Business among industrial distributors is not particularly good these days. Indeed, business hasn't been very good for the past year-and-a- half or so.

In some areas of the industry, there has been some radical retrenching, as distributors completely rethink the direction of their business commitment from an entirely new perspective. For most though, it's less a matter of finding new areas of product and/or volume opportunities than determining the way they want to run their businesses, with emphasis placed on the kinds of business being pursued.

Should they place more or less emphasis on pursuing existing business, on gaining new business based on volume, or more emphasis on individual transaction possibilities? The quiet questioning taking place among many distributors roughly translates like this: "If we can't make money in a particular market, is there a good reason for staying in that market?"

Dr. Michael E. Workman, industrial distribution expert and professor emeritus at Texas A&M's Industrial Distribution program, sees a number of reasons for the less-than-enthusiastic mood that seems to be dogging many companies in the distribution field. Most companies, he points out, are closely related to each other and have relationships that tie back to the application of supply management principles in the field of industrial distribution.

A major problem, suggests Workman, is that much of the activity associated with recent applications of supply management principles to distribution has not been successful. Often, he suggests, what passes for supply chain thinking is really little more than some thinly disguised price leverage. Much of the talk about seller benefits, he suggests, is largely window dressing.

"I talked to dozens of people who were really excited in the beginning about the evolution of supply and bringing supply chain management into the distribution process," says Workman. Very often, distributors were disappointed to find that they did not see any significant cost removal at the supply side of the business. All they did see was huge amounts of cost removal at the customer side of the business.

In any case, as Workman and many in the distribution industry see it, the marketplace for distribution has become a "very difficult arena" in the past few years. In their estimation, the spread of integrated supply selling, strategic sourcing companies, reverse auction facilitators, the decline of domestic manufacturing, global access to materials, and increased costs for benefits and transportation, have put many distributors into a "narrowing position between customers and their supplier manufacturers."

Sharp edge

A deeper strain of pessimism runs through the ruminations of Larry Brandt, a principal partner of Calumet Distribution Group, which bought the steel mill distribution business of Strong Tool Co. Formerly of Bethlehem Steel, Brandt built a reputation over the years as one of the nation's foremost experts on MRO purchasing. He retired from Bethlehem in 1998 and became a founding partner of Strong Tool in 1999.

Brandt and his partners couldn't have chosen a worse time to set down roots among the integrated steel mills of northwest Indiana, Baltimore, and eastern Pennsylvania. Of the four major customers Brandt and his partners started with, three have since filed for protection under Chapter 11 of the bankruptcy laws. Still, as Brandt sees it, the problems at Strong Tool involve more than market mistiming.

The point that Brandt, Workman, and many others in distribution are making is that much of the supply management progress being touted in the distribution industry these days is coming at the expense of small, regional, and/or specialized distributors. Brandt argues that during the late 1980s and early '90s the keys to managing MRO (cutting costs) were tied to buyer-distributor partnerships, and the distributors' ability to reduce costs through their unique product/service knowledge of the marketplace.

Today, on the other hand, Brandt warns that the momentum in the industry has shifted in the direction of consolidation. Purchasing, especially, is being consolidated in a way that, while it may yield savings short term, also poses future supply problems for those companies that do not have a national presence and significant computer capability. In short, he says, the field is being reduced to a small number of regional distributors, a few well-known national super distributors, and a relatively small number of poorly funded specialty distributors.

But while Brandt's version of distribution piles a heavy weight of discomfort onto the shoulders of many distributors, it's hardly more severe than his view from the purchasing desk.

"Unfortunately," he says, "current procurement tactics will, in my opinion, reduce the options for the purchaser, and the market will end up reinventing itself into a 1970s' version of MRO sourcing—but without the sources."

Brandt also says that purchasing departments have been taking a beating as outside consultants continue to convince their corporate officers that they can provide immediate 20 to 30 percent price savings through their particular approach to strategic sourcing (which often includes use of reverse auctions).

The fundamental principles behind most of these cost-saving moves, says Brandt, appear to involve the consolidation of volumes within a buying company and/or consolidation of volumes between buying companies. The focus in all cases, he says, tends to be price and the net effect on buyers is their reduction to the status of one-time project participation and process launchers. This makes it virtually impossible for a buyer to manage a commodity or contract nationwide from a remote geographic location.

Perhaps more important, suggests Brandt, are the elements of the supply chain that don't get addressed by all the new tactics and strategies hawked by the consulting experts. That's because many companies do not identify the costs associated with supply chain internal steps. As a result, buyers are given price challenges rather than service and total value issues to weigh. Ironically, he says, with the downsizing being launched by outside consultants, there are fewer buyers to even participate in the price challenges—not to mention the launching of cost-reduction projects.

