Small and mid-size distributors have several key advantages over their larger competitors, according to a survey of 306 distributors, manufacturers and manufacturer reps by the Industrial Supply Assn. And many purchasing agents agree, according to recent data from Purchasing magazine, a sister publication to INDUSTRIAL DISTRIBUTION.

According to the ISA report, The Changing Role of Small Industrial Distributors, smaller operations—defined as having less than $7.5 million in annual sales—enjoy a higher level of expertise, respond more quickly and have more local knowledge than larger distributorships.

But there are disadvantages to being small, chiefly in the integrated supply market. The cost of technology is also a competitive disadvantage, as is access to capital and product lines and the ability to provide competitive pricing.

“These disadvantages could keep some small distributors continually off balance, but many have found ways to get around these disadvantages,” states the report, which was released last spring. “Customers will often look beyond some disadvantages because many of them want smaller players to survive and to continue to offer local market support.”

The report contains a variation on the so-called “80/20 rule,” which holds that 80 percent of sales come from the top 20 percent of customers. Respondents said more than 40 percent of sales come from their top 10 customers and that they expect this to continue for about 70 percent of those customers.

And over the next five years, revenues from services will rise from about 14 percent of total sales to roughly 25 percent of all revenues.

A Purchasing survey confirms that outlook from a buyer's perspective. As Eugene Brieck, director of purchasing at Ash Grove Cement Co. of Overland Park, Kans., tells the magazine, “We have weeded out the weaker distributors and have awarded that business to the strong distributors that can support us over our large company.”

A senior supply chain analyst says she plans to improve relationships with her distributor suppliers while “eliminating those few we do not need,” and a third respondent notes that distributors who “offer better service will get a larger share of our business.”

D. Bruce Merrifield Jr., president of Merrifield Consulting Group of Chapel Hill, N.C., tells Purchasing that some buyers, looking to consolidate their spend, are exploring a shift to manufacturer suppliers to gain full advantage of price discounts and rebates.

“We are constantly challenging the system of distribution,” says Randy Clark, senior strategic buyer of MRO and packaging for Volvo Group Non-Automotive Purchasing in Greensboro, N.C. “Why deal with a 'middle man' when you can deal direct?”

Another respondent to the Purchasing survey, Grain Processing Corp. vice president Jeffrey Stone, says his company will be moving toward more third-party agreements with both distributors and manufacturers in the next year.

But this challenge to distribution is not playing out among all purchasers.

“When you bypass the distributor, unwittingly the buyer and the manufacturer will have to pick up the functions the distributor was doing and they will do them far less efficiently,” notes Merrifield.

Instead, they place their purchases with the manufacturer and get the lower price that's associated with volume buys—and pay a fee to a distributor to fulfill and track their orders. Forward-thinking distributors, he says, are embracing this trend.

And the move to consolidate buying across a single company with many locations may challenge buyers at local plants, who could balk at essentially paying double—once to buy direct from the manufacturer and again for a distributor's services. That could push them to turn to small, local distributorships.

In manufacturing, respondents said suppliers depend on small distributors for loyalty and look to larger wholesalers for national contract management. Mid-size distributors are valued for their ability to provide some of each.

Distributors say they value suppliers of tightly focused product lines that require local technical support and value-added content. Chief among their concerns is the growing competition from overseas—especially China. Finding and keeping good workers is also a worry, as is the shrinking domestic marketplace. In fact, the respondents say specialty distributors—those with 50 percent or more of sales from a single product line—and international distributors are best positioned for growth.

“The real opportunity for growth will likely lie in finding markets … and matching size, capabilities and delivery to those market requirements,” the report states, noting that urgent questions remain unanswered, namely the viability of fee-based services, whether the global economy and the shrinking domestic marketplace will kill some distributors and how to recruit and keep talented employees.

“Small distributors are not likely to disappear and they will have some advantages in the future. Small distributors need to pay close attention to customers who … need what small distributors are best at providing. They will need to be very good at providing value-add and getting paid for it,” the report concludes.