The tenuous manufacturer-distributor relationship has always had its ups and downs. But the relationship between the two supply chain partners has worsened significantly in the last five years, according to INDUSTRIAL DISTRIBUTION's 57th Annual Survey of Distributor Operations.

In this extensive survey of nearly 800 distributors, 63 percent of the respondents said suppliers' loyalty to distributors had ''worsened somewhat or significantly.'' Only 20 percent of the respondents said the relationship had improved.

And when distributors were asked about their loyalty to manufacturers, 47 percent said it had worsened.

The news didn't get any better when distributors were asked how many of their manufacturers could be considered true partners. Sixty-three percent said they considered less than five of their key manufacturers true partners. That number especially stood out when many respondents said they represent more than 100 manufacturers.

The distributors defined a true partner as a manufacturer who authorizes a limited number of distributors in a given market, makes reasonable purchase levels to allow distributors to get discounts, assists in joint sales calls, provides new product training, and works to develop joint marketing plans.

The news doesn't surprise Mark Dancer, vice president of Pembroke Consulting, a company that studies the distribution channel. Dancer said the economic downturn ''has exacerbated the friction that has always been in place. Distributors equate partnership with protection of their territories.''

He added that it was particularly significant that distributors consider such a small percentage of their suppliers ''true partners.''

Dancer said the best way for both groups to work together is to focus on what's best for the customer (not necessarily their own business), examine ways to improve service levels, and take costs out of the supply chain. He said distributors and manufacturers need to find common ground and determine exactly what benefits can be gained by working to improve operational efficiencies, such as integrating systems and exchanging information across the channel.

In addition to the difficulties in the manufacturer-distributor relationship, distributors also were faced with a number of other problems last year. The economic downturn continued to wreak havoc for distributors, as well as for other small businesses. Forty-one percent of the distributors who responded to the survey reported a sales decrease.

''OEM and MRO sales were so slow we faced layoffs of key personnel in all departments. This is the worst business volume I've seen in 27 years,'' one distributor said.

Companies instituted many steps to cope with the downturn. Distributors froze salaries, reduced travel, and eliminated or reduced 401Ks. Twenty percent ordered layoffs, 12 percent ordered pay cuts, while 5 percent furloughed workers. But as bad as conditions were last year, it couldn't rival 2001, which was a 'disaster,' in the words of several respondents.

On the plus side, 31 percent of the respondents reported an increase in sales. Why the increase?

''Because, for us, 2001 was such a terrible year,'' one distributor said. Other distributors said increased sales came from diversifying their product lines, focusing on profitable customers, better sales efforts and new sales personnel.

''We hustled a lot more than we had been and, frankly, were more aggressive than our competition,'' another distributor said.

Still another said that his company had developed new accounts in new market segments.

''Frankly, we worked a lot smarter,'' the distributor said.

A major problem in 2002 was the tremendous surge in health care costs, a trend that continues. Eighty-two percent of distributors reported an increase in health costs. Nearly half of the respondents said the increase ranged from 11 to 20 percent. Another 23 percent said their costs had soared from 21 to 30 percent.

Distributors took a number of steps to control those rising premiums. Thirty-seven percent of the distributors said they increased their employees' share of contribution, 28 percent increased deductibles, while another 22 percent reduced coverage.

Some distributors and manufacturers say the increase in health costs forced them to cut back on hiring. The statistics speak for themselves: the nation's smallest firms pay higher premiums than any other size group, about $30 more per month than other firms. Only 55 percent of companies with three to nine workers offered health benefits in 2002, down from 58 percent in 2001.

The news isn't great for 2003, either. The Wall Street Journal recently reported that the Washington Business Group, which represents nearly 200 major employers from across the country, released a study showing that 80 percent of employers planned to increase co-payments or cost sharing this year. In another recent study, the group said that 57 percent of employers plan to increase cost sharing for 2004.

In 2002, distributors were faced with the loss of manufacturing plants as many companies in the United States opted to move overseas, particularly to China. Forty-four percent of our respondents said they were affected by the decision of some manufacturers to move out of the country. In fact, nearly half of those interviewed for the survey said they lost up to 10 percent of their sales because of the overseas moves.

''Too many of our customers are leaving,'' lamented one distributor.

''Manufacturers going to China has created a very ''spooky'' atmosphere,'' another distributor said, noting that whole industries are vanishing in the United States.

