Hang On Tight

April 1, 2003
The rapid flow of information will transform the distribution world. The question is, will distributors play a role?Love or hate the Internet, you must

The rapid flow of information will transform the distribution world. The question is, will distributors play a role?

Love or hate the Internet, you must admit that it has kept a lot of business theorists busy predicting how it will change our lives. Amid their overworked metaphors about highways and revolutions and virtual this and cyber that, you'll often run into one of their favorite futuristic words for the market changes now underway-it's a big one full of scary implications for electrical distributors: "disintermediation."

The idea is that the speedy flow of information made possible by the internetworking of the business world will eliminate the need for some participants in the product and service supply chain. In essence, it means cutting out the intermediaries. That means you.

The road to disintermediation begins with the idea that many businesses that act as intermediaries in their markets are there because of bottlenecks in the flow of information. Nobody can learn everything, and many businesses exist to supply knowledge and experience in arcane subjects, such as health insurance or harmonic distortion, when customers need it. Having that scarce information allows the seller to bundle it with products and paid services and charge a single, premium price for the package. Being in a position to provide that information to customers makes the intermediary valuable to product manufacturers as well, who as a result don't have to invest as much to fill the market's every educational need.

The rise of the Internet has made information on every conceivable subject more easily accessible, which lowers the price customers are willing to pay for a product to get the information along with it. If networked computers can make product selection and ordering easier, more efficient and more reliable than talking to a human being, then it makes sense to shift those humans and resources to duties computers can't do as well. Therefore, the first players to be disintermediated are those for whom information exchange is the primary function-whose product has no physical presence beyond the data exchanged. Theorists often cite travel agents, insurance agents and branch banks as being among the first to lose their market positions to networked computers. The theory is usually extended, though, to encompass retailers, wholesalers, magazine editors and anybody else who stands between a customer and a supplier.

When you combine the information flow of the Internet with just-in-time manufacturing and overnight shipping, the perceived need for local physical inventory diminishes, and the case for eliminating the wholesaler gains strength. To top it off, on the World Wide Web it's technically just as easy for the manufacturer to take orders from customers online as it is for a distributor. If you're a manufacturer, customer or business theorist and you look at a traditional market channel flow chart in search of ways to flush out waste, the distribution function seems an obvious point for consideration. After all, the only thing happening there is somebody buying product, putting it on a shelf, taking it off the shelf and selling it again at a higher price, right? (Be prepared to defend your answer--it could have a resounding impact on your future.)

In the introduction to his 1996 study Foundations of Wholesaling, James Kenderdine, associate professor and director of the Distribution Research Program at the University of Oklahoma, Norman, Okla., points out that assaults on distribution are nothing new. "Unlike other sectors of the economy, wholesaling periodically has to contend with those who argue that it no longer has a significant role in the economy and who predict that it will wither away," Kenderdine wrote. "None of these predictions has proved right, and none are likely to prove correct in the near future."

Now, once again, distribution's demise is being announced with some fanfare, and perhaps a little prematurely. This time it's the Internet that will make distributors a thing of the past. It lets customers gather information on their own schedule, learn about products and place orders directly from the manufacturer who can ship it overnight, all with extreme accuracy, or so runs the conventional wisdom. Who needs a distributor in such a world? And if it turns out that such a world doesn't need distributors, can a wily distributor carve himself a place in the product channel anyway? There are some positive signs.

"I believe some of the greatest opportunities that will exist over the next 20 years will exist in distribution," says Clyde Moore, president and chief executive officer of Thomas & Betts Corp. (T&B), Memphis, Tenn. "I think some of the greatest profits to be made, and some of the greatest sales growth to be made, will be made in the distribution industry, because their role has the greatest flexibility of adapting."

That adaptability may be a key to your future. It's clear that if you want to make it through the transition to a thoroughly internetworked world, you'll have to take a fresh look at what you do. Take some time to pick your business apart according to function and evaluate each function for its value to the customer, your ability to make it a competitive asset and other measures of value depending on your company's mission. The mix of products and services on the list you end up with may not look much like a traditional electrical supply house. You probably ought to get used to that. Much as you may like being an electrical distributor, the definition of that market role may be in for some radical change. What you do will matter more than what you're called.

