"Manufacturing is dying out, particularly in the Northeast, due in large part to job loss to China," one distributor said, echoing the concerns of several distributors from that region of the country.

China may not be the final destination for many U.S. manufacturers. Some are looking to Vietnam or Africa for future growth and lower labor costs.

Government action needed

What should the government do to minimize the move of manufacturers to China?

Seventy-three percent of the respondents told us that tax incentives are necessary to promote investment in the industrial marketplace. In addition, respondents said the United States should impose tariffs on imports from China, and that the government should take other steps such as reducing corporate taxes and health care costs, and permitting more tax benefits for investing in plants and equipment. The net result would allow American manufacturers to better compete in a global economy, according to our respondents.

Some others also questioned whether unions are driving up salary costs and benefits, making it more difficult for American companies to compete with their foreign counterparts. At the same time, distributors voiced concern over a lack of skilled workers, such as tool and die makers in the United States, and said that the aging workforce makes it even more difficult for U.S. plants to compete internationally.

While China was listed as a top concern, distributors also pointed to other issues that are affecting their ability to compete. Steel prices, surcharges, shortages, and scrap metal prices are creating havoc in the channel, according to respondents.

"Scrap metal shortages are dramatic-ally increasing material costs and decreasing product availability," said one Midwest distributor.

A continuing problem—and also one that's not getting better—is soaring health care costs.

Of the 85 percent who said their health costs grew in 2003, 76 percent said costs rose up to 20 percent, coming on top of a double-digit increase in 2002. Seventeen percent said their costs had increased between 20 and 30 percent.

Faced with those staggering costs, 45 percent of the distributors said they increased their employees' share of premiums; 39 percent increased deductibles; 29 percent found a new insurance provider; and 24 percent reduced coverage. Four percent eliminated health insurance coverage. All those numbers are substantially higher than in last year's survey. Meanwhile, some distributors said they are looking to flex-plans or, in some cases, becoming self-insured.

"Health care costs are huge. This is probably one of the reasons so many companies have moved offshore," said one distributor. And it isn't only health care costs that are causing distributors to have sleepless nights. Workmen's compensation costs are also skyrocketing, distributors said, particularly in states like California.

Accounting for receivables

It continues to take a long time for distributors to be paid for the products and services they provide. Seventy-six percent of distributors' customers take up to 50 days to pay their invoices. About 6 percent take more than 60 days. The average was 46 days, up one day from last year's survey.

To improve their collections procedures, 71 percent now accept credit cards, 54 percent track receivables weekly, and 48 percent pre-screen accounts.

A number of distributors are bringing their salespeople into the collection process, while some offer cash discounts for early payers, and still others make personal phone calls and write letters to customers after 15 days of non-payment.

Some distributors are taking even more drastic steps.

"After 60 days, we just cut them off," said one distributor. "We can't act as a bank for our customers, particularly when we have to pay our suppliers in less than 30 days."

Despite these problems, distributors remain optimistic about this year. More than 80 percent of respondents expect to see a sales increase of up to 20 percent. But even with this optimistic outlook, many are cautious. Rising oil prices and the costs of the war in Iraq are forcing some distributors to take a second look at their sales projections for the remainder of the year.

This also may be the year that acquisition activity picks up. Nearly a quarter of the respondents said they are actively seeking to acquire another distributorship, up from 16 percent in 2003. And 37 percent said they would welcome an acquisition offer, about the same percentage as last year. Thirty-eight percent of the respondents predicted that there would be more mergers and acquisitions this year than in 2003.

Distributors are serious about growing their businesses this year through a variety of methods. They are automating their warehouses, focusing on new products and investing in software to increase productivity gains and operating efficiencies.

"We intend to be much more aggressive in our sales efforts this year," one Southern distributor said, noting that he hoped to grow his business by increasing sales to existing customers.

Most distributors favor the same approach. More than 90 percent said sales growth will come from existing customers, and 78 percent said they intend to find new markets and customers in order to fuel growth.

In addition, respondents said growth would come from sales over the Internet (33 percent), broadening their product offerings (41 percent), expanding geographically (32 percent) or hiring more technically trained salespeople (28 percent) in order to grow.

Finding those salespeople won't be easy. Distributors said that finding technically astute people who also have selling skills is one of their major difficulties today. The end result: a lack of adequate help is keeping distributors from growing their businesses.

