Charts from Purchasing

The industrial distribution industry appears to be fashioning itself into a force that is much more centralized, controlled and vital. But so far, that new vitality has looked more like an unanswered wish list than a reality.

Major restructuring, which began in the late 1990s, is still not producing the efficiencies promised by its proponents, when restructuring was first broached. Therein is the gist of this year's Purchasing magazine report on the distribution industry.

More important, say industry observers, is that many of the weaknesses cited in Purchasing 's report as internal are actually homegrown weaknesses beginning to take on global competitive significance.

Tools, such as integrated cost reduction, creative customer analysis, consolidation of the purchasing function, value analysis, and on-time delivery techniques, appear to be given more lip service than actual use. In addition, many conventional tools such as reverse auctions and data-mining techniques are often under-applied or ignored totally.

To be sure, many distribution executives deny such charges vociferously, and point out how hard they are working to improve service and efficiency in the distribution channel. But for many individual companies, the promise still exceeds any payoffs.

Buyers are still complaining about 'high costs and bad service,' while a fair number of distributors are complaining that they are not experiencing adequate payoff for past investments in improved systems equipment and software.

Long-term, the industrial distribution industry characterizes its problems in terms of shakeout. Distributors say the industry has trimmed down to fighting weight proportions and is in the process of building new infrastructure around three general sets of components:

• A handful of large national distributors perhaps joined together with large international distributors. These are the super distributors of the 1990s who specialize in taking the costs out of ordering.
• A grouping of large and mid-size regional distributors offering a higher level of service and transportation.
• A large grouping of commodity specialists offering technical help and service and inventory management.

These and other movements toward radical structure change came about in reaction to industrial moves that are still being made, especially among U.S. firms starting to feel the full heat of global competition. Many firms are only now being pressed from above to cut costs, improve pricing on purchased goods and services, and maximize and generally improve corporate and global competitiveness.

In many companies, the target was shifted from traditional marketplace issues to complex ones not generally thought of as purchasing related, per se. People with specialized insights into operations, finance, and design engineering have been recruited to sharpen purchasing's focus on cost reduction and, in many cases, distributors have been brought in to suggest new approaches to consolidation.

Unfortunately, in many companies, this free-wheeling approach to change has lost something in translation. Change has become a goal rather than a means for achieving a goal in many firms.

A prime example of this thinking shows up in buyer-seller treatment of consolidation. Early experiments with consolidation of functions and processes resulted in impressive cost reductions—internally and externally.

As new attention was extended to disciplines such as lean manufacturing and cost-reduction improvement processes, distributors and their customers (purchasing executives) were extended new corporate responsibilities.

For the first couple of years after its introduction to the distribution industry, consolidation was allowed to run rampant, notes Michael Workman, industrial distribution expert and professor emeritus at Texas A&M's industrial distribution program.

As he sees it, few of the companies sporting national distribution programs are actually able to provide local service when called for on a national contract. Indeed, says Workman, relatively few large distributors are able to provide dependable local service even on a local level.

Today, says Workman and other industry experts, the distribution industry is starting to turn for the better, but there is still ample evidence that most distributors still have much to do to become serious business competitors.

He notes, for instance, that over the past four or five years, there have been only three or four distributors nationwide that can claim world-class stature for their distribution programs. Particularly in need of improvement, he suggests, are advancements in developing an understanding of customer wants—especially in MRO areas.

What does the future hold for the nation's industrial distributors? Most of the industry experts contacted by Purchasing magazine are still not convinced that the large national distributors have solved their problems. Several, in fact, were openly skeptical about the performance of many of the national distributors.

On the other hand, many industry observers suggest that the regionals and the small distribution specialists are coping and competing more effectively than anyone expected.

Industry consultants expect the regionals to continue competing effectively, exploiting their recent successes in developing tough systems-driven business. On the other hand, most consultants suggest that the nationals, despite some near-term weakness, are picking up momentum.

Most predict that in the near future there will be few distributors worth their salt who will be unable to provide their customers with dependable local service when negotiated on a national or regional level.

