While the economy continues to be the biggest challenge facing industrial distributors this year, our 55th Annual Survey of Distributor Operations shows that a host of other problems are causing distributors to have sleepless nights. These difficulties aside, distributors are still optimistic as they dream about the future and many predict they will see sales increases this year, despite the slow growth in the manufacturing sector.

Specifically, the 1,058 distributors who responded to the survey said that customer consolidation, vendor reduction, a surge in national contracts and manufacturers selling direct are cutting into their ability to make a profit. Seventy-two percent of the respondents said their customers are drastically slashing their distributor base, a trend that is expected to continue.

"Things have changed rapidly in our marketplace," one distributor in the Midwest told us. "We're seeing more competition from national distributors who are moving into our territory, lower margins, fewer customers and less loyalty from our suppliers." He also said that some of his long-time manufacturers are selling their products to "all types of distributors" and are using the Web to deal directly with customers.

A distributor in the Northeast said that more and more customers are moving their operations overseas. "The loss of manufacturing in the U.S. is going to hurt all of us," he said. Other distributors seem to agree. Last year five percent identified this as a major concern. This year that number has doubled to 10 percent.

Ironically, our survey shows that many manufacturers with locations overseas are asking some of their key distributors to locate branch offices in those countries. A total of 24 percent of the respondents said this trend is occurring more frequently.

Other respondents said that national decisions affecting local plants are creating fewer sales opportunities on a regional basis. "What we have to prove to [customers] is that we provide enough valued added services so we can get business and protect our margins," one distributor said.

Not all distributors are singing the blues. A number of distributors (more than 50 percent) said sales would either increase or remain at the same levels as 2000. How are they going to do this? One way, according to respondents, is by hiring more technically inclined salespeople. In fact, 63 percent of the respondents said they expect to hire additional salespeople in the next two years. Other distributors said they are using database marketing to develop new customers, penetrating deeper into existing customer accounts and formulating customized solutions for customers — in effect creating a partnership in which the distributors serve a vital role as a consultant rather than as a salesperson.

Distributors also said they will be developing strategic alliances with non-competing distributors and reducing the number of products they sell. Other distributors said they intend to focus on their core competencies rather than trying to be all things to all customers.

"One of the things we're looking to do is to refocus our energies by determining who are our most profitable customers. We need to work harder to gain further sales through better marketing programs," said another distributor.

Many distributors said they have also added new product lines. Distributors said they are looking for products to complement their existing lines while others will be selling more fore engineered products. Other distributors said they would be offering more services such as fabrication and kitting, while some are looking to previously untapped markets such as government and municipal accounts.

And speaking of markets, distributors are selling to a number of non-traditional customers. This is in contrast to a major criticism of distributors in the past claiming that they were smokestack chasers, basically focusing on industries such as automotive and aerospace.

Today, distributors are selling to varied industrial sectors. The top industrial markets for distributors are general industry (80 percent); construction (58 percent); machine/job shops (58 percent); utilities (49 percent); the food industry (48 percent); and the automotive industry (46 percent). Some of the other non-traditional markets distributors identified include furniture, semi-conductor, telecom, packaging, plastic injection molding, and medical industries. Some regions over the years have seen a drop off in manufacturing and a new focus on the service sector. This is particularly prevalent in the Northeast and has created new selling opportunities. One distributor is selling specialized miniature hand tools for use in a clean laboratory environment to a company producing chips, while another is selling small, miniature belts for use in the computer hardware industry.

Just a few years ago the Internet was viewed by many as a threat. That isn't true today, at least for the most part. Instead, distributors said that the Internet has become a tool for them to expand their reach and find new customers.

A total of 74 percent of the respondents said they now have Web sites. That is up from 68 percent a year ago. Not surprisingly, nearly all distributors with sales of more than $20 million have Web sites. That figure today stands at 96 percent, up five percentage points from last year's survey. But there has been significant growth in Web sites by small distributors, those with sales of less than $5 million. More than half (55 percent) of these distributors now have Web sites, up 10 percentage points from our previous survey. A majority of those distributors outsource their Web maintenance.

More and more distributors are also selling products from those sites. And they expect that trend to continue. More than half of those surveyed (55 percent) predict that customer purchases of products will increase via the Internet. In fact, some distributors say they are relying on the Internet to help them reach targeted sales goals for 2001.

Surprisingly, few distributors (15 percent) report they have worked with customers or suppliers on joint e-business initiatives. At the same time, 19 percent of the respondents told us that their key suppliers are asking them to integrate their business systems with them. In recent months, we've heard from several distributors who told us they have been working with their customers on developing specific partnering e-business arrangements. This is something we'll be following in the future.

