Your e-options
Distributors face many choices for conducting business over the Internet. Here are the leading options to consider and a primer on what to ask.
By -- Industrial Distribution, 7/1/2000
The emerging e-business world provides a variety of choices for distributors to sift through. As models develop and dot-com firms make their pitches, it's worth sorting out what's going on.
What follows is a description of the leading options to do business over the Internet in the industrial distribution marketplace. The selection of choices is based upon interviews with distributors, e-commerce vendors and a consideration of research by industry analysts and consultants.
Given the pace of e-commerce change, this is not intended to be a permanent breakdown of the options and vendors, nor is the mention of particular firms meant to be all-inclusive. Following the detailed descriptions of some choices, distributors and other industry experts comment and give tips on how to evaluate them.
The leading options include:
Do it yourself - Distributors that transform their basic marketing Web site to one that can process orders. It's not always a complete solo effort, as many firms get help from a catalog development vendor or other third party.
Online exchanges - Often run by "dot-com" vendors, these Web sites bring together supplier catalogs and typically charge transaction fees.
Variations of these exchanges are described further below: the two main types are closed "horizontal" networks typically created by software vendors, which may stretch across multiple product categories or industries; and portals, which are pure Internet businesses that link to catalogs and provide content like industry information.
Distributor consortia - Groups that set up an electronic marketplace to display distributor's catalogs online, with members in place to fulfill orders.
Supply chain networks - Set up by huge buyers like the major automakers and the aerospace industry to streamline their purchasing with existing suppliers.
Auction and reverse auction sites - Enable sellers to post goods for sale and buyers to post their needs; used primarily for used capital equipment, surplus inventory and other hard-to-move items.
Mass catalog compilers - Bring together multiple supplier catalogs in a single searchable online database.
Choose more than one - Many distributors say they won't pursue just one approach, especially one that customers may reject.
Do it yourselfers
Most MRO distributors have built Web sites to at least give them an online marketing presence. Of more than 900 distributors contacted for ID's Annual Survey of Distributor Operations this year, two-thirds report they have sites, and about 60 percent of those indicate they sell products from them. Many rely on their own employees or local Web designers to do this, while half of the distributors ID contacted outsource the maintenance of their sites.
While many have taken the first step, fewer conduct transactions online in true e-commerce with their customers. Some companies, particularly those with Web-savvy executives and employees, are bringing their site to the next level by themselves.
A small Detroit cutting tool distributor, Metro Tool & Equipment Co., (www.cuttingtools-detroit.com) did this during the past year, for example. The firm spent about $12,000 on Web consultants, software and a digital scanner to build an online product catalog and virtual store where users can buy tools in secure transactions. Employees also added information resources like a tap/drill calculator, and frequently update and expand the site themselves.
Patrick Parr, an industry analyst at the investment bank ING Barings LLC, says it's vital for small- to mid-sized distributors to put up an Internet storefront that invites customers to buy electronically.
"You go to a lot of sites today but they're cumbersome to use," says Parr. "So you go elsewhere or pick up the phone. You're doing it the same way you used to."
He cautions that small distributors especially should not rush to set up a transaction site if they don't have ample fulfillment and logistics support behind it.
Just as Metro Tool & Equipment relied on Web consultants to design their site, many companies need help to prepare their catalogs for the Internet and integrate ordering with their "back end" computer systems for receivables, accounting, etc.
A growing number of vendors are available to do this. Perhaps the largest is online catalog developer and publisher Thomas Register (www.thomasregister.com), which introduced online ordering this spring. There are also firms called application service providers like HotSamba (www.hotsamba.com) that develop, host and maintain distributors' Web sites and catalogs for a setup charge and monthly fees. Other vendors like eCatalogs (www.ecatalogs.com), which includes catalog provider Howard W. Sams, call themselves content service providers and offer an array of hosted e-commerce services.
Online exchanges
In today's vernacular, online exchanges are also often called Internet malls, trading hubs and e-marketplaces. They come in various shapes and stripes. Many are "open commerce providers" that match buyers and sellers of all sizes, as described by distribution consultant Bruce Merrifield, while others are more restrictive. The two main types are horizontal networks and portals.
Horizontal networks
What they do: Provide a closed network for buyers and sellers, often using the proprietary software of procurement and/or enterprise resource planning software vendors like Ariba, Commerce One, PSDI or Datastream Systems.
What's different:
These exchanges are called "horizontal" because they often segment target markets more by customer size and type than by a "vertical," single industry such as steel
Use of the vendor's software is usually an integral part
The network never takes ownership of product
They often allow customers to locate and compare products and pricing through an aggregation of e-catalogs, or through an auction or reverse auction
Revenue: Derived from transaction fees, advertising and software licensing fees.
Portals
What they do: A portal is an entrance, or a means to an entrance. In the MRO and construction supplies arenas, portals provide a place for viewers to click through to find information, including links to supplier catalogs, industry research, technology updates and even general news. Many also conduct transactions and provide services like requests for quotes and requests for information.
