"Globalization" is defined as "making worldwide in scope or application." To many people, that means selling goods and services in faraway lands. It is a concept remote to many distributors' problems and not something in which they will soon be involved.

But globalization also means purchasing goods and services around the world, looking for price, quality and delivery that best serves customers' needs.

Global sourcing is one of the fastest growing methods industrial distributors use to gain market share, enter new markets and raise profit margins. Worldwide markets for buying goods and services are opening fast, and the quality of those goods has risen dramatically in the last decade, according to distributors buying both here and abroad.

In its 1998 edition of Facing the Forces of Change-Four Trends Facing Wholesale Distribution, the National Assn. of Wholesaler-Distributors surveyed distributor and manufacturer participants on this issue.

"The increased integration of markets across national boundaries exposes domestic wholesaler-distributors to new competitors — both from new products coming into the country and from foreign distributors that may enter it."

That was in 1998, and in 2001 the process continues to accelerate. The North American Free Trade Agreement set the stage for farther-reaching, multi-national trade agreements, including Asia and South America. The tactic for distributors could be to align themselves with suppliers and foreign distributors, to best leverage the distributors' knowledge of their products and customers.

The best strategy is, according to many experts, "If you can't beat 'em, join 'em." The 1998 Facing the Forces of Change report states that domestic distributors who align with offshore suppliers "have an opportunity to increase revenue by capturing the distribution of the rising number of these imports." In doing so, they can also expand product lines.

One of the main issues about offshore goods is quality. International firms have worked in earnest to meet world quality standards, according to quality reports from the National Assn. of Purchasing Management, and more goods are coming to U.S. customers that fill the quality bill.

As the quality of foreign items goes up, however, quality becomes less of a sales tool for domestic goods suppliers. Pricing, and the pressure it represents to domestic manufacturers, becomes the most important item.

We spoke to a manufacturer's representative and a distributor with differing viewpoints on the question of price vs. quality and the impact of foreign goods on margin and U. S. manufacturers.

Every distributor has customers who are open to trying any new product, and those who want strictly domestic brands in a narrow quality and appearance range. To take on a line of lower-priced foreign goods, distributors must research their markets exhaustively.

The fastener market has seen a flood of offshore products for many years, but there are customers who continue to reject them, in full or in part, says Michael Smith, president of Smith Associates of New York, a manufacturer's representative firm, and program chairman of the Metropolitan Fastener Distributors Assn. According to Smith, consolidation in the fastener industry can leave him with a dilemma when it comes to the origin and prices of fasteners.

"We buy from Company A and Company B. When A represents another company or product line, that product line may by in direct competition with agreements that we have with Company B. It happens all the time," he says. Often, the line that comes into competition is a foreign-purchased brand, he says.

The problem arises when a manufacturer of screws, for instance, buys a manufacturer of nuts and expects Smith to represent that nut line. Smith's company has an exclusive nut company. He won't break that contract, but he will lose a lot of business if the other nuts are cheaper, he adds.

"When a customer has a price of twenty dollars per thousand screws from offshore, and my price is twenty-five per thousand for a domestic brand, I ask them simply if the price is their 'landed cost,' which includes taxes, inventory costs if they have to store a large quantity, freight, customs and any hidden costs. Do they have a large letter of credit for the goods? All those things drive up the apparent cost of twenty dollars per thousand," Smith says. "Aside from that, I think, unfortunately, where price is concerned, U.S. manufacturers have a very difficult time competing on price in terms of wages [and other costs] that are so much higher in this country," he says.

In the case of fasteners, according to Smith, specials and non-commodity, technical items are more reliably made in this country. "But until we make products that can compete with the pricing of other products, we will be in trouble. We can't tell other countries not to make a better product, and we can't tell them not to sell them here."

That strategy did not work for the steel industry, Smith says, as they tried to force foreign steel makers to pay big tariffs but did not upgrade their manufacturing processes to save production costs.

Making matters even more difficult for distributors, customers are looking to reduce the number of suppliers on their books.

According to Industrial Distribution's 55th Annual Survey of Distributor Operations, 72 percent of distributors find that customers are reducing their supplier base by an average of 25 percent. The pressure is on to find the lines that compete on price, quality and delivery for every product distributors carry, according to the survey.

In July, Industrial Distribution surveyed Specialty Tools and Fasteners Distributors Assn. members about the pricing pressures they experienced due to imports. The result was much the same as other surveys noted here: a majority — 62 percent — had pressure on their sales due to import pricing.

Among the details noted by distributors were statements that many will begin to buy foreign products, while others will try to reinforce the quality of domestic products and support them with more services.

Dr. Adam Fein of Pembroke Consulting, writing in the 2001 edition of Facing the Forces of Change: Future Scenarios for Wholesale Distribution, notes that new competitors will challenge traditional distributors for supply chain market share. He agrees that large customers will reduce their local sourcing by reducing the number of suppliers they will use.

Consolidation forces smaller companies to fight price battles with companies who purchase globally and in huge quantities.

Scott Camp, product development and procurement manager for Fastenal, Inc., of Winona, Minn., says his company has developed many global sources for specific products, especially fasteners, to fill the needs of customers. That is not to say, he adds, that profit and market share are not part of the equation, but acquiring goods and services from every source must take quality, price and overall value into consideration, regardless of the origin.

All of those factors must be considered when selling within Fastenal's highly competitive market, he says.

"We get a lot of fasteners from Taiwan and China. Pricing from our strategic sources overseas is very competitive and the quality is quite consistent," he says. "Even after you factor in the related costs of duty and freight, there is still quite a gap between domestically manufactured items and those sourced abroad. The price is a compliment to our bottom line, obviously, but quality is definitely there, and is getting better all the time."

Fastenal, Camp notes, will procure products that are "as good or better" than those of current sources.

Camp considers the real challenge for domestic fastener makers in possible "price wars" is that quality of fasteners is rapidly becoming a non-issue. As a result, domestic manufacturers have to offer more services along with top-quality products in order to maintain their value position in the eyes of their customers. Quantity pricing of goods from overseas remains better than domestic quantity pricing, he adds.

"From a purchasing perspective, the buyers' confidence and acceptance [of foreign products] continues to increase because of better quality and general market trends. Global sourcing is a very big part of our strategy because it does not look only at cost but at the rising quality and availability of Far Eastern products. In addition to cost saving opportunities, we have also been impressed over the last several years at the amount of innovations that are coming from overseas manufacturers. Suppliers in this country are going to have to look seriously at these realities and plan accordingly to stay competitive," Camp says.

Fastenal has some customers that want only domestic products, like government buying groups, but they are dwindling, he says, and his company is seeing greater acceptance of product alternatives than ever before.

According to Camp, manufacturers in the United States are entering joint ventures with offshore manufacturers of tools, fasteners and machinery to produce items per the domestic manufacturer's processes and specifications. The idea is not new, Camp notes, but has become a necessity in recent years in order to compete.

"Companies open a foreign plant without closing the domestic one. Now, it's true they close plants to open offshore in some cases but that's for largely different reasons than joint ventures. Companies are doing so to meet prices while still promoting their specific brand," Camp says.

Branding remains very important to customers.

"There are some very strong brands ... in our marketplace, but not all are manufactured domestically. These joint ventures will continue to develop, as will the trend toward moving manufacturing offshore, as a result of customer demand," he says.

Along with better prices and availability, manufacturers must offer more support, more flexible terms and work harder to build demand at the end-user level with more salespeople on the street and more joint calls. While those efforts are true for all suppliers, those factors, Camp says, are all the more important for domestic makers who have lots of foreign competition.