A Mixed Bag of Problems
Globalization and other challenges are changing the face of distribution, according to ID's 60th annual Survey of Distributor Operations
By Jack Keough, Editor -- Industrial Distribution, 8/1/2006
Purchase a copy of the annual survey here.
The impact of offshore manufacturing, an aging work force, a lack of experienced salespeople, and a surge in prices is causing distributors to rethink their marketing strategies in dealing with an ever-changing global industrial marketplace.
Those are some of the results from Industrial Distribution's 60th Annual Survey of Distributor Operations, in which more than 400 distributor executives from across North America told us that their customer base is changing more rapidly than many of them had predicted just a few years ago
“Globalization and customers moving to China are having a devastating effect on our business,” said one distributor executive. “And it's not going to get better in the future.”
Those comments were similar to what we heard from respondents last year, but were more prevalent in this year's study.
In fact, 72 percent of the respondents said they had lost anywhere from 1 percent to 10 percent of their business because their customers had moved offshore, and another 15 percent said they had lost between 11 percent and 20 percent. Nearly 60 percent expect more of their business to be lost overseas in the next few years.
Not surprisingly, more than 40 percent of the respondents said they are interested in doing some type of business in China—whether that means setting up operations there or importing products from Chinese manufacturers.
A case in point: two distributors in Minnesota combined forces last year to form a joint venture in China, supplying the component product needs of some U.S. companies with China-based operations. RT/Dygert International and Patton Industrial Products have domestic customers who either have, or are planning to establish, manufacturing facilities in Asia. The companies have set up shop in the Waigaoqia Free Trade Zone in the Pudong district of Shanghai to support those customers with design and technical assistance, global supply chain integrity and customer service programs.
How are other companies learning to do business in China? Some respondents said they have attended trade shows in China; others have already established branches there to serve existing customers, or have established new business relationships with agents/reps serving the Chinese marketplace. Others have a different approach. “We are China specialists,” one distributor said. “We are doing very well by exporting American-made industrial products into China.”
Other distributors says they're learning about doing business in China through trade magazines, consultants, manufacturers, and trade associations.
The extent of doing business internationally is underscored by a study done by the Bearing Specialists Assn., which showed that 62 percent of its members export products.
Some distributors are worried that new Chinese competitors could be moving into the United States. More than a quarter of our respondents predicted that Chinese suppliers will enter the U.S. market, “and compete with [us] for customer sales in a few years.”
Distributors said they are interested in stocking more imports, and many said they want to learn more about how to source those products.
Another 13 percent said they would import products from China if they could get help from a third-party provider such as a buying group, alliance or other organization. Particularly significant is the number of distributors who say they expect to private label products from China. Many are doing so today, and more say they will be doing this in the future.
While distributors are concerned with the impact of globalization on their businesses, they're equally concerned about finding quality people—especially since the aging of the workforce is impeding their ability to grow.
“With the decline of the industrial base, there continues to be a shortage of qualified salespeople,” one distributor said. “The age of the average industrial salesperson is probably over 50. This age disparity does not bode well for our industry, [and neither] does the declining number of customers.”
Other distributors pointed out that industrial distributors need to, “change our management 
style to motivate a new generation of workers with vastly different values and work-life expectations.”
This continuing problem was cited by a number of distributors who said the difficulty has become more apparent in recent years.
“Many of our more experienced personnel are retiring,” said one executive. “And we just haven't found good people to replace them.”
The problem isn't confined to distribution. One recent study showed that the average age of a tool and die maker in a manufacturing plant was 56. A manufacturer of power tools told us that he could not run a third shift simply because he couldn't find qualified employees.
The problem of finding qualified people has been near the top of the list since we began this annual study. But the problem seems more critical now, as more and more baby boomers retire.
Buying problemsA continuing problem for many distributors is the growth of national contracts, which is causing fewer and fewer spot buys, resulting in less business for small and regional distributors.
“We're seeing more and more centralized purchasing by major plants and the elimination of local purchases,” said one distributor.
Another distributor added: “We now are forced to compete with multi-national companies, making it more difficult to compete when a customer focuses on price. We exist because of the local service and support we provide. National buying agreements have really hurt us the most.”