The idea is to unbundle your products and services, an approach Bruce Merrifield of Merrifield Consulting Group, Chapel Hill, N.C., has been advocating for years.

The survivors in the distribution market will be those who unbundle their products and services best, predicts T&B's Moore.

Many of the functions distributors provide will continue to be required by the market, though the way they're provided, thecompany providing them and the price they bring may all change. For example, customers will still need somebody to assemble an array of goods from multiple manufacturers. Expect more of it to be done online by companies that never take ownership of the product, says Kenderdine of OU. He points to a relatively new online electronics source called Cyberian Outpost as an example.

Cyberian Outpost, www.outpost.com, says Kenderdine, will take an order for a particular computer or modem or camera or software package, delivered in a particular manner to a particular place on a particular date, then request quotes from other suppliers for the best price to fit those parameters. The service essentially brings customers together with a huge number of potential suppliers and helps them get the best deal. Whether or not you consider such a company a distributor, there's no doubt it provides a service that could easily be adapted to just about any industry model, including electrical.

Other kinds of third parties are already moving to interpose themselves into the traditional channel between manufacturer and end users by creating virtual communities where end users can get all sorts of information, including searching for and ordering product. Such sites present end users with new ways of learning about and ordering products they might normally buy from a distributor.

One interesting example is a group of sites at www.verticalnet.com. VerticalNet has community sites for the electric power, solid waste, water and public works industries. Each includes breaking news and feature articles, discussion forums, product announcements and other handy services. The very first selection at the top of the navigation frame is a window in which a user can search the site's buyer's guide for a product or manufacturer. A search brings up a list of suppliers, including a mishmash of manufacturers, distributors and other sources, and links to further company information such as line cards and contact information. If you want information from all suppliers under a given category, you can get it by pressing one button.

The kind of information service provided by such sites will be a major part of any future business model, say many observers, and the sites out there today are just beginning to scratch the surface of the potential benefits. Distributors will have to respond by keeping pace by offering their own information services, by working with such providers as an order-fulfillment service, or by directing their energies to other areas, such as getting closer to local customers.

The unbundling of products and services will provide an incentive for distributors to offer new, untried services based on a deeper understanding of the individual customer's needs and designed to make his or her life easier. Take the example, suggested by Moore of T&B, of a distributor who, realizing his local contractors don't like to send their drivers to a distributor because of the time it takes, starts a service picking up contractors' trucks at night and restocking, organizing and returning them so they're ready to hit the road when the electricians show up in the morning.

Such unbundling and innovative thinking, already widespread in the industrial maintenance, repair and operations (MRO) market where many distributors restock customer tool cribs, will characterize distributors who thrive in the face of disintermediation, says Neil Parker, president of T&B's Electrical Products group. "Providing that service takes a lot of pressure off price, and the switching costs are enormous because the end user now has to find somebody who can provide not just the supply of the product but the service and maintenance of the bins."

The distributor's position as the keeper and protector of deep local product stocks is likely to come under pressure. Although the value of this function will never be eliminated for some product categories, the market will likely not support as many companies in this role as it has historically done. The physical characteristics and demand fora product will determine how it flows through the channel. Fast-moving, large volume, low-cost items that customers expect to be in stock will continue to be stocked by distributors and will continue to be shipped in truckload quantities as they are today, as will freight-sensitive products such as wire and conduit.

Slow movers, on the other hand, will more often be shipped direct from manufacturer to the customer, says Moore of T&B. "We believe that in the future, one-at-a-time items will be shipped electronically on the distributor's behalf. It (the box) will still say 'From XYZ Distributor,' and have the distributor's packing list, but it will be shipped from our warehouse direct from the customer." Research conducted by T&B shows that distributors overall could take about $1.5 billion out of their inventories if they shipped more slow-moving items direct from the manufacturer, Moore says.

