This three-part story, written by former Purchasing magazine editor in chief Jim Morgan, addresses the relationships that are changing the distribution business, how purchasers view the performance of their distributors, and how those running the business will meet distribution's future needs. Part 1 focuses on the changing relationship between purchasers, manufacturers and distributors.

Many buyers an sellers in the distribution business have come to view the problems in the distribution industry in terms of a number of relationships that have gone wrong, or are in need of adjustment.

Dr. Michael E. Workman, industrial distribution expert and Professor Emeritus at Texas A&M's Industrial Distribution program, links a number of relationship breakdowns to understanding many of the problems being experienced by industrial distributors.

One of the least understood of these relationships, says Workman, has been the distributor's kinship with its manufacturer suppliers. Traditionally, this was a closer connection than even that of the distributor to the end user. The larger the percentage of a company's product that a distributor took to market, the closer the kinship; and the closer the kinship between the distributor and its supplier, the more likely a volatile buyer/distributor relationship.

In recent years, suggests Workman, this delicate balance has been changing. Communication between manufacturers and end users has been on the increase and this, in turn, has led to a drastic change of the distributor's role.

"In many cases, the change has reached a point where the distributor's real customer has become its supplier," he says.

Typically, in this change of roles, the manufacturer supplier has made a contract or a deal with the end user and then contracted with a distributor to perform the details. In recent years, the distributor doesn't even do distribution, but is merely contract labor for the manufacturer.

Another factor in the changing relationship is the place of exclusive distribution. Over the years, manufacturers' use of distribution has been waving back and forth—from putting the distributor totally in charge of selling product, to downplaying exclusive distribution agreements, to an approach featuring a limited use of exclusive agreements. Much of the renewed interest in exclusive distribution appears to be among manufacturers. In simple terms, many are picking and choosing among distribution modes in order to get closer to the sale.

Often, these actions entail deals in which distributors provide the functions of distribution, but not the selling of the product. They are using exclusive deals that don't revolve around product exclusivity so much as functional exclusivity. Indeed, currently there is much uneasiness among industrial distributors that manufacturers are getting ready to take more of their distribution business directly to their ultimate customers.

Are these concerns real? The answer among economists in the field is yes, but don't expect the functions of industrial distribution to disappear. Someone will have to do them, and many manufacturers who use distributors to sell and service their products readily admit that they are not good at selling product. In such cases, the distribution function will probably not change that much.

On the other hand, some manufac-turers are actively planning to take back many of those marketing and selling functions performed by their distributors. Many plan to create brand preferences and demand, hire distributors to respond and react to that demand, and generally promote a new era that doesn't revolve so much around the buy-hold-sell inventory mentality so much as it does a full supply chain sourcing tilt.

In this new model, the manufacturer helps to sell, the distributor helps the customer with sourcing problems, and shipping and receiving helps with logistics related to the problem.

While it may be comforting to know that the larger, more aggressive distributor still has a place in the business, what about the small, medium-sized, and highly specialized distributorships? The answer to that concern is a difficult one, and also based on relationships. In fact, much of the distribution business is still based on personal relationships and, for many small distributors, this could be bad news.

Many heads of small distribution firms say that they achieve higher levels of success when their business strategies move from the personal relationships of small businesses to the more corporate interactions with larger companies. With some customers though, this strategy shift doesn't happen very often or work out well. But for those other distributors, notes Workman, such a move signals the potential for greater sales-driven business.

Perhaps what is changing the fastest is the industry's approach to pricing on the part of distributors and their manufacturer-suppliers. There is perceptible movement from fixed pricing to a cost-plus mode. Under this mode, each additional service tracks directly into the cost. Price of product is really not a factor. What counts are things such as the number of services performed, the number of transactions required, level of activity in the market, even the level of direct competition.

In the past 12 to 24 months, Workman says the industry has come through a period of performance enhancement where it was forced to take cost out of the business. Now, he says, the industry has re-entered a period of opportunity enhancement where it's creating new business or "revenue generation." Distributors are looking for new customers, and new ways to serve old customers. From a production standpoint, buyers can expect to see more innovation offered to customers and potential customers. Many distributors suggest that there will be more innovation moving to the market than has been visible in the past five to six years.

Today, says one industry spokesman, users have more options to get product than was ever possible in the past. Manufacturers are in the process of presenting as many of those options as possible in hopes that the end user will bite on one or a few of those offerings. That's how many economists see parallel channels developing—whether it's e-commerce, catalog business, telephone-based business, local-owned inventory business, use of reps, or use of non-competing distribution. In fact, the customer has so many options today that the product becomes less of a factor and the availability of that product becomes the primary factor.

Global distributor business competition also has become a hot issue over the past several years. The problems began when many large distributors went offshore for products, and marketed them under their own private labels. Predictably, this new relationship began causing some extreme headaches when the offshore product line began to be competitive with their locally produced product lines. In some cases, the private label goods began diluting their own market share. To date, private branding has only really been effective among the very large distributors; and smaller companies can't do much about it.

Global sales, on the other hand, are becoming a growing source of business for large distributors. Early quality problems appear to be gradually disappearing. Especially noteworthy quality improvements have been achieved for parts from China involving metal removal, metalworking and electronic parts and components.

Perhaps the biggest global relationship problem today is the pipeline. To assure on-time delivery of goods produced offshore, buyers often still need six months' delivery notice.

Watch for Part 2 of this series in a future issue of INDUSTRIAL DISTRIBUTION. James Morgan is former editor in chief of PURCHASING magazine.