There have always been predictions of the death of distribution. Yet, every time the business environment changes, distributors have keep up. Today, distribution is alive and kicking. The death knoll has never tolled - not yet!
The new electronically-connected society is again forcing changes in distribution. Technology has created new opportunities, functions and capabilities that we have never had before. There will be evolutionary and revolutionary changes in the way distribution works. Survivors will continue to play an important role in getting product from manufacturers to end users; but the distributor of twenty first century will not look like they did last year.
Our traditional model, the supply chain is no longer workable. Consider the chain analogy. It is made up of independent links. We know that the weakest link determines the strength of the whole chain. Yet, in the current environment, each of us works to become stronger, even if that means breaking a neighboring link.
There is also a problem of communications. Only adjacent links are connected. And where they come together, there is often friction as they "rub each other the wrong way." This is not a model for success in the future. The global market place will not allow old time distributors to survive as they have in the past. From providing raw materials through design, installation and project completion, companies will have to work together to meet the demands of a "real time economy. It will be up to today's distributor to replace the supply chain with a supply team.
EVOLUTION OF THE SUCCESSFUL SUPPLY TEAM
In the future, team members will do what they do best. While manufacturers will continue to manage production, distributors will find some of their traditional roles are taken over by better competitors. For example, companies such as UPS, Federal Express and other similar operations are able to provide cost effective delivery services. Only in very special circumstances can a regional (or even national) distributor compete in terms of capability, coverage or cost.
Bonded warehouses and public distribution centers are more efficient at receiving, managing picking, packing and shipping then all but the best companies. The independents have the latest electronic technology and are capable of sending packages with our labels on them. No one has to know it did not come directly from a distributor's warehouse. Most of them will even guarantee that their operation will be less costly than managing your own facility.
Another traditional activity of distributors is credit management and collection. When was the last time someone really collected the full interest on a late payment? Most distributors are willing to "crack" with one call from a customer who mentions a competitor's name. Guess what? Organizations like VISA, MasterCard and American Express are getting into the game. They know how to manage credit and make a profit doing it.
Take away production management, inventory management, logistics management and credit management, it is appropriate to ask: "what is left?" This is exactly why we can accurately predict the demise of the supply chain as a viable business model.
So, if the concept of the supply team is right for our time, what does it mean to how we work together and the relationships between team members? The promise of working together is that redundancy will be reduced. The member of the team who is best positioned, trained and capable of doing it will do everything once. Think about how many times an item may be picked and packed as it meanders from the OEM to the final consumer? How many times do the customer, the distributor, master distributor and manufacturer's rep order the same part?
Imagine a future where the customer enters an order for product online. It is transmitted to all members of the supply team. Computers find the best location to manufacturer or ship from and schedule the logistics with the end user. When received, the credit manager electronically collects the amount due and distributes it to the members of the team in the percentages they have agreed upon. No paper, everything entered once and information shared by everyone.
The role of the distributor in this scenario is focused on two things they have always done best: relationship management and coordination. Unless the product is pure commodity with no value added, there will always be a point where person-to-person contact will take place. No one is better situated to establish and maintain these relationships than the distributor.
The same goes for the critical responsibility that determines the success of any given team - coordination. Someone has to be in charge of making sure everything happens as promised. A single point of contact is needed to solve the inevitable problems. Distributors have always been in the best position to deal with all of the team members - whom ever they may be.
Into this puzzle we add the new concepts of e-Business. They are changing the way we do everything. E-business is not as intimidating as it might sound. If we examine the component parts, it is easier to understand and manage.
E-Business encompasses four key areas of business operations. They are:
E-Marketing - generates interest
E-Selling - automates parts of the selling process
E-Commerce - transaction processing
E-Resource Management - supports the enterprise
The first, E-Marketing, creates an interest in our products and services. It has often been static, such as an electronic billboard on the information superhighway or a simple online catalog. Today, that is changing and through animation, streaming audio and full motion video, there is nothing boring about e-marketing today.
The second, e-selling is an interactive capability that takes a prospect and turns them into a buyer. Here information is provided to assist in making a purchase decision. It needs to be in "real time," as online customers do not want to wait for answers to their queries. Included are such mundane considerations as availability and price. "Wizards" to help a customer select the right combination of products for a specific application or to meet a specific "code" are attracting the most attention.
The third, e-commerce, is the actual exchange of transactional data. In addition to the sales order entry, many other transactions are included such as catalog requests, inventory movement and return authorizations. It encompasses all activities where companies link information generated in daily operations between trading partners. Interconnectivity has created opportunities for supply team partners to increase efficiency in all aspects of their operations.
It is important here to note that the Internet is not required to do e-commerce. Just as important, being on the Internet does not mean one is doing e-commerce. The Internet is just a communication medium. Sending EDI over a value-added network is fully e-commerce.
