Newton, Mass.— The distribution industry is changing in important ways, but such changes bring new opportunities. That was the message from Adam Fein of Pembroke Consulting as he previewed the results of the latest Facing the Forces of Change report at the National Assn. of Wholesaler-Distributors Executive Summit in January.

Fein's company researched and wrote Facing the Forces of Change: The Road to Opportunity for NAW and its Distribution Research & Education Foundation. The report, which is the seventh in the NAW series, was released this month. It provides an economic outlook on the distribution industry, and focuses on four key "forces" shaping the business: customer self-service, strategic sourcing, fee-based services and pricing, and logistics and fulfillment.

Fein says the report is comprehensive and usable, with information gleaned from interviews with more than 1,000 distributor and 400 manufacturer executives.

Among the highlights of the report are analyses of the forces shaping distribution among three main customer segments: contractors, industrial buyers and retailers. This is the first time the report has contained a separate chapter on industrial buyers, Fein said. In addition, The Road to Opportunity includes a new chapter on manufacturers, explaining the significance of the report to their business.

"This is the best of the seven books I've done for NAW," Fein said in a separate interview. "We wrote this report to give wholesale distributors a launching pad for strategic thinking and to generate new ideas about how to remain competitive and profitable in the future."

The report examines wholesale distribution on a broad scale. Consequently, the forces shaping the industry have already penetrated some segments and are still to come in others, Fein explained. Nonetheless, it offers a glimpse at what is happening in the industry and provides food for thought in the form of discussion questions for companies to use in figuring out what each trend means to them.

The report predicts a solid year ahead for the overall economy and for distribution. A return to information technology spending by U.S. companies is a driver of that growth. Distributors are a part of the trend, Fein said, noting that wholesale distribution accounts for 20 percent of IT spending in the United States. In addition, he said wholesale distribution will grow by 5.6 percent this year—faster than the U.S. economy will grow. Revealing some other general findings from the report, Fein said wholesale distribution remains an important part of the U.S. economy, representing 7 percent of the country's private Gross Domestic Product.

Fein offered insight into the four forces shaping the industry:

Customer Self-Service: As customers begin to do more for themselves—researching products online and using self-service ordering methods, for example—distributors will follow suit, adding online technologies to make it easier for customers to do business with them. Consequently, Fein said the customer will question the role and value of the distributor sales force going forward. As a result, sales positions in the wholesale distribution industry are predicted to grow by just 10 percent in the next six years; in contrast, IT positions are expected to grow by 40 percent in that time.

Strategic Sourcing: The report suggests that the trend toward centralized buying will continue. This will translate into a need for fewer feet on the street, as corporate purchasing takes over. The research suggests that large distributors—those with more than $1 billion in sales—should expect more than half of their revenues to come from contractual relationships over the next few years.

Fee-Based Services: "We try to cut through all the hype and say what's really going on," Fein said, adding that this issue is about "how a distributor can help their customer in measurable, quantifiable ways." The research suggests that fee-based services and fee-for-service pricing will grow sharply, though challenges to the strategy remain. For example, Fein said 90 percent of the distributors he interviewed plan to offer training programs to customers by 2008, and most plan to charge a fee for that training. The problem is, distributors traditionally include training with the product price, making a new fee for this service a hard sell. It's more important, Fein said, to develop new services—such as kitting and packaging of products—in a fee-based model.

Logistics and Fulfillment: Logistics companies pose a threat to distributors, Fein said, adding that integrated supply has paved the way for this trend. Essentially, alternative channels are attractive to suppliers and customers as they look to reduce costs and streamline operations. He said large distributors have the most to fear from this trend because they tend to compete on the quality of their logistics. However, he points out that customers will look to other sources for product knowledge and support—an area where traditional distributors will retain an advantage.

The chapter analyzing industrial buyers is of particular interest to industrial distributors, Fein added. Key messages from that chapter include:

• The long-term loss of a domestic manufacturing base will hit industrial distribution hard.
• Industrial buyers will become increasingly sophisticated and constantly question the value of distribution.
• Industrial distributors will struggle under tightening margins as undifferentiated suppliers of undervalued services in a declining market.
• Industrial distributors still have the opportunity to offer meaningful services to the surviving customers.

In addition to the findings, the report outlines strategies to help distribution executives cope with the challenges ahead, according to Fein. Facing the Forces of Change: The Road to Opportunity is available online at www.nawpubs.org. To learn more about the report, go to Online Features for an overview written by Fein.