Continued price surges in steel and oil are causing some distributors to try and increase prices, but many buyers are refusing to yield, resulting in increased margin erosion. Increasing competition is creating additional pressure on margins, especially because of overcapacity. In fact, price competition was listed as distributors' number one concern (42 percent), followed by increased operating costs (36 percent), and finding qualified people (35 percent).
Nearly 30 percent said that distributor competition was a top concern. Distributors pointed out that because of mergers and acquisitions, they're seeing new competitors, especially from national chains that are expanding geographically. These new, better-capitalized distributors have the advantage of better buying procedures and use of technology.
Distributor competition was listed as the third concern of distributors in our survey, up 6 percent from last year.
One obvious top concern for distributors is the escalating cost of health care. Although health care costs rose last year, the increase was not as high as in previous years. Most distributors reported that they absorbed the increased costs—but they won't be repeating that move in 2006. “We simply ate the difference because it didn't rise as much,” one distributor said. “We won't be doing it this year.”
Some distributors gave incentives to employees to become better consumers of health care services, while others increased co-payments and inpatient and outpatient costs.
One of the more popular ways to reduce costs is to educate employees on the costs of health care. Several companies said they instituted wellness programs or offered bonuses for employees who quit smoking or took exercise classes. One power transmission distributor said he reduced his insurance premiums dramatically because he paid $1,000 bonuses to a handful of employees who lost weight or had stopped smoking.
Mergers and acquisitions continue to rise as distributors look to expand geographically. Twenty-four per percent said they had been approached with an acquisition offer last year, but that the deal was not finalized. Four percent said they either bought a company or had been acquired.
The percentage of distributors who are looking to acquire or would be willing to be acquired has not changed dramatically this past year. But what has changed is the opening of branches in new areas by larger distributors. Several distributors, particularly those in Canada, said they've seen new competition emerging. “It's become increasingly difficult to compete. It seems as if everyone today is your competitor,” one distributor said. Just in the past two months, three major distributors have opened new branches in Canada.
Despite the increasing number of mergers, most distribution companies are still family owned. This year, 74 percent of the respondents identified themselves as family-owned businesses, up 3 percent from last year. And not all of those businesses are small companies. More than half of the respondents with more than $20 million in sales say they are family-owned companies.
Whether or not your company is family-owned, every business is faced with the problem of outstanding receivables. The median number of days for outstanding receivables is 44. Distributors are taking a variety of steps to reduce that number, from using credit cards (69 percent) to tracking receivables weekly (57 percent). Forty-five percent of the respondents pre-screen accounts, and more than half involve salespeople in collecting past due accounts.
Distributors are selling to a variety of markets. Nearly 60 percent of the distributors sell to machine/job shops, while 55 percent sell to the construction sector, and 51 percent to the automotive industry, which is up slightly from last year. One reason for that increase in sales is the number of foreign automakers who have established plants in the United States. Still, distributors say they're not happy. “Foreign automakers don't buy nearly the amount of products that domestic automakers did in the past,” said one distributor.
The role of technologyBuyers continue to use traditional methods, rather than the Internet, for the vast majority of their purchases, according to our study. Last year, half of the respondents said that customer sales over the Internet ranged from 1 percent to 10 percent. This year that figure was 46 percent. Forty-one percent recorded no customer purchases over the Internet. Those figures have not shifted substantially since 2002.
What can be gleaned from these results—and based on comments and interviews from a number of distributors—is that many buyers are using the Internet as a tool to search for new products and information, but not for completion of the purchase. And many of the respondents don't expect this to change in the next year.
“We haven't seen a strong surge of interest in buying over the Internet,” one distributor told us.
Meanwhile, about a third of the respondents said they have participated in e-auctions, not much of a change from last year. Yet most distributors who have participated in such auctions still do not have a favorable opinion of them.
This year's Annual Survey shows that the industrial marketplace is indeed changing. Competition has become more fierce, new competition is emerging, national chains are creating increased problems for the local or regional distributor, and globalization is changing today's marketplace. How distributors deal with these changes will decide their future.
Purchase a copy of the annual survey here.
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