The service of sending road-going sales warriors to court purchasing agents will lose value as the information they bear becomes more conveniently available by electronic means, but there will still be a value to feet in the street. "Eighty percent of what outside salespeople do is really prosaic information-relay stuff-price and availability, do we stock it or not-and a lot of that stuff is just going to disappear because the customer's going to be able to help himself faster, 24 by 7," Merrifield says. "When they do that, they're probably going to expect a functional discount because the cost structure at the distributor's going to be less."

New opportunities will appear for distributor salespeople to act as consultants for their customers. A good model for distributors to follow in deploying their sales forces in the future, Merrifield says, is the value-added reseller (VAR) concept borrowed from the computer industry, where technicians help customers on an hourly basis to get the most value out of a system. "The guy gets a salary plus some sort of bonus based on the bottom line of the whole company, and their job is to go out and clock hours, paid for by customers. If they value it, they'll pay for it. If they don't value it, they won't. The product that flows through the warehouse will still be everyday low price, and services will become unbundled."

The distributor of the future could offer customers a menu of sales and service specialists, Merrifield adds, filling in the dialogue. "'If you want a guy to come out and do inventory, housekeeping and gruntwork stuff, we have a guy in a jumpsuit who does that, and he costs so much per stop and so much per hour, just like your copier repairman. If you want a consultant to come out and do a project for you, here's the fee schedule.' It will be a very different world."

Distributors can use this same approach when providing additional services requested by their manufacturers, and given the continued withering of margins, they may have to use this approach. For instance, Kenderdine of OU expects more distributors to take over customer support and obsolete parts supply from the manufacturer on a fee-for-service basis.

As for the concern that all the services provided by distributors could be replaced by the manufacturer or somebody over the Internet, selling direct has been an option throughout the history of the electrical industry, and distributors have thrived for good reason. In a nutshell, manufacturers and customers can't do distribution at a lower cost than distributors do it, says Bill Elliott, president of Elliott Electrical Supply, Nacogdoches, Texas.

Moore says manufacturers don't want to take over distribution's functions anyway. Manufacturers are good at making products. Distributors are good at knowing what a contractor or other customer really needs and wants. "The fact of the matter is it would make no sense for us to get good at that. We don't know what those contractors want. We're not close to them. It's a local business. It's an individual sell. As things unbundle, things will be done more and more by local people, not by national or international people. Why would we hire a bunch of people to run around and figure out what contractors want to stock their trucks when, oh by the way, we only make a tenth of what goes on those trucks. The distributor will still be the focal point for putting together the bigger package.

"What they will do is become more and more focused on the users of this stuff, looking at ways to save them money through cost savings or efficiency or less hassle," Moore adds. "Distributors will be much more focused on the end user and much more specialized. There'll be a lot of investment in computer systems and software to track what these people want. Less generalists in the sense that 'I own a store, you come buy what you want,' and more, 'Go find the people who use this stuff and design services that make them want to come to you.'"

Distributors in the electrical industry certainly are not sitting still and letting change pass them by. Many are already actively engaged in changing their companies to respond to changes in the business culture. They have embraced electronic commerce, as you can see from the progress on the industry data warehouse (page 30). They are attracting the notice of Wall Street, which sees lucrative opportunity in the distribution business (page 45). They are in this for the long haul, and they are preparing to offer customers enduring value, no matter what the future brings.

Clearly, according to some of the electrical distribution industry's thinkers, distribution provides services that are of considerable value to the marketplace, and that value will continue to prove itself. Regardless of what they think, though, right now there are entrepreneurs who see the future differently and will constantly strive to make their fortunes by eliminating distribution and any other "redundancies" from the channel. Your place in the market will remain secure only so long as you can defend it by adding more value at lower cost than other alternatives.

Distributors today have a rare window of opportunity to take the leading edge of change and have a hand in determining how business will be done in the electrical industry for years. Once the market sorts itself out, you can expect the channel to return to a fairly stable model, Merrifield believes. The previous model was developed and refined over a 100-year period. As with most things, computers will probably speed that up as well. "I think we're in the third year of a 10-year revolution," Merrifield says.