While many respondents to Electrical Wholesaling's annual ElectroForecast survey dared to dream of single-digit sales increases in 2004, concerns over a shrinking industrial base were on their minds, too.
Most respondents expect sales growth of up to 5 percent in 2004; several of the more bullish reps, manufacturers and distributors think they can achieve sales gains between 6 percent and 9 percent. The residential, educational, government and institutional market segments generated the most optimism. Respondents were decidedly less excited about sales prospects for the industrial and OEM market segments.
INDUSTRIAL MARKET
Any rep, distributor or manufacturer who deals with the industrial market had concerns about low sales demand and the flight of factories to China and other less-expensive manufacturing locations.
Said one rep, “Manufacturing has moved south of the border or to the Pacific Rim. This will make it very difficult for the industrial sector to come back. There are too many lost jobs, and the people that do come back to work are making less money than they were before.”
Another rep said one of his biggest challenges was finding new business to replace what was lost due to manufacturers moving out of his market area. “The continuing loss of manufacturing to China and Mexico is shrinking our OEM and MRO segments.”
Yet a surprising number of respondents didn't glimpse any economic danger signals for 2004. One common concern, however, was the lack of inventory carried by manufacturers and distributors.
“Any spike will create shortages,” said Jim Amey, principal, Robert A. Amey Inc., Portland, Ore. “Inventories are very low.”
“The supply pipeline is empty beyond the ability to accommodate a 5 percent business increase,” agreed another rep.
Christopher Hartmann, president of Thomas & Betts' electrical division, Memphis, Tenn., echoed the opinion of many respondents, saying the economy is on solid footing for modest growth in 2004. “The only significant risk on a macro level would be another major geopolitical or socioeconomic event such as a terrorist act or scandal in the financial markets,” said Hartmann.
At least one industry economist had concerns about the impact of some macroeconomic factors on the market. “Soaring government spending will crowd out more productive private investment,” said Don Leavens, vice president and chief economist, National Electrical Manufacturers Association (NEMA), Rosslyn, Va. “Rising commodity costs including energy will temper recovery. Higher interest rates will dampen demand growth for housing and durable goods.”
INDUSTRY CONSOLIDATION
Survey respondents' opinions differed regarding consolidation's impact on their companies. A few distributors and reps said it would not affect their companies at all, while some said even though national or large regional distributors already owned most of the key locations in town, consolidation would continue. Others are in active acquisition mode and plan to use consolidation to grow their businesses. Generally, respondents didn't think 2004 would be a particularly active year for consolidation.
Said T&B's Hartmann, “Industry consolidation will not heat up again until 2005 and will not have a major impact on the market or our company in 2004.”
From the reps' perspective, consolidation affects the lines they carry and the vendors that distributors can stock. “We see more of this, and it really has had a dramatic impact on reps,” said Thom Hiemer, MWE Inc., North Kansas City, Mo. “We all work hard to grow a particular line, and then it consolidates with another manufacturer. Who the rep winner is will always be an extensive debate.”
Nonetheless, the tone of most respondents reflected a certain inevitability that consolidation would continue in the future. Said Bob Powell, principal, Kunz Powell and Associates, Malvern, Pa., “It is a fact of life. We cannot control it, and we must keep options open so it does not consume us.”
SPAS
Special Pricing Authorizations (SPAs) also frustrate survey respondents. Several respondents said the industry needs a standard for SPAs and a method of transmitting them electronically, and were in favor of net pricing.
“This issue continues to consume too much time and energy,” said Duff Greenwood, principal, Cleaves-Bessmer-Marietti (CBM) Inc., Kansas City. “Manufacturers need to apply resources to get a better handle on the competitive levels in each territory and provide appropriate prices, products or services to meet the situation. Distributors need to spend more on education and training of their personnel to develop a professional, knowledgeable sales force that adds value and increases profit margins.”
Added one manufacturer, “SPAs will never go away under current channel models. The industry could cut down on the time spent on SPAs if manufacturers did a better job of setting published prices and pricing policies, and distributors did more proactive selling and demand creation on things other than price.”
Art Andrews, principal, Andrews-Johnson-Brusacoram, Minneapolis, said the electrical industry should focus on two areas in regard to SPAs. “Have distributor into-stock costs very close to market costs and just say ‘no’ to end users that are not organized enough to plan their needs,” he said.
Another rep said distributors are too worried about price and should concentrate on service and inventory. “SPAs have cut the price, reduced the profit and, in general, have been detrimental,” he said.
