LIGHTENING THEIR LOAD
Distributors are increasingly putting the control of back-office operations into the hands of a third party so they can concentrate on their customers
By -- Industrial Distribution, 9/1/2000
The demands placed on distributors are increasing exponentially these days. In response, many distributors are taking a calculated look at their strengths and weaknesses and turning to outsourcing as a way to improve their overall performance and contribute to the bottom line.
Distributors outsource a variety of day-to-day business functions-from payroll and accounting functions to Web site design and transportation services-so that they can concentrate on their core competencies: distributing industrial goods and providing technical assistance. And today, that core area of expertise has grown to include numerous value-added services that leave the distributor with limited time and resources to devote to some of the back-end functions of the business.
"Distributors won't have unlimited resources in the future," says industry consultant Bill McCleave. "They're going to have to narrow their band of core competencies and push the others to people who've selected those things as their core competencies. Distributors have to pay attention to the things that customers will use to measure their value. They're going to have to outsource things that fall outside their selected core competencies because trying to be everything to everybody just isn't going to work."
In Industrial Distribution's 54th Annual Survey of Distributor Operations, 93 percent of responding distributors reported that they outsource transportation services, divided in order of prevalence into small package delivery, motor freight (trucking) and air freight. In addition, 46 percent of distributors reported that they outsource Web site maintenance. Among the other activities that distributors reported outsourcing are fleet maintenance (26 percent), manufacturing (22 percent), freight payments (12 percent) and logistics/warehouse software systems (9.5 percent).
In this article, ID takes a look at specific business activities that distributors and industry consultants say will provide the industry with increased opportunities for outsourcing during the next few years.
Technology resources
Distributors, particularly small- to mid-size independent distributors, often find keeping up with the fast pace of technology a financially and logistically daunting task.
In response, McCleave predicts, distributors will increasingly outsource their distribution and software computer operations.
"A small distributor, in particular, has a hard time," McCleave says. "The companies they outsource to can bring in more [technology] talent than the distributor can because there's an upward progression in those companies."
Jim Alexander, president of Orton Industries, an $18 million distribution firm in Doraville, Ga., agrees that technology and e-business solutions, in particular, are prime candidates for outsourcing. Orton Industries is currently exploring outsourcing options for its e-business solution plans.
"The technology part of our business is so important, but with limited resources we need to look at outsourcing as an opportunity to satisfy that requirement of the marketplace," Alexander says. "We can't afford to spend too many people resources on the computer technology side of our business, versus having our people spend their time serving our customers in the product technology part of our business."
Fortunately, technology companies like Navision Software-makers of accounting and business management solutions for mid-size companies, like the enterprise resource planning software called Navision Advanced Distribution-are making it easier for distributors to outsource this aspect of their businesses. Navision is partnering with Compaq to provide its ERP technology solutions via an application service provider, which essentially allows distributors to "rent" software packages through an Internet or private network ASP, rather than licensing the software themselves.
"We're basically leasing our software so that the customer is not required to come up with that big up-front payment for the software, making it easier for them to meet their needs," says Todd Bergeson, product manager for Navision US. "We're also allowing the database to be modified for their needs."
Navision's product manager for distribution, Mike Memmel, says securing software through an ASP provider can be particularly helpful for companies that grow by adding locations.
"As you get more and more locations, the [information technology] support and cost can become relatively prohibitive and since the margins are getting pretty thin for distributors these days, every cost you can eliminate or reduce is one less thing you have to worry about when you start dealing with margins," Memmel says.
Leasing software applications could easily save a distributor thousands of dollars and provide them with the flexibility of upgrading their systems as needed.
"With an ASP solution, the time to implementation and the risk is really reduced," Memmel says. "These guys are really good at distribution, but dealing with the IT side of the business is probably something they'd rather have someone else do for them."
Warehousing & logistics
Industry consultant Bob Footlik speculates that the ultimate form of outsourcing for distributors may be to get out of the warehousing business altogether and concentrate on sales, marketing and service.
