Forces Of Change

Upcoming trends for material handling

Dynamic forces of change are converging upon the wholesale distribution industry. The business environment is changing, forcing material handling equipment distributors to change too. Looking ahead, MHEDA members face a future in which the realities of the business environment differ from the past in novel and challenging ways. The traditional ways distributors make money and grow will be rewritten through a combination of external forces of change and by the strategic responses of innovative distributors.

Current growth trends and the business-friendly political environment provide distributors with the financial flexibility to get on the road to renewed relevance and increased profits. Material handling equipment distribution executives must take advantage of this opportunity and evaluate the strategic options that will affect their companies for the long run. Based on Pembroke Consulting's research for the Facing the Forces of Change: The Road to Opportunity study, a few of the most important trends for MHEDA members are highlighted here.

Customer Self-Service
Over the next few years, self-service technologies will change the way material handling equipment distributors do business with their customers. Customers will accept more responsibility for performing activities they previously expected their distributors to handle. This means distributors will be forced to respond as customers take on a more active role in the pre-sale and transaction portions of the buying process.

Customers are trying to do more in less time. They gravitate toward self-service when they can perform activities that bring them added value, such as becoming better informed about product options online regardless of their distributors' line card, or simply to save time, such as checking order status online instead of placing a call.

Distributors no longer have a lock on information needed by customers to make purchasing and sourcing decisions, since manufacturers and other online sources increasingly will make such information readily available. As a result, the sales force's perceived value in educating customers about new products and in-use applications will be eroded significantly. Some customers simply will not want to pay the margin required to support an outside sales force.

Customer self-service technologies also are a cost-effective way to boost the productivity of sales and service personnel, especially when used with customers whose level of spending does not justify labor-intensive interactions.

Wholesale distribution executives expect to redeploy their sales force toward more prospecting and away from dealing with existing customers. However, these productivity improvements will only happen if the sales force is comfortable selling through new technologies and they can teach customers how to gain information, place an order or solve simple problems themselves.

Strategic Sourcing
Strategic sourcing is a structured process by which larger, multi-location customers attempt to leverage their purchasing power. Strategic sourcing consists of three major activities:

1. Assessment and Spend Analysis: The first step involves aggrega-ting and analyzing internal purchasing data to measure spending by distributor, product, application and location. The customer tries to develop a complete view of total spending activity to identify the product baskets with the greatest potential savings.

2. Sourcing and Contracting: At this stage, customers attempt to leverage buying power across sites and within product categories using tools such as national contracts, vendor reduction or reverse auctions.

3. Implementation: To achieve the benefits of sourcing, customers attempt to enforce buying discipline by the individual buyers within their own organizations. Centralized purchasing departments attempt to clamp down on individual buyers who buy from non-specified distributors, buy the wrong products, or pay higher prices than they should.

The strategic-sourcing process encourages customers to become more confrontational, rely on increasingly sophisticated sourcing initiatives and use new technologies to counter the field-level sales tactics of distributors. Aggressive tools such as online reverse auctions, in which lowest product price wins, are here to stay and will continue to grow.

Furthermore, customers will push for better internal contract compliance from end-users within their organizations. Expect the elimination of regional pricing for large customers, local price-matching by small distributors, and new constraints on the ability of local buyers to choose brand and supplier.

Fee-Based Services and Pricing
Fee-based services and fee-for-service pricing will grow sharply, but significant barriers will remain. Our data show that more than 80 percent of wholesaler-distributors plan to charge fees separate from product costs. Some customers will accept fees, but slowly. Other customers will change distributors rather than pay for service.

Fee-based services promise improved profitability for those distributors who can deliver innovative services with genuine value to the customer. Creative distributors are charging customers for new services, rather than giving away value-added services for free and hoping to recoup the costs with product margins.

Nevertheless, our research clearly shows that new fees for old services will not work. Many distributors still see fees as a new way to charge for something that used to be given away for free. Obviously, customers can be expected to refuse to pay for something that once was free, even if they acknowledge the economic logic behind the concept.

Fee-based services must deliver new value to customers. What appears to be a unique or valuable service can become commonplace in a few years as competitors join in. A fee-for-service pricing approach will succeed only if distributors offer services that directly improve the customer's profitability and operations. Success here is not measured by delivery times or fill rates, but rather by customer productivity gains, labor savings, ergonomic improvements or a faster time-to-market.

Manufacturers, under product pricing pressure from both imports and domestic competition, also have identified fee-for-service as a business opportunity. In fact, most manufacturers in our study plan to build on their design and research activities and offer fee-based services directly to end-users, with or without their distributors.

Logistics and Fulfillment
Third-party logistics companies are on a collision course with distributors for control of the supply chain. Going forward, competition for wholesale distribution's core logistics and fulfillment functions will greatly intensify. About 80 percent of the 200 largest logistics companies already offer pick-pack-ship services in direct competition to wholesale distribution. More than one-half of Fortune 500 companies currently outsource supply chain functions to logistics companies.

Suppliers will treat logistics companies as viable alternatives to wholesale distribution. A majority of suppliers to distributors expect logistics companies to be competitive with wholesaler-distributors for customer order processing and fulfillment. However, wholesaler-distributors will retain a distinct advantage in post-sales service and support.

Alternative channels now provide additional options for material purchasing along with service levels that differ from traditional distributors. Customers turn to these channels for different buying situations, chipping away at wholesaler-distributors' long-standing share of channel sales.

The Road to Opportunity
New challenges bring new opportunities for savvy distributors. As products increasingly become commodities, customer service will become the true differentiator. Distributors have an opportunity to become suppliers of customized and differentiated relationships throughout the supply chain instead of merely reliably providing goods.

Wholesale distribution has survived by continuously reinventing itself. Strategies and tactics for wholesale distribution executives are included below. By adopting these and other strategies, your company can successfully seek out new paths to profitability.

Get to know your customers all over again. Unfortunately, some distribution executives have developed an unchallenged familiarity with customers through years and years of day-to-day account servicing. Test the understanding of yourself and your management team with external, objective data from customers. To understand the true service needs of your customers, sit down with both good and bad customers and walk through their buying processes.

Offer new fee-based services that directly improve the customer's profitability and operations. Distributors can leverage existing relationships, build on traditional competencies, offer new value and get compensated appropriately for the new added value that is provided.

Remain a cost-effective channel. Encourage self-service by customers to reduce costs and boost internal productivity. Self-service should be the default alternative for customers whose level of spending does not justify labor-intensive interactions. Many distributors already are seeing internal cost reductions when customers begin entering their own orders.

Train your sales force for tomorrow's challenges. Salespeople, who are accustomed to selling on price, will need training to compete in the evolving world of services and solutions. Evaluate each of your salespeople to determine if he or she needs training in qualifying customers, uncovering problems, identifying solutions or bringing the company's resources together for problem-solving. Make sure compensation plans are based on customer-focused needs, not just on history.

Act now to reinvent supplier relationships. Online auctions will force distributors to cut back on salespeople and request more drop shipments to customers, undercutting the fundamental distribution role desired by manufacturers. If distributors do not take the lead, manufacturers will simply take more and more business direct.

Offer unbundled supply chain solutions to suppliers and customers. Distributors of all sizes are leveraging technology, warehouse infrastructure and logistics as a fee-based service without performing sales and marketing activities.