What's different:
Portals seek to be valued information centers and, in most cases, commerce hubs
They essentially offer distributors a place to be seen and be contacted
Buyers can locate distributors, manufacturers and can often request quotes
Revenue: Derived mostly from advertising, but beginning to take transaction fees.
Some examples of portals are VerticalNet, which provides information for more than 53 industries, PurchasingCenter, which targets MRO buyers in mid-sized firms, and SupplierMarket, a marketplace of direct materials for built-to-order products.
When considering vendors that operate online exchanges, distributors should be aware of another distinction: those that are buyer-oriented and those that are so-called neutral intermediaries, Merrifield says.
Buyer advocates focus on end users that seek the lowest price for MRO commodities using methods like soliciting quotes for competing bids and holding reverse auctions. Vendors doing this include EqualFooting, which focuses on helping small business buyers save money.
By contrast, so-called neutral intermediaries do not "interfere" with established relationships among buyers, distributors and manufacturers. Eventory, for one, provides virtual storefronts for distributors and acts like a telephone directory for buyers. Another, Toolshopper.com, also maintains existing customer-distributor relationships, while IndustrialAmerica, an exchange backed by MSC Industrial Direct, pledges to be neutral when it opens in September.
Supply chain networks
What they do: Provide a place for large buyers to do business with existing suppliers and manage it in a standardized way. The goal is to cut procurement costs by streamlining transactions and allowing participants to check scheduling, the status of deliveries, do online bidding and more.
What's different:
Networks like one the Big Three automakers' announced early this year are invitation-only, eliminating suppliers that are not e-commerce ready
The networks themselves are developed by the major players that provide e-commerce platforms
The providers do not take title to the products, as orders are routed to suppliers
Revenue: Derived from transaction fees, software licenses, fees for Web site development, hosting catalog development, etc.
Earlier this year, E & R Industrial Sales of Sterling Heights, Mich., was invited to participate in an online procurement network General Motors began before the three automakers joined forces to create an even larger one. This spring the company, which sells to metal cutting shops and other automotive suppliers, was one of several dozen involved in a pilot program throughout Michigan.
Paul Thomas, director of marketing at E & R Sales (www.erind.com), says that to be invited by GM, his firm had to be technology-ready, for one. It already had a Web site and a server to upload data to the exchange, for example. But GM also wanted suppliers with solid inventory, great customer service and product knowledge, he says.
Thomas says the online network is "very intense, sophisticated and the search engines are very detailed. They want their buyers to have all the good information, and the decision is not based on price, it's based on the relationship you have."
"It's like us being online in their intranet with our catalog," he says. "It's a non-threatening thing. It's just a streamlined process so buyers can go online and use preferred suppliers."
"It's not a way to streamline distributors and cut their margins," continues Thomas. "It's pretty much to help [GM or other manufacturers] streamline their purchasing processes internally."
Distributor consortia
What they do: Distributors join together in attempt to be a sole online source of products for customers, and members typically share the cost of developing an e-commerce vehicle. Examples include supplyFORCE, which Affiliated Distributors created last year to handle its national accounts, and the Independent Distributors Cooperative-USA, a buying group of 58 power transmission and bearing firms.
What's different:
Shared e-commerce development costs when distributors own an equity position
Distribution network in place
Selective distribution policies with manufacturers often honored; brand name products often sold only through authorized distributors
Revenue: Participants pay fees.
Gus Hughes, senior vice president of Dillon Supply in Raleigh, N.C., says that when Affiliated Distributors unveiled its plans last fall to create a new e-commerce engine and company for its national accounts, his firm jumped at the chance. Dillon Supply (www.dillonsuppy.com) had $130 million in sales last year and is an A-D member.
"The main key was we wouldn't have to reinvent the wheel," says Hughes. "We wouldn't have to spend a million or two on an interactive Web site, because they were basically going to do it for us ... It looked like it would give us the flexibility we needed, and would get up and running before we could even think about it."
He says supplyFORCE.com, which is expected to go live in July, differs from some of the online marketplaces because distributors are already in place to fulfill orders. Participating distributors buy a certain amount of shares in the business based on their overall volume with A-D.
When the company's site goes live, buyers will initially order at standard catalog prices, Hughes says. Later on, perhaps this fall, a pricing matrix will be introduced for existing customers that lists their preferred distributors.
Meanwhile, regional alliances and co-operatives are springing up to compete in the electronic arena with large consortia like supplyFORCE. Eventory CEO Jon Cohen, for one, expects this battle to heat up as online exchanges such as his bring together distributors into virtual alliances of their own. This will "allow them to present a unified front to compete on national accounts," and can be configured so that users can do business both with the group and individual distributors, Cohen says.
Other options
Among the other leading options are using auction and reverse auction sites, and joining a mass catalog to extend your reach.
