Value-Added Services in a
Self-Service Culture
Epicor White Paper
Sponsored Research for Distributors Serving MRO/Industrial/Institutional Sectors
Value-Added Services in a Self-Service Culture
1
About the Research
This project came about as an extension to prior Epicor-sponsored research in 2015 which
concerned eCommerce and channel relationships between manufacturer and distributor
as relationships become digital. From this research, we found that small- to mid-market
distributors were behind in eCommerce, with nearly two-thirds selling less than 5% of their
demand online. However, larger firms, especially those over $250 million or more in sales, were
growing eCommerce sales, with many firms selling 10% to 20% or more online. However,
small- and mid-size distribution firms seemed secure in their existing plans. Many were
investing and improving their eCommerce presence, albeit not at a pace similar to their larger
competitors. Additionally, they were growing sales despite lagging in eCommerce investment
and performance; why and how were they doing this? We gained some clues, from the 2015
research, that the answer was in fee-based services. In short, small- and mid-size distribution
firms were securing their growth and digital defense by moving further into the value chain,
offering more complex services to their top customers. Given the fact that services, as a subject
in distribution, has not been a “hot topic” since before the Great Recession, we decided to
investigate with a brand new project. We hope the research proves valuable to your ongoing
management efforts.
This research project is the result of a collaborative effort between Epicor, Industrial Supply
Magazine and Benfield Consulting. Epicor is a major supplier of Enterprise Resource Planning
software with eCommerce solutions for the distribution sector and is the research sponsor.
Industrial Supply Magazine serves distributors in the MRO/Industrial/Institutional sectors and
Benfield Consulting is a Chicago-based firm working with dis-tributors and manufacturers in
B2B channels.
The research instrument was placed online in the third quarter of 2016. A total of 153
distributor respondents completed the survey.
Value-Added Services in a Self-Service Culture
2
Respondent
Demographics
The size in annual revenues of
respondent firms is reviewed in Exhibit 1.
In the Exhibit, we find that the revenue
ranges are dispersed as follows:
X 45.4% of respondents with sales less
than $25 million
X 13.8% of respondents with sales
between $25 million and $50 million
X 13.2% of respondents with sales
between $50 and $99 million
X 11.2% of respondents with sales
between $100 million and
$249 million
X 9.9% of respondents with sales
between $250 million to
$500 million, and
X 6.6% of respondents with sales over
$500 million
Exhibit 1
Firm Revenues of Respondents
From prior research, these revenue
ranges are common, as most distribution
firms in the industrial and institutional
sectors tend to be small. However,
consolidation is growing the larger firm
size ranges, as 28% of firms are over
$100 million in sales.
Firms covered a variety of industrial and
institutional sectors as depicted in Exhibit 2.
This represents the breadth and diversity of
industries, institutions, and applications of the
combined $700 billion in sales sectors in North
America. In Exhibit 2, multiple responses
find that firms are strong in Industrial
and far above other sectors with a strong
showing of 87.5%. However, for each 10%
response there are 15 firms serving the sector.
Hence, non-traditional sectors including
packaging and health-care were 27 or more
responses which qualifies for a statistically
valid sample. Somewhat surprising was the
showing of construction (43%) as a top
response, however, there has been through
consolidation a mixing of firms in construction
sectors (PVF, Electrical, HVAC, etc.) with more
traditional sectors of MRO/Industrial.
Exhibit 2
Respondents by job title and function are
important. The greater the responses in
Executive and Management functions, the
more predictive the survey. These positions
control much of the firm’s expenditures
and set strategic direction. In Exhibit 3, the
Executive respondents represent 45% of the
sample and, when added to Management,
the total responses comprise 70% of the
entire sample. Hence, the predictive value of
the survey is high, as seven out of 10 positions
are Executive or Management.
Exhibit 3
Respondents by Function
Service Revenues and
Current Practice
A question that has often curiously eluded
prior research on services is how much do
fee-based services comprise the typical
distributor? The answer varies by size of
distributor, however, the research finds
that a weighted average of 12% of all
revenues come from fee-based services
and, furthermore, this is expected to grow.