Footlik points to master distributor Production Tool Supply, which calls itself "America's Tool Crib," as one example of how close distributors can get to eliminating the need for their own warehouse. Master distributors offer smaller, independent distributors access to a broad range of products without having to stock slow-moving inventory.
Depot Direct, Inc., of Perrysburg, Ohio, plays a similar role in the market, allowing distributors like Larry Peterson, president of Midwest Fluid Power in Toledo, Ohio, to outsource some of the costs associated with warehousing product.
Defined as a high-end, electronically directed warehouse and logistics center, Depot Direct helps distributors streamline their order fulfillment process and alleviate inventory costs. The company works with its primary customer, the manufacturer, to centralize an inventory that is representative of what the distributors are selling. Distributors then establish a relationship with Depot Direct to purchase product from them and sell it to the end-user.
Depot Direct's president, Kathleen Krueger, explains the difference between her company and a master distributor: "We're a neutral entity in the relationship. We don't market or sell the product. We have no stakehold in the sale of the product, as master distributors do. We're strictly facilitators. Our stakehold is in the performance of the product throughput."
For distributors like Peterson, outsourcing some warehousing and fulfillment service activities means cost savings and an increased ability to compete in the channel.
"We are not an entity that can use economies of scale to compete in the channel process as a low cost provider in areas of freight or warehousing technology tools, or just in the velocity of goods through the channel," Peterson says. "In order to reduce the impact that other providers of goods could have because of their size, it's important for us to identify outside players that can allow us to be low cost and retain our position in the marketplace. ... That outsourcing allows us to utilize the technology tools and a much broader level of inventory."
Through its relationship with Depot Direct, Midwest Fluid Power now has a breadth of product well over 200 percent of what the company used to handle by itself. The company now stocks what Peterson calls "proximity sensitive inventory"-just the items he needs for a given day-and has reduced its capital requirement for product by 70 to 80 percent.
A related solution would be to participate in an inventory-sharing program, which is something Orton Industries does as part of an alliance the company has with 14 other distributors.
Alexander says like many distributors, Orton will need to examine their warehousing/logistics solutions as changes in technology continue to evolve.
"Because of the changes in technology and logistics, warehousing is not what we do best," Alexander says of distributors. "We need a local inventory, but it can be limited. The biggest percentage of our logistics service to the customer could be better served with a central, professional warehousing process. We need to focus our resources on the customer side, the relationship side, the product and value-added services side."
There are a number of other business activities that distributors may be interested in outsourcing-such as accounts receivable, engineering services, vendor-managed inventory services, order fulfillment, and some customer service functions. The common link between all of these activities is that they are not typically among the distributor's core competencies and distributors will need to weigh the benefits of performing such tasks themselves, or outsourcing them to a company with expertise in a given area.
There may be many items on a distributor's list of business activities where his or her company's performance is adequate, but can't be considered expert. So which of those activities become candidates for outsourcing?
There's no magic formula to arrive at that answer, unfortunately. It takes a unique mix of soul searching and number crunching.
"It's all based on activity based management costs," says Jim Alexander, president of Orton Industries. "You just have to dissect your business costs and determine from that what you do best, what you can afford to do best, and what opportunities there are around you to outsource activities in a more economical way."
Al Basile, transportation consultant for the Specialty Tools & Fasteners Distributors Assn. and president of Consolidated Traffic Inc., says most of his customers turn to CTI to negotiate rates with carriers, provide optimal carrier routing and freight audits, etc., because they're looking for a way to save money.
"Most of our customers don't feel this is their area of strength," Basile says. "Our initial contacts usually come through the finance area-controllers, treasurers-and they're always looking at the bottom line."
Industry consultant Bob Footlik says that while the bottom line is a motivating factor for outsourcing certain activities, it isn't everything.
"There are three factors that are traditionally taught in business schools as a way to make decisions: balancing time, money and manpower. But it's the fourth factor that's not mentioned that drives many distributor decisions, and that's aggravation," Footlik says. "All other things being equal, the distributor will move in the way of least aggravation. That's what pushes the outsourcing decision-everyone has a different trigger point on aggravation. When you're talking outsourcing, you're not just talking dollars and cents."
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