So far, the auction and reverse auction sites appear to work best for used capital equipment and surplus inventory. Vendors in this area include TradeOut.com, FreeMarkets and e-STEEL.
The mass catalog compilers bring multiple supplier catalogs into a single online format. These vendors include W.W. Grainger's OrderZone, IndustrialZones.com, InduserveSupply and manufacturer-created entities like MilPro.com and Rockwell Automation's PTplace.com.
Pursue multiple paths
No one has a crystal ball that says which, or how many, of these e-options will succeed. Pursuing several e-commerce strategies at once may be the best advice of all.
There's no doubt that this is the year many distributors will test out the waters. ID's annual survey shows that 14 percent of companies signed on with some sort of dot-com exchange or portal as of late last winter, and interest is growing.
Parr, the analyst from ING Barings, says it's still too early to say whether a dominant e-commerce model will emerge. He believes the so-called first mover advantage is overblown. "But it's clear that having your own content in a parametrically searchable form and your own site enabled for commerce is a critical step," he says.
Chuck Houston, vice president of marketing at Industrial Distribution Group New England, agrees there are merits to working on multiple strategies. He notes that most of the large publicly held distributors like IDG work with multiple players, as well as develop their own "sell-side" strategy. "The independent distributor would be well advised to do the same," Houston says.
Working just one strategy is risky because no one knows which business models will survive, Houston says, and most of the start-up players have evolving models. And perhaps most important, Houston says, "in the long run, customers will migrate to various models, including their own 'buy-side' models. They will take their procurement to auction sites and portals as well. So we want to get to where the customers will be. That will not be in one place."
James Solodar, a senior analyst at Pembroke Consulting, says distributors and manufacturers have ample time to figure out what to do about the threat posed by some MRO buying-selling exchanges.
That's because distributors, not the dot-coms, already hold the customer relationships, he says. In addition, it will be much harder than dot-coms may think to cut transaction costs significantly while they "unbundle," or separate sales, service and fulfillment functions.
Michael Skinner, a senior manager at Pembroke Consulting, advises distributors to keep their eyes on the prize: figure out which online functions will cut costs and improve customer services first.
Skinner suggests many companies have not yet improved the flow of goods as they add new functions to their Web site. Many distributors plan to begin processing orders online this year, for example. The challenge, he says, is not just to implement that, but do it in a way that streamlines customer support services.
"For each capacity added to your site, ask, what value are you looking to create?" he says.
Editor's note: Analyses considered include "Changing Channels-Electronic Commerce and Industrial Distribution," ING Barings, Jan. 2000; "The Promise & Peril of On-Line Exchanges," Pembroke Consulting, May, 2000; "Who's Who in MRO E-Commerce," Pembroke Consulting and Modern Distribution Management, January, 2000; "How Will Electronic Commerce Play Out in MRO Channels," Merrifield Consulting Group, April, 2000.
Reason for developing e-commerce* Most important reason Cited in top 3 reasons Increase sales to established customers 30% 68% Lower costs of selling 20% 56% Acquire new customers in existing geographic markets 20% 51% Customer requests for e-sophistication 18% 39% Lower procurement costs 17% 38% Acquire new customers in new geographic markets 13% 29% Threat from competitors 11% 33% Threat of manufacturer direct sales 3% 14% Supplier requests for e-sophistication 3% 12% Source: Pembroke Consulting survey of 350 firms, December 1999 * Some respondents selected more than one reason as being most important |
Chuck Houston, vice president of marketing at Industrial Distribution Group New England, suggests distributors ask three questions to evaluate the dot-coms.
First, "try to distill down their business model into one phrase that clearly conveys what they do."
For example, says Houston, is the vendor an "e-distributor who buys products from MROP suppliers and re-sells the product to end-users using the Web, or a Web-hosting company for medium sized industrial distributors looking to outsource their primary Web strategy?"
Perhaps it is a software vendor with a "menu of services ranging from back-end integration on the end-user side to hosting sell-side 'branded' marketplaces, using the Web as a medium."
Second, understand the "content" options. This refers to catalog selling information deployed on the Web, which is often referred to as e-content. You need to learn how the dot-com solution plans to develop content. Does the participating distributor supply raw data to be enriched by a third party? Does the dot-com outsource the process, or is the content already in place at the vendor? Does the vendor depend on manufacturers for raw data, which will then be enriched?
There are a number of excellent firms doing this work-on behalf of manufacturers, distributors, and end-users.
Third, how does the dot-com make money?
"You should ask the question, 'What are all of the ways that you derive revenue?'" he says. "Does it involve advertising, transaction fees, auction commissions, monthly hosting, mark-up on product, other fees, etc? This goes a long ways towards understanding the model."
E-commerce related activity Percent who rate it as "more difficult than expected Shift customers to purchase via the Web 74% Integrate outside sales force and Internet sales 64% Integrate inside sales force and Internet sales 45% Determine which features to include on the site 44% Find and select Web design firm 17% Source: Pembroke Consulting survey, December 1999 |
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