There were other difficulties for distributors. Many are, essentially, acting as bankers for their slow-paying customers. In fact, 46 percent of the distributors said it takes 40 to 50 days for customers to pay their invoices. Another 17 percent said their receivables had reached up to 60 days. The median was 45 days. So what are distributors doing to reduce those days of outstanding bills? They're taking to the phones.

''We're calling, calling and calling our customers,'' one distributor said.

Others are dropping slow-paying accounts, taking credit card payments, tracking receivables weekly and pre-screening accounts. Still others say they are bringing their salespeople into the collection process, or are assigning individuals on their staffs to focus on late payers.

Distributors realize they need to provide value-added services, as well. The problem is that they don't know how to get paid for such services, and not many believe customers are willing to pay for them. Some did say, however, that they are making headway on fee-based services, which include: setup/installation, fabrication, employee training, technical/ product support and faster delivery.

One of the surprising results was the reaction we received when we asked respondents if they agree or disagree with the following statement: Industrial distribution is a commodity. Little innovation is possible. Seventy-one percent said they either strongly disagreed or disagreed with that premise. But 13 percent said they agreed.

By a wide margin, distributors said they could grow their business by focusing on value-added services. However, 65 percent said that even if they do add more value, customers would resist paying for it. Eighty-two percent of the distributors said they must find new opportunities to deliver value-added services in order to survive.

Nearly 70 percent of this year's respondents say they have Web sites. Most of those who do not have sites are distributors with less than $5 million in annual sales. Nearly half of the distributors that do have sites sell products from them. Sales via the Internet are growing, and distributors expect that trend to continue.

While customer sales sent via the Internet are increasing, so are distributor purchases of industrial supplies. About 45 percent of the distributors said they used the Internet in 2002 to order industrial supplies.

A large number of distributors have worked with suppliers and/or customers on e-commerce initiatives in the past 12 months. Many distributors said they have linked their Web sites to their manufacturers.

''Customers can connect to our business system over the Internet and place orders. We are constantly ''tweaking'' this software,'' one distributor reported.

Other distributors say they are involved in discussions with third parties to transact business, while others participate with manufacturers on an online storefront.

Reverse auctions (online bidding to get contracts to supply products) have not caught on with distributors. Only 18 percent of the respondents said they had participated in such auctions, and nearly all of them said the experience was unfavorable. Several distributors interviewed for this article said they would not participate in such auctions, since it leads to decreased margins, and is unprofitable for distributors.

''Reverse auctions are an anathema to distributors and hopefully will pass away,'' said a distributor from the Midwest.

Distributors offered mixed responses about integrated supply. The percentage of distributors with integrated supply arrangements has not grown compared to last year, according to the study. Only 24 percent of the distributors have integrated supply arrangements with customers. Some openly question whether integrated supply is a fad or is here to stay.

''Several of our customers have dropped integrated supply contracts over the past two years,'' one distributor said.

About half of the respondents, mostly smaller distributors, said they are involved as second-tier distributors selling products through integrators.

Despite the lack of growth in integrated supply, most distributors said they view it as a threat to their businesses.

And maybe they should. Frank Lynn & Associates in Chicago, a company that has been studying integrated supply for many years, says that revenues for large integrators are growing at the rate of 8 percent per year. The firm predicts that there will be four or five multi-billion dollar integrated suppliers in the years ahead.

During the late 1980s and 1990s, mergers and acquisitions were top distributor concerns. Not any more. Although still a concern, this issue barely can be seen on the radar screen.

The study also shows that distributors are buying more products from master distributors. In addition, there is a large amount of ''churn'' in the industry and distributors are adding more products and brands to complement their existing lines.

And despite the growth of the mega-chains, distribution firms are still largely family owned. Eighty-three percent of the respondents to this year's survey are family-owned enterprises, up several points from last year's study. And 32 percent of those companies have been in business for more than 40 years.

To whom are distributors selling? Topping the list are construction accounts, followed by machine/job shops, the government, food industry and utility companies.

This is a far cry from years ago, when automotive and aerospace ruled the industrial sectors.

The survey shows that distribution is still in the midst of an unprecedented era of change. Several distributors openly questioned whether or not they could survive because of the economic uncertainty, a squeeze on margins, fewer customers and increased competitiveness.

At the same time, many distributors said they are finding new markets and using technology to increase their competitiveness. And at least one distributor remains optimistic.

''Business comes back — it always has,'' he said.

Full copies of the 57th Annual Survey may be purchased for $295. Please call Alice Yu Miller at (617) 558-4504 for more information or visit our Web site, www.inddist.com.