The 65th Annual Survey: Value of the Distributor

This article originally appeared in the May/June 2012 issue of Industrial Distribution. To view it in its original format, click here.

Not much has changed when it comes to the reasons our respondents believe their customers continue to do business with them.

In our March 2012 Profits & Pricing Report, we asked our readers to discuss some customer issues relating to pricing fluctuations. Many cited raw material pricing increases as a driving force affecting their own companies pricing. Eighty-one percent of our survey respondents went on to say that they passed supplier price increases down to their customers, a strategy that created some relationship tensions.

Still, most of our respondents to this year’s Survey of Distributor Operations continued to stress the strength of their long-standing relationships. In fact, 90 percent said this was a primary driver of their business, over 49 percent who cited price (See Figure 1, right). This suggests that, while shifts in pricing may cause tensions, customers are likely to still stick around for the sake of a longstanding relationship. One reader suggested it was “the history of our company. We’ve been in business since 1909.”

Figure 1: Which do you feel are the primary reasons your customers do business with you?

History aside, it’s clear that the value proposition for using distribution has become stronger over the years as more reinvent themselves. User-friendly procurement tools such as e-Commerce are just one small part of the overall picture: Inventory solutions and the ability to neutralize some carrying costs have likely contributed to the sustainability of these relationships. Earlier this year, wholesaler Brighton-Best talked to us about this changing nature of the relationship side of the business: “It used to be that managers would travel all over to see the accounts because that’s how people knew you,” explained ChuckHalpin, a 30-year veteran of the company. “But now with so many transactions going through the website — for a lot of people, that is the face of the company.” Based on the many factors involved, it’s likely that relationships are just one part of a much bigger, more intangible value equation.
What may be more interesting is just how low price falls on this list of reasons distributors think their customers do business with them, where respondents were permitted to “check all that apply.” Product availability produced the second highest number (83 percent), while technical support (what many might view as a catch-all category for services) was cited as a primary driver by 73 percent. Lower on this list of what you considered customer priorities were engineering capabilities (35 percent), VMI (34 percent), and 24 hour support (35 percent).

One write-in respondent called his/her company an “industry-related resource nucleus.”

This speaks to what it appears the “relationships” embody: distributors fulfilling a trusted role to come through with resources, and — if they can’t — at least an honest answer as to why. These types of intangibles, perhaps, are at the root of a long-standing supplier-customer problem where our survey respondents struggle to clearly relay the value of their role in the supply chain. The need for these fact-based conversations will only increase as industrial distributors begin to push for the monetization of some of their more costly and time consuming services.

Figure 2: Of the following services, for which do you charge a fee?

In the meantime, most of our survey respondents stick to the basics when it comes to charging for services, with the vast majority citing shipping as a cost-driven option for their customers (Figure 2). It’s likely that this high response rate also reflects the fact that all distributors offer shipping. Some of the other, more technical areas like kitting or tool crib management (considered pure service categories), might not be in play for all respondents.

 

Based on the number of you suggesting you offer these services, nearly 2/3 of those boasting design/engineering consultation appear to charge for it, and about half charge for inventory management services. Based on Figure 1, 74 percent of respondents see their technical support as a strong factor in their businesses. Still, only 18 percent of our respondents say they charge for it, meaning this is likely the most widely available and largely complimentary service.

And speaking of complimentary services, 56 percent of respondents tell us that they’re not offering any unbundled services whatsoever, meaning their vantage point in this category is still very full scale solutions-centric. The trend in unbundling has been interesting and truly reflects the economic conditions of each year’s response group.

Write-in answers to this question were varied. While some respondents emphasized that they don’t charge for anything (this including standard fee-based services such as shipping), others cited some areas we hadn’t mentioned in our survey question options. One cited “after hours service” as a revenue-driven service, while several mentioned tasks related specifically to industrial vending solutions, such as re-filling of machines and machine rental.

Our 2007 results showed that 36 percent were selling services for a fee (unbundled). This dipped in 2008 and 2009 with the economy, with 30 percent and 27 percent saying the same, respectively. It’s likely then as the economy has improved a little, distributors have begun to again feel more comfortable with some fee-based solutions that exist outside of a traditional contract: 44 percent said they were offering unbundled services in 2011, with this year’s results hovering at about the same number.