Hank Bergson, president, National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y., was quite specific in his suggestions. “Get rid of them,” he said. “Price products fairly and adopt a national pricing strategy.”
When asked what the electrical industry could do to cut down on the amount of time distributors and manufacturers spend on SPAs, one distributor said succinctly, “Net pricing. Go electronic.”
“Automate,” agreed another respondent. “Use technology to control the transaction.”
E-BUSINESS
Although some respondents believe the implementation of EDI, IDEA's industry data warehouse (IDW) and other tools of e-business is progressing at a realistic rate, an undercurrent of discontent about the progress exists.
Several manufacturers, distributors and reps agreed the lack of push from customers for e-business, antiquated legacy computer systems at distributors and limited capital available for new system investments were stifling e-business in the electrical wholesaling industry. Others pointed to poor data quality, incompatible computer systems and poor articulation of the value-added benefits these tools offer.
Said CBM's Duff Greenwood, “Distributor investment in hardware, training and systemic adaptation has stymied the growth of e-business tools in the electrical industry. This causes representatives and manufacturers to slow down — dumb down if you will — and perform functions that are costly and add little or no value. The overall cost of transcribing purchase orders (from a distributor's faxed purchase order) into a manufacturer's computer system has to be astronomical if tallied industry wide.”
With 28 locations in 10 countries, John SantaCroce, president and CEO, Argo International Supply Corp., New York, brings an international perspective to the status of e-business in the electrical business. Yet he is experiencing the same problem as domestic distributors.
“The customers are not pushing EDI or e-commerce,” SantaCroce said.
Another distributor attributes some of the problem to internal resource constraints. “These things do not just happen because they are electronic. They take people resources behind the scenes.”
T&B's Hartmann sees several challenges on the e-business scene. “Limited resources (time and money), poorly defined cost-benefit analysis, arguments and conflicting agendas between large and small members of IDEA.”
A Texas distributor said IDEA has not yet achieved its full potential for a variety of reasons.
“The original plan for IDEA was flawed,” he said. “The private network was a bad idea. They have corrected that, but only after wasting most of their capital and creating a lot of debt. I believe that with IDX and the right business plan it can still be saved.
“And there are too many versions of EDI documents. This could be solved if IDX translated EDI documents that they passed through… Also, IDEA and Trade Service need to consolidate and reduce the cost of maintaining the database.”
Gary Brusacoram, a principal of the rep firm, Andrews-Johnson-Brusacoram, Minneapolis, said the word doesn't appear to be getting out about the benefits of e-business. He also believes the perceived costs of implementation are a problem.
“It would seem that NEMA and NAED haven't made effective presentations,” he said. “Not everyone that should be is sold.”
THE 10 BIGGEST CHALLENGES FOR ELECTROFORECAST 2004 SURVEY RESPONDENTS
- Weak economy
- Pricing pressures
- Industrial plants moving offshore
- Consolidation and the resulting turmoil
- Pressure to reduce cost of doing business
- Imported goods from the Far East affecting U.S. manufacturing jobs
- Keeping, motivating and training quality personnel through the turnaround of the economy
- Health care
- Low inventories of goods at distributors and manufacturers
- Doing more with less
WHAT'S THE DEAL WITH E-BUSINESS?
Respondents believe these factors are slowing down the adoption of EDI, IDEA's IDW and other e-business tools in the electrical industry.
- Antiquated legacy systems at distributors
- No push from customers
- Limited capital for new system investments
- Resistance to change
- Data quality and compatibility
- Perception of a poor return on investment
- Inadequate “sales job” by industry associations on benefits
SPAS: SOLUTIONS, RANTS AND OTHERWISE INTERESTING IDEAS
ElectroForecast respondents said plenty about special pricing authorizations (SPAs). Here's a sampling of what distributors, reps and manufacturers think the industry can do about SPAs.
- Automate. Use technology to control the transaction.
- Manufacturers should allow distributors to sell into stock at levels that allow them to compete with home centers.
- Stop using SPAs as a tool to manage excess distribution.
- Manufacturers should stop using SPAs to protect margins.
- Publish more realistic trade pricing and drive pricing decisions down to the local level.
- Manufacturers should admit that competitive pricing pressures are everywhere and come up with realistic pricing for individual markets.
- Simplify and speed up the process by standardizing the reporting of SPAs.
- Boycott those vendors that refuse to change.
- Cut rebates and dating to represent true market-price levels.
- Be more competitive — and realistic — with into-stock prices.