Exhibit 4 offers a view of service revenues
for respondents and, surprisingly, some
distributors derive a substantial part (> 25%)
of their revenues from feebased services. From
the Exhibit, the distribution of firmsand their
fee-based revenues are:
X 20% of firms have less than 5% of their
sales represented by services
X 19% of firms have between 6% and 10%
of their sales represented by services
X 31% of firms have between 11% and
25% of their sales represented by services
X 12% of firms have between 26% and
50% of their sale represented by services
Industrial
Industrial Sector Response Percent
Responses by Sector (Multiple responses)
87.5%
43.4%
33.6%
25.7%
23.0%
22.4%
20.4%
18.4%
17.8%
Construction
Fasteners
Fluid Power
Petroleum
Janitorial
Other
Packaging/Paper
Health Care
45.4%
13.8%
13.2%
9.9%
9.9%
6.6%
Less than $25 million
$25 million to $50 million
$50 million to $99 million
$100 million to $249 million
$250 million to $500 million
Over $500 million
Less than $25 million
$25 million to $50 million
$50 million to $99 million
$100 million to $249 million
$250 million to $500 million
Over $500 million
The forward investment attitude of services
is important to understand. Is the practice of
fee-based services an area that distributors will
invest in?
Owner/Executive
Management
Operations
IT
Sales
Finance/Accounting
24%
45%
2%
1%
3%
25%
Owner/Executive
Management
Operations
IT
Sales
Finance/Accounting
Value-Added Services in a Self-Service
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Exhibit 4
Service Fees as Percent of
Overall Sales Revenue
The answer to the question found
that services were financially
attractive because:
X Customers who purchase services
purchase a wider range of products
(27%)
X Customers who purchase services are
less likely to switch suppliers (23%)
X Services are less price sensitive than
products (23%)
X Services have higher gross margins
than products (17%)
X Vendors invest in services as it helps
their product sales (10%)
Exhibit 5
Future Service Investment
Nearly 40% of respondents replied they
are planning to grow service revenues,
with 18% responding service revenues
would remain flat. Interestingly, no
respondents selected that service
revenues would decrease. In short, there
are a variety of reasons distributors
find fee-based services attractive and a
fertile ground for future investment. Top
reasons for investment include increase in
breadth of products purchased and increased
loyalty from customers who purchase services.
Service Investment
To recap, distributors currently sell 12% of
demand in fee-based services, and investment
in services is expected to increase, with
40% of firms expecting services revenues
to grow. It is important to note, our service
research is primarily interested in services that
generate revenue. In the basic distribution
services platform, initially, distribution firms
did not develop products. However, the
existing services provided by distributors are
mostly mature and the basic service platform
is well-documented and offers little room
for differentiation. Hence distributors, to
differentiate their firm, need to consistently
deliver quality services their customers want
to buy. This requires understanding of future
services to invest in and how to deliver them
consistently while reducing error and cost.
When evaluating services, distributors have a
variety of hard and soft measures to consider.
Exhibit 6 lists priorities that distributors use
to evaluate whether a service is worthy of
investment. The top four investment criteria
are exceptionally close and include the unique
value of the service (23%), service profitability
(22%), infrastructure support/people to staff
the service (22%), and fit in the firm’s growth
strategy (21%). Another 10% selected the
ability of the ERP system to track, invoice and
manage the service.
Exhibit 6
Criteria for Service Investment
Types of services for future investment were
reviewed. The table in Exhibit 7 ranks, in
descending order, the types of services that
wholesalers expect to invest in for both non-
fee based and fee-based services. We offered
the non-fee based category to understand if
there were service categories that managers
felt warranted investment. In Exhibit 7, these
categories are listed including no-charge
services of consultative sales and inventory
management. These services are part of
the fabric of distributors in the Industrial/
MRO/Institutional sectors and it is difficult
to be a distributor without offering them.
We stress the word mature including the
observations that these services become
expected by customers but the ability to
charge for them, separately, diminishes
as their offering becomes common. It is
important for distributor managers to
consider if nocharge services are overdone
in their investment and sap the potential
of fee-based offerings. By definition, most
fee-based services are not mature, hence,
they are typically not offered by the majority
of distributors. In the past, as services gained
maturity, they moved from a fee basis to a
no-charge basis. This is changing, however,
and is due to capital and IT investment in
the new category of services. Often, services
such as preventive maintenance, assembly
Less than 5% of sales
6% to 10% of sales
11% to 25% of sales
26% to 50% of sales
Does not apply/Don’t know
19%
20%
31%
12%
18%
Less than 5% of sales
6% to 10% of sales
11% to 25% of sales
26% to 50% of sales
Does not apply/Don’t know
Grow service revenues
Service revenues remain flat
Service revenues will decrease
Service revenues increase loyalty
No response
0%
14%
39%
18%
29%
Grow service revenues
Service revenues remain flat
Service revenues will decrease
Service revenues increase loyalty
No response
Service profitiability
Infrastructure support/People
ERP system to track, manage, invoice
Fit in growth strategy
Unique value of service
Ability to transact online
2%
22%
22%
10%
21%
23%
Service profitiability
Infrastructure support/People
ERP system to rack, man ge, invoice
Fit in growth stra egy
Unique value of service
Ability o ransact onli e
Additionally, we asked about the
appetite for future service investment,
with the results in Exhibit 5.