One of the great dangers in trying to give perspective to a subject as broad as industrial distribution is that exceptions often outnumber similarities. Thus, while we generally can say that the distribution business is relatively weak in such industries as capital equipment manufacturing, steel, and many MRO product lines, very strong distribution business is being recorded in product areas such as electronics, chemicals, and pharmaceuticals. In fact, in the areas just noted, distribution is turning good results in developing outsourcing business.

In any case, despite the danger of too much dependence on generalizations, there are, right now, a number of indicators that buyers with distribution/MRO responsibilities should keep under advisement. Here are nine areas purchasing/supply professionals will need to keep under observation over the next few years:

1. Much business in the distribution industry will continue at a shakeout pace. Long term, the ultimate result appears to be a handful of large national distributors in each major field. Some economists in the field see a time when the top dozen or so distributors will dominate many of the major distribution channels.
2. On the purchasing side, industrial buyers are continuing to reduce the numbers of distributors they deal with. In addition, in many large companies there has been a considerable amount of consolidation of the purchasing function. Many decentralized purchasing organizations have been folded into more centralized supply management configurations. This looks like another trend that has a long way to run.
3. Meanwhile, integrated supply, spearheaded by a number of major national distributors, major regionals, and manufacturers continues to grow. Many groupings are combining into consortia offering packages for a number of products. Especially popular in this area are packages of MRO products.
4. Contract selling also threatens to become a major competitive force—provided industrial distributors can show customers good numbers on cost of acquisition as well as product prices.
5. Despite greater insistence by buyers and sellers on the need to stress value over price, real value-added buying and selling appears to be on soggy ground. More than a few participants in our latest distribution survey suggest that value added—while still alive—is struggling for air. Heavy emphasis on big-ticket cost savings appears to be sapping interest in value added.
6. Traditional mark-up pricing also continues to be under siege as the larger super distributors use their quantity buying clout as a sales weapon.
7. Major focus by major companies on use of reverse auctions and other cost-cutting concepts appears to be having a negative effect on the concept of value-added selling. There is some evidence that heavy focus on price is reducing the quality of service being provided by distributors.
8. Interest of distributors in contract manufacturing continues to grow, especially in the electronics, chemicals, pharmaceuticals, and assorted high-tech fields. Traditional manufacturing, however, has remained relatively slow in investigating CM.
9. One area that has been less than promising for many distributors has been the continued decline of domestic manufacturing and the opening up by U.S. manufacturers of access to the global marketplace.

How good is performance?

Performance is usually one area where buyers expect to see lower business volume accompanied by better performance numbers. This year's numbers, however, seem to be bucking the trend—at least in the area of inventories.

Efforts aimed at satisfying customer calls for lower pricing appear to be resulting in reduced amounts of inventory being held by distributors. Until recently, severity of the inventory situation tended to be masked by the fact that many distributors got out ahead of the curve when they installed e-business tools to clean up paperwork bottlenecks in the ordering process.

Nevertheless, a growing number of buyers are complaining that distributors appear to be cutting back on the amount of inventory they carry. Of those purchasing executives taking part in Purchasing magazine's latest survey, for instance, 65.9 percent say they have experienced cutbacks. Many, like Timken's John Fair, have suffered through both longer leadtimes and stockouts. John McGuirk, purchasing manager at Clarage Fan Co., Birmingham, Ala., for instance, reports both stockouts and longer leadtimes as the result of inventory cutbacks.

In general terms, though, performance has been relatively good. While only 3.4 percent of respondents score distributor performance at the excellent level (versus 13.5 percent in 2002), this year's "good" ratings were up over last year by 73.3 percent to 53.1 percent. Performance by distributors vs. manufacturers, meanwhile, rose by 34.6 percent.

Many survey participants asked to name the biggest problems they are facing in dealing with distributors responded with a wide range of requests and suggestions. Sherman Amstrutz, vice president purchasing, at MCA in Massillon, Ohio, complains about lack of follow-up procedures when computers fail to register inventory figures correctly. Many, like Paul Greenwood, purchasing manager at Spectrum Aquatics, Missoula, Mont., express a measure of skepticism over how aggressive distributors are when it gets down to dealing with their orders.

A fairly large number of respondents agree with John A. Coulter, purchasing manager, Barton Mines, North Creek, N.Y., who stresses the need for improved training of sales reps. Gerald Lauer of Lake Erie Press Systems, went further in noting that reduced inventories and lack of knowledgeable sales staffs are quickly turning many distributor sales staffs into "order takers"—without knowledge or background.

Finally, respondents were asked to tell us how industrial distributors could make buyers' lives easier. Many suggestions were surprisingly simple. For example, Thomas Bohm, North American MRO buyer for Thyssenkrupp Bilstein, says the most highly prized contribution a customer could make to Thyssenkrupp would be to "provide solutions based on their thoughtful observations." Bohm says this kind of buyer-seller interplay is especially useful when digging for answers to tough cost-cutting problems. Thomas B. McSwain, purchasing manager for Steelworks Corp., Denver, was equally direct, "Give us consistent quality and reliable shipping promises and life will definitely be better."