One big worry area for those tracking distribution's business health is inventories. Wide differences, for instance, have been developing around concerted inventory levels, and threaten to delay the industry's efforts to launch into a new era of industrial distribution.

The nub of the problem is relatively straightforward, says Workman. There is only one substitute for inventory, and that is information. The less information a distributor has, the greater the need for local inventory.

'There is a critical need for more information in the middle of the product-producing process,' Workman says.

Perhaps the most noteworthy finding in this year's industrial distribution report is found on the buyer's priority list. Despite five years of concern over price/cost concerns, quality still leads the list.

Also notable in this year's report:

• Prices. Many buyers feel that distributor pricing, especially on non-production items, tends to be more rigid than manufacturer pricing. As a result, many small firms are experiencing serious cost squeezes and receiving little help from suppliers. Many purchasing managers suggest that their distributor suppliers are not fighting hard enough to keep prices in line.
• Availability. Many purchasing executives complain about back-ordering. 'With business down,' says one, 'I would expect fast service. Instead, my distributors are reducing inventories.' Many buyers say availability problems are spilling over to areas such as quality control and on-time delivery.
• Delivery. Missed delivery dates seem to be hitting many parts of the country. A number of buyers indicate that delivery hit a performance peak in 2001 and has trailed off since. Much of the problem is being blamed on poorly trained help.
• Technical assistance. In many distributorships, trained help is scarce, and its absence is causing serious quality problems. Some distributors who used to provide large amounts of technical assistance free, or at a relatively low cost, are now selling product knowledge.
• Communication. For many purchasing executives, the biggest problem in communication is a lack of follow-up on earlier purchasing technology installations. Cutbacks in program funding also has resulted in disappointing performance in many firms. In addition to the above trends in distribution, these areas of unease need to be monitored and addressed by purchasing professionals all along the supply chain.
• Strength. Look for substantial distributor strength over the next two quarters. Resurgence will be mainly among the large regionals and specialists. These distributors have been showing surprising drive in developing systems-driven business.
• The squeeze. Don't be surprised to see a severe profitability squeeze on major regional and specialty distributors. The culprit: tough price competition and failure to leverage buying clout achieved by the large distributors.
• Consortiums. The heavy-handed consolidation and consortium building of the past year or so appears to be on the wane. Buyers who were not that enthusiastic to begin with have been making the point that better communication (not more complex systems) is what's needed in bringing about cost reductions of scale. Consortiums are becoming popular with distributors for data gathering, market research, and marketing analysis by non-competing consortiums.
• Super distributors. Despite the generally gray picture painted by many economists, expect to see a great deal of new openings and expansions over the next few months. The heaviest building pace will be among the large regionals.
• House brands. Expect to see the friction between distributors and their manufacturer suppliers get hotter. So-called super distributors are showing more determination to move further into the use of house brands in fighting off price wars.
• Value. Value-added buying and selling is on soggy ground. The reason: it's often too difficult to define the value. What's valuable to one is often of no value to another. Many buyers are finding that service often does not equal value. The result is that traditional mark-up pricing is under siege by super distributors who use quality buying clout as a sales weapon.
• Reps. Expect the number of manufacturers' representatives to continue declining over the next two years or so. This is mainly the result of the continuing squeeze to meet tighter cost control objectives of supplier distributors. Many suppliers figure they can handle the selling job themselves.
• Stocking reps. Don't be surprised to see an increase in the number of stocking reps—manufacturers' reps who hold significant inventory. In most cases, the inventory is owned by the manufacturer, but handled by the rep to meet tighter order-to-delivery demands by customers and increase inventory handling efficiency.
• Offshore buying. A lot of foreign-made product is building up in distributor inventories, warn distributor and buying execs. Many worry that over-buying is taking place and could lead to serious inventory imbalances in a market that is already awash with private labels and litigation.
• Integrated supply. The biggest problem for proponents of integrated supply is that it's too complicated and most distributors don't have the information bases to make it profitable. From top to bottom, complains one regional supplier, 'there is a huge gap in management skills that is weighing us down.'

These and more topics raised by the report shed some light on the consistent (on-time delivery and quality), and shifting (stocking reps and house brands), concerns of purchasing departments and industry experts across the supply chain.