Value-Added Services in a Self-Service
4
Exhibit 8 gives the results from the survey
regarding a new service development process.
In the Exhibit, we find 50% of respondents
had no answer to the question for having a
formal NSD process. The response offerings
of Does Not Apply/Don’t Know lead to the
overall conclusion that many distributors don’t
use a formal service development process.
The overriding question is, does a formal
NSD process make a tangible difference
in financial performance? In Exhibit 8, we
compared service revenues for firms who
answered “Yes, for most services,” versus
those who answered “For some services. .
.” or “For a few services.” The findings were
eye-opening. Firms that regularly use a NSD
process generate 47% of their revenues in
services versus 25% of revenues in services
for intermittent uses of a NSD process.
Additionally, for firms that responded “Does
not apply/Do not know,” we find 86% have
service revenues less than the weighted
average of fee-based revenues of 12% of
total sales.
Exhibit 8
Does your firm have a formal new
service development process?
(Please choose one)
There are two primary types of NSD processes:
Agile and Stage-Gate. Both processes
come from new product and new service
and kitting, and light manufacturing
require significant investment in IT,
plant, property and equipment. These
investments require a profit and loss
structure where management can clearly
see if the service is of enough value
to offer a positive return, hence a fee
basis is preferred. Too often, we find
where management creates services in
hopes they will grow product sales or
increase customer loyalty. But the clear
indication of these investment goals is
difficult to measure; product volume and
competitors falling away can occur for
many reasons. It is our belief that future
service development will be more of the
fee-basis type. It is the best means to
gauge if the service has enough value to
the customer to offer a positive return.
Exhibit 7
Developing the New Service
New Service Development is a topic
that has received lukewarm reception
among distributors. The reasons for this
are, largely, the fact that distribution,
heretofore, has been a sales driven
structure; the emphasis is directed at
personal influence of the individual.
The more successful firms in service
development have dedicated marketing
management or support from executive
management to invest in new services. In
smaller firms, where fee-based services
often represent a higher percentage
of sales than large firms, executive
management serves as marketing
management to successfully develop
and launch the service. We asked about
a formal service development process
to manage new service offerings. New
Service Development (NSD) comes,
largely, from new product development
in manufacturing. The exception is that,
once the new service is developed,
it is nearer to launch than a product.
Unlike products, there are few service
prototypes that can be test-marketed
development in, typically, larger corporations
but we have used them in distribution
companies successfully. We describe the more
common process of Stage Gate in Exhibit 9.
Exhibit 9
New Service Development Process-
Stage Gate Method
In Exhibit 9, the Stage Gate process has
eight stages with total costs of $159,000
to $345,000 to successfully launch six
fee-based services. These costs are, mostly,
not incremental to the distribution firm but
represent funds diverted to support new
service development. The overall process
represents a funnel where, at each stage of
the process, the number of potential services
is winnowed down until six are launched and
deemed successful. Each stage has unique
characteristics which are outside the scope of
this report to explain in detail. However, there
is plenty of literature available on the Stage
Gate process and we recommend further
research if there is interest. In one area of the
NSD process, however, we researched where
distributors get ideas for successful services.
Exhibit 10 provides a list (multiple responses)
of areas where distributors gather new service
ideas. Customers top the list, followed by
competitors, employees, vendors, non-direct
competitors and acquisitions. Surprising
to many is the inclusion and reasonably
selected category of vendors for new service
development. Our work in services for
distributors finds, however, that an increasing
amount of vendors are interested in working
Consultative sales for product
application (No charge)
Inventory management services
on-site (No charge)
Preventive maintenance of field
repair for free
Assembly and kitting on a
fee basis
Light manufacturing on a
fee basis
Service Type Percentage
ERP System and Service Management
(Multiple responses)
76.7%
62.8%
47.7%
41.9%
26.7%
Consultative service on a
fee basis
24.4%
Programming or IT service
(No charge and fee basis)
17.4%
Yes for most services
For some services but not others
For a few services
Does not apply/Don’t know
16.3%
50% 17.3%
16.3%
Yes for most services
For some s rvices but not thers
For a few services
Does not apply/Don’t know
Value-Added Services in a Self-Service Culture
5
with distributors on services that help sell
their products. Finally, we offer a caveat
about relying on competitors for new
service ideas (62.5% of respondents).