One technology item that hasn't caught on is the use of automated data collection by distributors. A total of 33 percent of the reporting distributors said they use automated data collection while another 14 percent expect to do so in the next year. Most of those distributors have more than $20 million in sales. But most distributors with less than $10 million in sales do not use automated data collection nor plan to do so in the future.

The top concerns for distributors, according to our survey are: economic conditions ( 57 per cent); price competition (51 percent); manufacturers selling direct (38 percent); finding more qualified people (23 percent); distributor competition (34 percent); keeping qualified employees (23 percent); and manufacturers selling to non-authorized integrated suppliers (21 percent). Although there was a shift in the order this year as compared to last with the economy becoming the top concern, there was a marked drop-off in the dangers of e-commerce. Last year 18 percent of distributors said this was a major concern. This year only nine percent said it was a problem.

Distributors also mentioned regional problems. "The power problems in our area have hurt us and may continue this way for a while," a distributor from California told us. Another problem affecting all distributors was the length of time it was taking for customers to pay their bills.

"It's taking up to 60 days for some of our customers to pay their invoices," one distributor lamented. "It seems like some of them expect us to be a bank for them. Yet we have to pay our bills to suppliers in 30 [days]. This is becoming a major problem for us."

The number of distributors with integrated supply arrangements remains virtually unchanged from last year's study. A total of 33 percent of the respondents said they had such agreements in place, compared with 35 percent last year. What has changed, however, is their view of the growth of integrated supply. Last year, 81 percent of the distributors with integrated supply agreements said that sales of such arrangements would increase. This year only 44 percent said these arrangements would increase, while 48 percent said they would retain the same number of such contracts. Is this an aberration? Frank Lynn & Associates, a well-known and respected consulting firm headquartered in Chicago, predicts that integrated supply will continue to grow at about 27 percent annually.

A number of respondents (37 percent) said they are second-tier distributors and are providing specific products through the integrator for use by the customer. That number is up slightly from last year. Mark Dancer of Frank Lynn & Associates points out that about half of the distributors with revenue of between $10 million and $20 million are involved as second- tier distributors. The percentage of distributor participation as second-tier distributors drops as the size of the distributor increases (to 43 percent of respondents with revenue greater than $20 million).

Dancer said that e-business and integrated supply will merge to some extent, with integrated supply adopting Web technologies and dot-coms offering procurement services.

This year, for the first time, we asked distributors what their suppliers expected of them. The number one answer, not surprisingly, was to increase sales to new customers. Other top answers: buy online (39 percent); sell services to customers (38 percent); improve service levels to customers (33 percent); share customer information (30 percent); and add a specialist to represent a supplier's product line (23 percent). Distributors also reported that suppliers are asking them to work with them to develop joint marketing plans and focus on targeted accounts.

A few years ago, one of the emerging trends was for distributors to become ISO certified. That trend has seemed to wane. Our survey shows that only 18 percent of the respondents are ISO certified and another 19 percent plan to become certified. About 45 percent of the lager distributors, most of whom do business internationally, are certified.

Smaller distributors said they can't justify the costs in relation to the return.

The study also shows that there is much "brand churning" taking place in the marketplace. Nearly 60 percent of the distributors said they have increased their product lines in the past two years. Nearly half of the respondents said they will add product lines this year, while 35 percent also said they will add brands per product line. Most of those distributors said they are adding brands and product lines because of demand from customers.

The findings also indicate that the "traditional" industrial distributor is beginning to change. For example, nearly 20 percent of the respondents said they are buying products from a master distributor; six percent are outsourcing warehousing activities; and 20 percent plan to do so in the next two years.

Our 55th Annual Survey of Distributor Operations features the largest response rate in the magazine's history. A total of 1,058 returns were received from owners and executives of industrial distributorships across the United States and Canada.

The survey was conducted in March and April of this year.

There was an almost equal breakout between specialty and general line distributors. Fifty-one percent of the respondents identified themselves as specialty distributors while 49 percent identified themselves as general line distributors.

Despite the growth of the national chains and mega-distributors, most of the distributors said they were still family-owned companies. Seventy-two percent said they were family-owned companies, while 28 percent said they were not.

Many of the respondents said their companies have been in existence for some time. The average respondent has been in the distribution business for more than 30 years. Nearly 31 percent of the companies have been in existence for more than 50 years. And how's this for longevity? About four percent of the companies have been around for more than 100 years.

The entire report is available for purchase. The report breaks out a number of questions by sales volume. Please contact Alice Yu Miller at (617) 558-4504 or visit ID online at www.inddist.com for ordering information.