The Impact Of E-Business On
Industrial Gases And Welding Distributors

Customers will adopt new e-business technology when it benefits them and limit technology usage when the technology does not help them. This deceptively simple rule of thumb provides a framework for predicting the ultimate impact of e-business on the industrial gas distribution channel. It can also help you build your own company's strategy.

This rule of thumb, derived from my recent Facing the Forces of Change study, has important implications for everyone in the industrial gases and welding supplies channel. Welding supply distributors represent the most significant channel to market for industrial gas manufacturers and the most important supply chain for customers. Therefore, technology in the channel must benefit customers as well as demonstrate a clear return on investment for distributors.

Customer-orientation serves as the most important roadmap for managing your technology investments. This article highlights the way your customers will-and will not-use the Internet. Your company's technology strategy represents an opportunity to create an experience that solves genuine problems for your customers.

Where We've Been
Was it only two years ago that there was widespread uncertainty about the impact of the Internet on industrial distribution? Many forecast the demise of distributors once customers could easily access comparative bid information and place online orders. Distributors would be “disintermediated” as customers and manufacturers dealt directly with each other.

Many uncertainties have been resolved during the past 12 months. In hindsight, we can now see that the greatest competition for online exchanges came from existing ways of doing business, not from other exchanges. Once again, we learned that customers are reluctant to disrupt systems that work, even if those systems are partially uneconomic or somewhat inefficient.

This is particularly true in gas and welding supplies distribution because the stakes are so high and products so complex. Industrial buyers must procure supplies to keep factories running without disruption or downtime. A “first mover advantage” versus another exchange is relatively meaningless compared with the hurdle of competing against a functioning, in-place system of buyers, distributors, manufacturers, brokers and other players. The handling requirements of gases also protected distributors from purely online solutions.

Ordering via the Internet
There are many ways in which a customer can place an order with a distributor. The Internet is another way for a customer to communicate with a distributor, just as the introduction of the fax machine and EDI systems created additional options for customers. The Internet will not replace other modes of communication, but add to them.

The percentage of orders received online is expected to grow substantially. However, online ordering will not dominate the other ordering methods. Today, distributors who sell to industrial customers receive about 10 percent of their orders electronically. Within five years, distributors selling to industrial customers can expect to receive only about one-third of their orders online. (See Exhibit 1.)

In other words, traditional methods of ordering will remain despite the Internet and other new technologies. The phone, fax and sales rep will still be common modes of order placement. The entire purchase process for gases will never migrate completely online. Certain purchases will always require customers to speak with a sales rep or a technical rep.

Only certain types of products and purchase occasions lend themselves to both online purchasing and ordering. Exhibit 2 illustrates the relationship between increasing levels of product/service complexity and three fundamental methods for delivering product service and support:

1. Online Point & Click (or “Fire and Forget”) — no support required,
2. Online service/support — backed up by customer service call center,
3. Local service required — Internet-based transaction processing only.

The greatest impact of online technology will be realized with point-and-click hardgoods. These items are purchased frequently by customers and require minimal to no customer support. These products have a relatively simple procurement decision and limited need for ongoing support to migrate online.

As product/service complexity increases, the potential role for a complete online solution diminishes, but does not necessarily disappear. The variation in type and source of suppliers for more complex items will render online services inadequate in many cases, due to the need for much more extensive and personalized customer support functions.

Products that require additional services, such as installation, kitting and light assembly, also require more personal interaction. So far, it has proven nearly impossible to write online rules or algorithms that can completely replace voice and in-person contact between people, especially for complex or custom production materials and services. The Internet will also be less likely to replace the current order mechanism for new buys, since they often require a greater amount of personal interaction.

Purchasing Process
Even though online order placement will grow slowly, nearly all of your customers value the Internet as a source of product information. Your customers are increasingly looking online for product specifications, warranty and rebate information, technical information, potential suppliers, and standard pricing information. Many customers are showing a willingness to perform research tasks for themselves because the Internet makes it easier to search and obtain product information.

To meet these needs, manufacturers are developing online websites to provide information directly to customers, bypassing distributors. Manufacturers are communicating more frequently and more intensely with their end-use customers. Distributors are also at risk of becoming less critical as a resource to help identify and select appropriate products. As customers begin to rely heavily on the manufacturer for product information, the importance of the distributor's sales force as a source of this information is being reduced.

If you talk to your customers, you will see hints of this trend that are already apparent today. More than 80 percent of industrial manufacturers currently have (or plan to have) their product catalogs, product and technical specifications, and material safety data sheets online.

Instead of using the Internet to remove distributors from the channel, manufacturers can use e-business technology to integrate traditional channel partners into the sales and support process. Manufacturers in the industrial gas industry should recognize that the Internet is clearly a viable source of content, but can be poorly suited to the buying behavior and requirements of end-customers. Few customers appear willing to migrate their entire purchasing process to a direct relationship.

Winning Strategies
Customers will use technology when it benefits them (searching, ordering, sourcing) and limit technology usage when it does not directly benefit them. Customer expectations and capabilities will set the pace for the evolution and transformation of marketing channels and supply chain. Savvy distributors can only participate fully in the “bricks and clicks” era if they become truly customer-driven.

Here are four near-term actions that distributors should take to participate in this future:

Gather external, objective data from customers. If you are like many executives, you may believe that you “know it all.” Perhaps you do. But an evolving industry requires that you understand who your key accounts are today, and who they are likely to be in the future so you focus on the right segment(s) instead of trying to be all things to all people. What percent of your active accounts are profitable on a fully allocated cost basis? How many customers have you lost in the past year? Why did you lose them?

Use the Internet as a marketing tool. Customers will use the Internet to search for new suppliers. Make sure that you are using the Internet to reach prospective customers. Identify the sites that customers use to locate new suppliers. If your competitors are using a particular search exchange, so should you. Your customers will go to the Internet as well as the phone book. Make sure your ads are in both places.

Provide online ordering as an additional order option. Understand your customers' ordering preferences and typical purchase occasions. Remember, few customers will want to order online all the time. Online ordering is important, but not at the expense of other processes. Customers will want to order through a number of different interfaces, but will expect each to be responsive and aware of the customer history. This will require distributors to be equally agile with phone, fax, in-person or Internet sales, but also to build the infrastructure to allow information to move freely between the different sales channels.

Train your sales force to leverage online product and technical information. Technology will expand the role of the sales force beyond just order-takers. The distribution sales force must be comfortable selling through new technology as well as ready and able to teach customers how to gain information and order. The sales representatives of a distributor will need to teach and encourage customers to access a distributor's or manufacturer's website for product information and marketing promotions.

Place product information on the Internet. Customers will use the Internet to obtain product information. Whether or not you coordinate online product information with your manufacturers, customers will look to the Internet for this information. Provide general product specifications, technical information and standard pricing information on the Internet. If you don't, be prepared to direct your customers to a site that does provide this information.