Meeting new challenges

Small distributors must add e-commerce to a long list of challenges that already includes consolidation, integrated supply and the call to do more with less

By -- Industrial Distribution, 7/1/2000

Meeting the challenges of today's business world is difficult for every member of the supply chain, but small distributors may have it the toughest.

Every day, small businesses struggle to compete against a growing number of large, national companies. They not only compete for market share, but also for people, as the tight labor market continues to affect employers of all shapes and sizes. Small companies also struggle to position themselves in the world of integrated supply and to offer more and more services to a demanding customer base-at the same or lower prices than they've charged in the past. And now, they must hurry up and develop an e-commerce strategy before it's too late.

Small distributors must do all of this with limited resources and under constant pressure to keep costs in line and remain profitable. The distributors listed in the following pages are winning that battle and have earned a spot on ID's annual list of the 50 Outstanding Small Distributors.

Each year, ID publishes this special report on small distributors. We begin in February by asking companies with annual sales of $15 million or less to tell us their success stories. Our goal is to find out what small distributors are doing to survive-and thrive-in the industrial marketplace. We ask them about competition, industry trends, growth, and profitability. We also ask about services they must provide to customers and benefits they offer employees.

After gathering input from over 100 firms, we've come up with a list of the 50 Outstanding Small Distributors of 2000. The companies featured in the following pages represent a wide range of product groups-safety supplies, cutting tools, contractor supplies and fluid power products are just a few. Most of the firms specialize in a particular market segment and are constantly working to sharpen their niche. They list customer demands, industry consolidation, finding and keeping good employees, and e-commerce as their top challenges.

And the winners are ...

The 50 companies in this year's list answered a series of questions, which were then evaluated by an outside research firm. To be considered, each distributor had to have at least three employees, have been in business at least three years, and do between $1 million and $15 million in annual sales. From there, each firm was evaluated based on the following criteria: the number of value-added services they provide; sales per employee; number of training hours offered employees; gross margins; accounts receivable cycles; employee benefits; and technological capabilities. Extra points were given to companies with Web sites. This year, more importance was placed on service offerings than in past years.

Analysis of all the survey participants revealed the following: the average small distributor in our study does $5.95 million a year, has 16 employees, and has been in business 27 years. Average gross margins are 27 percent, receivables are outstanding 42 days, and there are four outside and three inside salespeople.

Forty percent of the distributors surveyed have Web sites and most offer the following benefits: vacation and sick time; family and individual health insurance; a 401K plan; formal training programs; dental insurance; maternity and paternity leave. Half the firms offer profit sharing and tuition reimbursement. Distributors surveyed also offer an average 40 hours of training per employee per year. Services provided to customers include: just in time delivery; inventory management; 24-hour emergency service; EDI; customer satisfaction surveys; ISO 9000 certification; and bar coding.

We asked the 50 winning firms a few additional questions-about consolidation, integrated supply, and e-commerce-to find out how some of the latest industry trends are affecting small companies. On consolidation, 29 companies said they did not receive a buyout offer in the last year, while 14 said they did, and seven declined to answer. On the flip side, 35 companies said they did not make an offer to buy another company in the last year, while eight companies said they did, and seven firms declined to answer. Most of the companies interviewed said they are not involved in integrated supply programs. Those that are involved participate at varying levels-some reporting that their program accounts for as much as 50 percent of annual sales.

We also asked how much revenue the firms derive from online sales. The small companies listed are doing little, if any, online selling. Twenty-two companies said they are not selling products online, 14 said online sales represent between one and 15 percent of sales, and one firm reported that Internet sales account for 30 percent of revenues. The remainder either could not calculate the amount or did not provide answers.

The e-commerce question

One of Jim Jaques' greatest concerns is e-commerce. Jaques is president of Massasoit Tool Co. in Warwick, R.I., No. 41. After launching a Web site a year ago, Massasoit Tool is now in the midst of developing its e-commerce strategy, which includes two key options. Jaques signed on with online marketplace Eventory earlier this year and is working with his software provider to develop an e-store on Massasoit's Web site. The e-store should be up and running this summer.

"We're not certain about anything at this point," Jaques says, referring to the state of e-commerce. "We're looking at those couple of things, and it's been interesting so far. Just having a Web site up has created business for us."

Indeed, many distributors with Web sites are anxious to take them to the next level. But many are frustrated by the time and cost associated with doing so. Dan McFarland, president of Mosier Fluid Power of Kentucky, No. 43, is trying to expand his e-commerce program, but finds it difficult to accomplish with limited resources.

"We want to have more of a presence in the e-business arena, where people can take a look at us and we can compete with some of the bigger people with national-type orders," says McFarland. "But it's difficult to do with limited resources ... We don't have a Web master to concentrate on that."

Instead, everyone at Mosier Fluid Power pitches in and helps out with the Web and e-commerce. In a small company, notes McFarland, "you have to wear a lot of different hats."

It's not just e-commerce that has small distributors concerned, however. Staying on top of technology, in general, is a pressing issue. Paul Ahrendt, president of The Tool House in Lincoln, Nebr., No. 20, says investing in technology can help a small distributor compete against the bigger forces in the market. He cautions that it's not an easy task, however.

"The amount of energy it takes to do that and get a return on investment [is high]," Ahrendt says. "I've spent enormous [amounts of] money on new software, hardware, a Web site, and a CD-ROM catalog. I've poured the money and energy of our people in these things to be able to stand competitively-but it's important to get a return."

While e-commerce is on everyone's mind, the simple struggle to compete in today's marketplace is what occupies the days of most small distributors. Technology, consolidation, employment issues and customer demands are all a part of that daily challenge.

"The small distributor is expected to continue supplying a level of expertise to an end user while they're getting their profit margins squeezed and still having to keep that same level of business-especially if you're specialized like we are," says Ken Hilterbrand, president of SSC, Inc., No. 1 on this year's list. "It's very difficult."

It's difficult, but not impossible. Most of the distributors we talked to for this study say they continue to benefit from a strong economy and are upbeat about the rest of 2000. And while competitive pressures will continue to loom large, most of the small companies we talked to are focused on continued success.

"I think the biggest challenge is trying to figure out who you are and where you want to be and how you're going to get there," says Michael Todd Smith, president of Todd Tool & Abrasives Systems, No. 19. "There are individual instances that have significant impacts on your business. When you're small, you can get swallowed up in changing your business practices for one or two customers. That's not to say you can't stay flexible, but you've got to stay with core beliefs because you can't be all things to all people. It's very important we focus on what we're doing and what we're good at. There's room for everybody."