Part 1

Part 2

In the third part of this three-part article on the state of industrial distribution in 2004, former editor in chief of Purchasing magazine James Morgan provides insights into the future of industrial distribution.

According to a report titled, Facing the Forces of Change: The Road to Opportunity, industrial distribution appears to be getting ready for some major changes.

The report, a prodigious piece of research released by the National Assn. of Wholesaler-Distributors and its Distribution Research and Education Foundation, is a good news/bad news document on the future of distribution in America. And although it covers consumer goods as well as industrial, the report is comprehensive enough to provide significant insights into the world of industrial distribution and what likely lies ahead.

According to Adam J. Fein, president of Pembroke Consulting in Philadelphia, and head of the research team that conducted the study, the traditional ways distributors make money and grow are about to be rewritten. They will be achieved through a "combination of external forces of change and strategic responses."

Buyers, Fein says, will be more confrontational and will demand (and get) real-time service and instant information from distributors (or manufacturers). In many cases, distribution's perceived value of information will be significantly challenged and eroded as buyers simply refuse to pay the costs of distributors' outside sales forces. The NAW-DREF team report indicates that it also expects to see buyers increasingly relying on sophisticated sourcing initiatives and using new technology tools such as online reverse auctions.

Logistics companies, according to the report, also are expected to play a more important role in distribution as they go head-to-head with distributors for control of the supply chain. In addition, the report appears to see logistics firms as alternatives to traditional distribution modes. In fact, the report notes that alternative channels are now providing options and service levels that differ radically from those provided by traditional distributors. Over time, this will contribute to a general chipping away at distributors' longstanding share of channel sales.

Suppliers to the distribution industry, says Fein, also will play an important role in distribution's change, as they begin shifting away from open distribution policies and move to more selective strategies in response to greater use of national contracts and more aggressive contract management.

As orders move online, notes Fein, manufacturers will be able to better evaluate the cost effectiveness of their distribution channels. Manufacturers under product pricing pressure from both imports and domestic competition have identified services as an important weapon in distribution's fight for market share. Most plan to build their own design and research activities and offer fee-based services directly to end users—with or without their distributors.

As Fein sees it, there are many strategies that distributors of all stripes probably need to adopt. Of these, he appears to pay special attention to four specific strategies that buyers, distributors, manufacturing suppliers, and end users should watch carefully for clues to the future of distribution.

Customer self-service. Buyers will need to perform more of the pre-sales and transactional activity that typically has been handled by distributors, such as information gathering, price/availability queries, technical support, and order placement.

Strategic sourcing. Distributors will need to follow a three-step process for reducing purchasing costs by limiting the ability of local buyers to choose brand and supplier. Sourcing initiatives will aim at countering the field-level sales and marketing effort of distributor sales reps trying to influence local buying decisions. According to Fein, online reverse auctions are here to stay and their use will continue to grow.

Fee-based services and pricing. Distributors need to charge fees separate from product costs. This strategy promises profitability, but can be risky as well if distribution fails to convince buyers to pay. As Fein sees it, "customers will accept fees, but slowly."

Leveraging technology. Warehouse infrastructure and logistics companies need to offer unbundled supply chain solutions to distributors and customers. Distributors will need to be competitive and treat logistics companies as viable alternatives to distribution.