Should the service in consideration be
offered by numerous competitors, it may
be a good idea to pass it up.
Exhibit 10
The role of ERP technology
in Services
As distributors move further into their
customers’ value chain, they develop
more unique services. These services
often require substantial investments
for capital equipment, manufacturing
space, and IT programs. ERP software
has an increasingly valuable role to play
in service development for distributors,
and the research pointed to several areas
where progressive software vendors are
offering needed functionality.
In Exhibit 11, we asked about ERP
systems and their ability to track and
manage specific types of services.
The responses were strong in site
inventory management, as many firms
offer inventory management service
in bin stocking, VMI, and integrated
supply forms. Surprisingly, we found many
distributors wanting to integrate their services
with their eCommerce transaction software.
In post-survey conversations, distributors that
are strong in fee-based sales wish to migrate
more mature services online. This relieves
customer service, inside sales, and accounting
personnel, as customers can self-serve for
service ordering and tracking.
The three least responses for ERP system
capabilities and services netted one-quarter
of the respondents. These included tracking
and management of light manufacturing,
post-sale technician service, and consulting
services. The need for the ERP system to move
into further service functionality is ongoing
and crucial to distributors getting cost out of
the service by linking it to eCommerce and
financially tracking service costs to make sure
they are providing a satisfactory return. Unlike
buy/sell products, services have considerable
labor and asset components to support
their ongoing provision. These costs, often,
use manufacturing cost accounting or track
unique labor costs not associated with typical
box in/box out distribution. We expect further
development of ERP systems and as it relates
to an increasing variety of services provided
by distributors.
Exhibit 11
Summation
Distributors have provided services to
customers as their products and basic
service platform became commoditized and
delivered reduced profits. As eCommerce
emerged in the late 1990s, distributors have
pushed further into the value chain of their
customers to offset the competitive threat of
online technology. The forces of maturation
of products and the online threat of larger
distributors is ongoing and will further force
small- and mid-size distribution firms to
develop unique services. Future services will
require a tested NSD process, marketing
personnel and/or processes to price, develop,
and promote new services, and ERP systems
that can successfully track service provision
and costs.
Today, distributors under $100 million in
annual sales have a higher percent of service
sales than their larger sales brethren. We
expect larger distributors, however, to increase
Customers
Service Ideas Percentage
New Service Ideas (Multiple responses)
87.5%
43.4%
33.6%
25.7%
23.0%
20.4%
Competitiors
Employees
Vendors
Distributors that are
not direct competitors
Aquisitions
Success Rate Typical Internal CostsService Funnel
200 Go In
48 Financially
valid ideas
24 Pilot
12 Launch
6 Succeed
$15,000 - $60,000
Idea Generation
Concept Development &
Testing
Business & Financial
Analysis
Communication &
Strategy Development
Test Market
Service Launch
Post launch support
Successful Service
Product
$8,000 - $15,000
$40,000 - $80,000
$60,000 - $120,000
$36,000 - $70,000
$159,000 - $345,000
Tracking and management of
offsite inventory
Integration of e-commerce into
our service portfolio
Tracking and management of
kitting and assembly
Light manufacturing and tracking
of direct costs
Tracking and management of
consulting services and fees
Tracking and management of
post-sale PM and site hours
Service Type Percentage
ERP System and Service Management
(Multiple responses)
64.1%
40.6%
39.1%
25.0%
25.0%
23.4%
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Value-Added Services in a Self-Service
their new service development or
openly acquire firms with unique service
offerings in hopes of spreading them to
a large customer base. Too, larger firms
can fund the investments in ERP software
to manage services and link them to the
eCommerce site.
The services of tomorrow will require the
best systems, strategic management, and
marketing processes available. Distributors
will need service profits to offset the
commoditization of the box in/box
out platform.
About Scott Benfield
The research and analyses are done by Benfield Consulting of Chicago and cannot be copied, in part or in whole, without permission of
Benfield Consulting. Scott Benfield is a Chicago-based consultant for B2B channels. He has been quoted in Forbes and the Financial Times
and is the author of six books on B2B channels. He can be reached at [email protected] and his site is
www.benfieldconsulting.com.
Value-Added Services in a Self-Service Culture
Given the fact that services, as a subject in distribution, has not been a "hot topic" since before the Great Recession, we decided to investigate with a brand new project. We hope the research proves valuable to your ongoing management efforts.
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