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Perfecting Partnerships

Sept. 1, 2003
Whenever electrical industry people get together these days, they invariably end up talking about the changes taking place in the electrical distribution

Whenever electrical industry people get together these days, they invariably end up talking about the changes taking place in the electrical distribution business. We all know there's plenty to talk about, whether we look at change in terms of yesterday's acquisition of the competitor across the street or ten years' worth of consolidation among the nation's electrical distributors. Alternate channels, electronic commerce, technology advances, manufacturer realignments, utility deregulation--or any other angle you choose--provide plenty of fodder for endless discussion.

A common question I often field is "Where is it all leading?" You want to know what these changes mean to the reality of day-to-day business today, tomorrow and one, three or five years from now.

With any market in the midst of change, the outcomes are open to speculation. I've done some speculating myself; I've also heard a number of opinions along the way. One that sticks in my mind and seems worthy of reporting at length comes from Mike Gambino, principal of M.J. Gambino & Associates, Inc., Syracuse, N.Y. As many of you will remember, Gambino spent several years in executive sales and marketing positions with Pass & Seymour/Legrand, Syracuse, N.Y., and Thomas & Betts Corp., Memphis, Tenn., before launching his consulting business. From this third-party perspective, he addressed electrical manufacturers at NEMA's Economic Outlook meeting held this summer in Washington, D.C., on the future of distribution in this industry.

Gambino believes the changes now roiling through the electrical distributor channel will alter the distributor-manufacturer dynamic, and that the manufacturers will need to make some changes of their own to adapt. "Manufacturers tend to look down on distributors, but they shouldn't," he says. Distributors are very good business people, he says, making a respectable 16% return on net worth and managing a healthy 8%-10% average sales growth over time, according to published industry statistics from various sources. The changes distributors precipitate in their own businesses will force manufacturers to adapt their methods.

Foremost among the trends Gambino sees is a doubling in the pace of consolidation among distributors, driven by customer changes, return-on-investment (ROI) considerations and technology factors. "The customer puts a lot of faith and trust in the channel (not the manufacturer) to do the right thing," he points out. With customer expectations on service options, technical knowledge, delivery speed and fill rates going through the roof, distributors are reacting by seeking out ways to sharpen their capabilities and lower their costs. Some answers have been found in reducing the number of suppliers on a line or product type, seeking out database marketing to help "up their batting averages" and looking for new ways to leverage current resources. Gambino notes, too, that distributors have been taking advantage of the improved inventory turns on mature lines to experiment in new or emerging lines.

Gambino draws the following conclusions for the not-so-distant future:

*Distributors will rank manufacturer and customer relationships based on how well they perform.

*Distributors will advance on the scale of expertise in selling, moving to a value-added, account-executive role and away from their traditional transaction and product focus.

*Distributors will use technology to increase productivity in inventory, service, electronic commerce (with both suppliers and customers) and database marketing.

*Distributors will continue to seek out single-source relationships with vendors.

*Distributors will continue to consolidate and/or form alliances.

To Gambino, the implications to an electrical manufacturer selling through electrical distributors stand out clearly. Among distributors, the number of buying locations (although not necessarily the total number of distributor houses) will decrease. At the same time, the leveraging and negotiating skill levels among distributor managers will rise. Suppliers will need to rethink their distribution policies and configurations, he concludes. He believes they will need to evaluate their businesses on a very local level, by metropolitan area. "(Manufacturers) will need national access," he states. "I'd even go so far as to say (they'll) need good access to a national chain."

Other shifts on the manufacturer front he points to as necessary to deal with include increased use of national account executives and a transformation of a manufacturer's sales force from a product/transaction orientation to an account-executive status. There will be more need to explain and back up product and service differentiation, too, as well as the necessity to sell the benefits of doing business with a particular company. The focus will move away from product alone. Finally, database marketing will shift so that information goes to the field rather than coming in from the field to headquarters.

This analysis is one of the more practical and thoughtful analyses of the situation I've seen, and it's well worth your consideration.