There are many models of e-commerce. The two major divisions are Business to Consumer and Business to Business. They are very different. While one may be willing to order a limited number of books by pushing an electronic shopping cart, a builder is not about to go through a 15,000 skus catalog to place an order for over 300 line items needed to build a C-store. This is especially true because in most cases, the buyer has to turn around and re-enter the same data in their system.
The consumer model only works in limited situations and even then with differences. For example, someone maintaining a station may only have access to a limited catalog of replacement parts that have already been approved by the parent company. They cannot see price, only availability. That is all that is important and it is all management wants them to consider in deciding where to order a replacement for a broken part.
INTERNATION INFORMATION SYSTEMS ARE NEEDED
The last category of e-business, e-resource management (ERM) encompasses the firms' own internal information systems used to manage and report on all other activities necessary for a business to be successful. The systems allow managers to view history, to manage the present and prepare for the future. Functions may include accounting, human resources, project or building management and other process activities.
E-marketing/selling has created a great deal of excitement with the well-publicized impact many early web sites have made on their respective markets. Internet-based experiments have provided the opportunity to speed information transfer. They have allowed the sales force to respond in a more timely fashion, when the customer wants information. No more delays with phone tag or snail mails lost in the wilderness.
E-resource management seeks to connect all business systems within an enterprise. Business leaders today need to access and link accounting records, warehouse data transaction counts and other information into decision support systems under a single umbrella. Managers are finding new ways to create knowledge by combining traditional accounting numbers with transaction data. New metrics are creating exciting opportunities to better manage our organizations.
Into this mix, we throw the Internet. It is the wild card. There is plenty of promise, but there is also fear - probably for good reason. There are many down sides and distributors should be aware of these as well as understanding what the benefits and upsides are. One of the first things that distributors should recognize is that once you use the Internet, it makes it easy for manufacturers to sell direct. Now, this is nothing new. Manufacturers have always been able to go direct. The Internet just makes it easier.
If a distributor does not add value to the products they sell, more customers will be more likely to go directly to the manufacturer. Therefore, it up to each of us to find ways to "add value" to everything we do. If we do not establish the value of our efforts, our services and our support, then we should not be surprised when customers go away.
The second issue is that the Internet makes it easy to shop. Anyone who has tried to shop for a car recently knows how easy it is to find prices. Not only can you compare prices between dealerships, it is relatively easy to find the actual cost the dealer pays. You can even look up the rebates they get and other considerations. This makes it very easy to negotiate.
The down side is that your customers can do the same to you. They can shop you easily among all your competitors and even some manufacturers. The end result will be global pricing. The big problem is that most distributors use the additional margin they make on certain items to cross-subsidize those things they sell at low margin.
Once we lose the ability to cross-subsidize our products, it will be more important than ever to reduce our cost of being in business. If we are not able to make a profit on lower gross margins, it will become close to impossible to stay in business.
Finally, there is the reverse auction. In a nutshell, you take a standard auction and turn it upside down. In a reverse auction, the customer lists everything they want to buy. They then invite distributors and manufacturers to bid. They watch the price get lower and lower and lower until somebody takes the last quarter cent to get the business.
It is almost impossible for a distributor to win in a reverse auction. Only manufacturers have the margin to win. And yet, the manufacturer needs to be careful. Without the local distributor to provide support and special services, the manufacturer may ruin their reputation.
Distributors must be strong and not provide service to low ball buyers at the same price that we give to our best customers. When someone needs help with a product that they didn't buy from you, charge them a surcharge. There is nothing that says that you cannot add 50% or more to your standard rates.
There is a lot of good about the Internet. But, we all must keep our eyes and ears open. There will be new competitors. There will be new challenges. It is up to each of us to be ready when they appear and respond quickly.
Plus, we have to understand which roles we do best, refine them, market them and price them to make a profit. We need to concentrate on doing the highest value work, getting rewarded for it and allow others to do warehousing, logistics (delivery) and financing.
The future is bright for distribution. It may be different, but those who are up to the challenge will survive all of the changes. They will survive consolidation, they will survive new technology and they will survive global competition. The best will still bring buyers and sellers together while coordinating the team. There will always be distributors and they can be very profitable.
Next month: Should we get on the Internet and how?
Steve Epner, CSP, with Brown Smith Wallace Consulting Group, St. Louis, has been directing traffic on the information super highway since 1966. A regarded industry expert, Epner is widely published and has provided comment for national business publications including the Wall Street Journal. Epner was a speaker at IFDA's 2004 Sales & Marketing Conference in Naples, FL. His experience in business, technology and strategic planning makes him a renowned technical speaker. For more information visit www.bswllc.com
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