"We just can't find these people, even in today's economy," one distributor lamented.

Reverse auctions

Distributors made one point perfectly clear: They don't like reverse auctions. Only 2 percent said they intend to grow their businesses by participating in these auctions.

Despite some industry consultants stressing that this will become an important issue in the years ahead, it certainly doesn't have enthusiastic support from distributors.

The number of distributors who participated in reverse auctions was up sharply last year, however. A total of 32 percent of distributors had participated in such auctions, up from 18 percent in 2003. But a whopping 82 percent of them said the experience was not favorable.

"This just isn't going to succeed," one distributor told us.

Those figures are in line what we've observed over the past few months. During a recent sales seminar sponsored by INDUSTRIAL DISTRIBUTION, we asked attendees how many had participated in reverse auctions. Only three distributors out of 50 raised their hands. And all of them said they wouldn't participate in such an event again.

Distributors are continuing to forge ahead with the sale of services to help their bottom line. The average respondent generates 12 percent of his sales through services. Although this number is down from 19 percent in 2002 and 22 percent in 2001, more distributors are selling services and are an important part of the sales growth strategy.

Distributors also report they are unbundling services and are receiving fees for fabrication, set/up installation, deliveries, employee training and on-site storeroom and tool crib management.

About 32 percent of the distributors said they receive up to 5 percent of their sales from such services. Thirteen percent said sales of services were between 6 and 10 percent of sales, and, most importantly, those numbers are expected to substantially increase over the next three years.

Technology & the Internet

Distributors indicate they expect to invest more in technology this year. A total of 96 percent of the respondents expect to keep the same levels of spending on technology or increase spending this year. Only 4 percent expect to cut back technology spending.

More than half of the respondents indicated they already have or will invest in a warehouse management system in the next two to three years. Another 70 percent have either purchased customer relationship management software or will do so in the next few years, and 90 percent have purchased or will purchase wireless e-mail or Internet access equipment.

One technology item that is not on distribution's hit list is radio frequency identification (RFID). Only 32 percent of respondents have bought or expect to buy such equipment in the next two to three years, and 68 percent said they have no plans to invest in such equipment. Some industry observers expected this number to be higher because many large corporations are requiring their suppliers to have such tags available in the next year or two.

The Internet is expected to play an increasingly important role for distributors in 2004 and beyond. More than half of the respondents said that sales over the Internet comprised between 1 and 10 percent of their gross sales. They said they expect to sell more and buy more over the Internet in the next year as part of their growth strategy.

"We're looking at the Internet to be responsible for a large portion of our sales," one distributor reported.

Relationships are improving

The distributor-manufacturer relationship shows some slight improvement, according to the study. Only 29 percent of the respondents said they were now worried that their suppliers would try to sell direct to some of their biggest customers. Additionally, 73 percent of distributors said that suppliers are creating new programs to increase the level of partnership. Distributors are still leery of sharing point of sales information with their manufacturers, however.

In analyzing this year's results, Mark Dancer, vice president of Pembroke Consulting, pointed out that distributors believe their most important suppliers are actively working to improve the level of their partnership. He also noted that manufacturers are reducing the number of distributors they sell through.

"Innovative manufacturers want to increase the level of partnership, but with a smaller number of distributors that are willing to fully engage as true partners," he said.

The survey also showed that more distributors are members of a buying/marketing group today than in the past. In 2003, only 18 percent of respondents said they were members of such groups. In our latest survey, 26 percent identified themselves as members. And 32 percent said the importance and effectiveness of buying/marketing groups would increase in the future, 53 percent said it would remain the same, and 15 percent said it would decrease.

While consolidation has picked up, 78 percent of the respondents identified themselves as being employed in a family-owned firm. More than half of the respondents said their companies had been in business for more than 50 years, and 9 percent reported that their businesses had been founded more than 80 years ago.

This is the 58th consecutive year that INDUSTRIAL DISTRIBUTION has produced this report. If you would like a full copy of the study, which is more than 120 pages long and includes an analysis by Mark Dancer, vice president of Pembroke Consulting, please contact Alice Yu Miller at (617) 558-4504, or visit our Web site at www.inddist.com.

Note: INDUSTRIAL DISTRIBUTION will release its 58th Annual Survey of Distributor Operations in September. In addition to the preview above, here is an online poll related to some of the issues raised in the survey. Please let us hear your opinions. Click here for a survey.

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