This fluctuating trend is interesting in relationship to some of the other information we obtained in our March Profits & Pricing Report on how often suppliers are evaluating their customer base. When 47 percent said they were constantly evaluating this area of their business (compared to 17 percent who endeavor to keep a customer at all costs), we took it as a strong indicator of confidence as well as suppliers regaining strength in their own value proposition. According to the report: “This trend perhaps indicates an evolving disconnect as distributors struggle to relay their value proposition to their customers, and customers continue to push the envelope in terms of their expectations. When inventory demands, services, and account management create more output than can be regained in customer spend, it could be time to cut some of these accounts loose — something many of our survey respondents say they’re not afraid to do.”

Figure 3: How much of your revenue do you derive from services?

But be that as it may, the revenue numbers in the services category remain low for most distributors, relative to overall sales. Still, distributors are gaining ground in this area, as evidenced by the trends in Figure 3 (page 38). While the majority of those at the high end (50 percent +) of the revenue scale have tapered off, the big gains of the past several years can be seen at the low end. For example, in 2009 34 percent of respondents said they derived none of their revenue from services. A huge shift can be seen here between 2009 and 2011, where only 14 percent said they had no revenue stemming from their service offerings. The 2012 results were fairly consistent with 2011, with 13 percent saying the same. Ultimately, most survey respondents live in the low end of the revenue pool when it comes to services, with the vast majority (57 percent) saying the derive somewhere between one and 10 percent of their revenue from this category. 17 percent of survey respondents suggested they land somewhere in the 11 to 20 percent range. Oftentimes hard to quantify, many distributors still look at the services aspect of their businesses as a value-added function. Likely these responses are educated estimates, as distributors continue to struggle to monetize this area of their business. For most, the additional spend that comes with providing customers with turnkey service programs makes up for the internal costs of these offerings.

That said, we’re hearing from many distributors that they’re placing effort towards trying to quantify just how much they gain in return for their service offerings. As these estimates become more and more targeted, it’s likely we’ll see distributors being forced to have some tough conversations with businesses that they thought were some of their best customers.

Oftentimes hard to quantify, many distributors still look at the services aspect of their businesses as a value-added function. Likely these responses are educated estimates, as distributors continue to struggle to monetize this area of their business.

Other items of note relate to some of the ways in which distributors are using available resources to improve their market knowledge and/or visibility:

  • 22 percent of survey respondents are part of a buying group. Just over three percent said they’re part of a co-op, with seven percent being a part of both. Last year’s results showed a net of around 35 percent involved in either type of group, which was slightly higher than this year’s results of just under a third in one or the other. Keeping a potential error rate in mind, it’s a realistic guess that involvement in these groups has not changed much over the past year.
  • Involvement in manufacturing advisory councils continues its decline. Over time, we’ve determined this is something far more popular with medium- and large-sized distributors, versus smaller ones. Our 2009 results suggested involvement from 39 percent of our readers, with 34 percent reporting the same in 2011. Our 2012 results show more erosion, with just 31 percent attesting to their involvement.

For those interested in utilizing industry associations for further development, we’d recommend looking further at some of the preeminent organizations in the industry, including:

  • Industrial Supply Association (ISA): ISA is committed to bringing channel partners together and fostering an environment that allows for a free flow of communication to better understand the needs of the manufacturer, distributor, industrial manufacturer’s representative, and service provider. For more information, visit www.isapartners.org.
  • National Association of Wholesale Distribution (NAW): Since NAW members represent all lines of trade, NAW is uniquely positioned to create programs and opportunities for executives to learn from peers with whom they do not compete. For more information, visit www.naw.org.
  • Specialty Tool & Fastener Association (STAFDA): STAFDA is a not-for-profit educational trade association comprised of distributors, manufacturers, and rep agents of light construction, industrial, and related products. Its educational programs include regional meetings, webinars, and workshops in addition to 65 different services/benefits offered, including valuable benchmarking reports and training manuals. For more information, visit www.stafda.org.
  • Power Transmission Distributors Association (PTDA): The PTDA is an association for the industrial power transmission/motion control distribution channel. PTDA is dedicated to providing networking, targeted education, relevant information, and leading-edge business tools to help distributors and manufacturers meet marketplace demands competitively and profitably. For more information, visit www.ptda.org.
  • The Association for Hose & Accessories Distribution (NAHAD): The mission of NAHAD is to promote a high standard of professionalism and integrity within the hose and accessories industry by providing a medium for communications, education, and training. For more information, visit www.nahad.org.
  • The Belting Association (NIBA): NIBA works to promote harmony between distributors/fabricators and their suppliers with the specific objective of increasing the flow of products through the distribution network that the distributor/fabricator members provide. For more information, visit www.niba.org.
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