease of use at a fair price. The new buzzword that takes everything into account is lowest "total delivered cost."
If the idea of the supply team is right for our time, what does it mean to the traditional relationships between distributor, manufacturer and consumer?
The greatest promise is that redundancy will be reduced. Everything will be done once by the member of the team who is best positioned, trained and capable of doing it. Think about how many times an item is picked and packed as it meanders from the OEM to the final consumer. How many purchase orders are generated and transmitted from the customer, the distributor, master distributor, rep and manufacturer?
If redundancy can be eliminated, the cost structure will be reduced. Those teams that are best at the game will have a great economic advantage over others in the marketplace. They will be able to provide a lower TDC, receive a lower gross margin and still make more money.
The distributor's role
Finding the best team member to do everything (production management, warehouse/inventory management, logistics management and credit management) begs the question: "what is left?"
The answer is relationship management. This is the key to future value. Which partnerships do you have? What customers are so closely intertwined with your operation that it is almost impossible for a competitor to come in? What suppliers do you have that ensure your customers an uninterrupted stream of product that is not available from many other sources? And who else is able to coordinate all of the team members to get the job done for the ultimate consumer? It was, is and will be the distributor.
All we have to do is recognize the role that has often been invisible, refine it, market it and price it for a profit. The way a business is valued may change, but the value distributors deliver will always be required. We need to concentrate on doing the highest value work, getting rewarded for it and allow others to do the warehousing, logistics and financing.
The future is bright for distribution. It will be different, but those who are up to the challenge will survive all of the changes. They will survive consolidation, they will survive new technology and they will survive global competition.
There will be fewer distributors. They will cover narrower markets, and the way they support customers will change. They will still bring buyer and seller together and coordinate the team.
The creation of supply teams will soon establish new values, new procedures and better returns. Total delivered cost will be the measurement tool of choice. New business concepts within electronic commerce will make it possible to do the unusual. The Internet will provide the communication highway. All we need are willing partners and trust. Find those and you are a winner.
1951-60
The industry continues its staggering growth during the roaring 50s. The National Industrial Distributor Assn. added 18 new members in 1956, pushing membership over 500. Four colleges were already offering distribution courses: Texas A&M, Clarkson, Bradley, and Western Michigan.
1961-70
The U.S. again faces international calamity with the Cuban Missile Crisis. Warren Foss, of M.L. Foss in Denver, tells distributors that there have never been greater benefits from an effective and efficient association of leading industrial distributors keeping abreast of the changing patterns." The other big story was the Vietnam War and the torn emotions of Americans toward our participation in the crisis.
1971-80
At the Triple Convention in 1971, one seminar offered was called "Managing the Under-30 Crowd," a direct reference to the ballooning hippie movement and growing animosity among younger people against the producers of war material. New emphasis was placed on last-in, first-out inventory control. Rising inflation and dwindling energy supplies worried distributors at the end of the decade.
1981-90
Soaring interest rates in 1983 send worries throughout the industry. Economists quoted in ID magazine predict the prime rate will approach 15 percent, and that distributors will have to pay close to 17 percent for loan money by 1984. The use of computers in distribution begins to skyrocket, and consolidation begins to ramp up.
1991-2000
Integrated supply, mergers, the Internet and technology gains forever change the landscape of distribution. Distributors nervously await the effects of the Y2K bug. Limited stock piling of inventory results. A torrid stock market and high distributor valuations spark rapid consolidation during the mid 90s, but that trend slows in 1999, as stock prices and valuations dive.
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