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Trends affecting industrial distributors
Trends Affecting Industrial Distributors Ronald D. Michman
Industrial distribution has only recently been affected by the trend of large distributors to merge, acquire, and expand. Independent distributors are confronted with new challenges that threaten their very survival. Major efficiencies must be developed in order for independent distributors to remain an important force in industrial distribution.
INTRODUCTION Existing methods of distribution in industrial markets are being challenged because of • • • •
changes changes changes changes
in in in in
size of distributors costs of maintaining a direct salesforce service requirements products handled
There were approximately 7,600 industrial distributors ten years ago; by 1975 it was reported that there were only 6,500. Although large chain distributors account for only 5% of the market, they are the fastest growing segment. Smaller firms are frequently acquired, and by
Address reprint requests to: Ronald D. Michman, Shippensburg State College, Shippensburg, PA 17257. Industrial Marketing Management 9, 213-216 (1980) © Elsevier North Holland, Inc., 1980 52 Vanderbilt Ave., New York, New York 10017
this means the remaining finns become integrated distributors. American industry spends about $40 billion a year on such products as ball bearings, hose clamps, lubricants, fan belts, and replacement parts for machines and equipment. The larger firms and their sales volume were reported for 1975 as: W. W. Grainger, $165 million, Curtis Noll, $120 million, Motion Industries, $80 million, Lamson Products, $40 million, and Kar Products $30 million [1]. The average five year annual dollar growth rate for these corporations was 19%. The changes taking place are causing ferment among smaller industrial distributor firms. On one side, manufacturers are confronted with higher costs of maintaining a direct salesforce and now desire their distributors to perform this function on a wide geographical basis. Moreover, some manufacturers have found it more efficient to perform part of the distributors' warehousing functions. On another side, contractors and industrial customers are exerting pressure for more costly technical services. Nevertheless customers are demanding a higher level of expertise and this results in greater product specialization. Unless the small distributor is able to form close alliances with manufacturers that enable him to learn how to serve these changing requirements, large industrial wholesalers will grow dominant.
213 0019-8501/80/030213-04/$01.75
CHANGES IN SIZE OF DISTRIBUTORS Using economics of scale, integrated distributors are able to reduce unit costs for inventory, transportation, warehousing, ordering, supplier selling, and distribution buying. Increased efficiency seems to be the results of integrated distributor networks. Many of these integrated industrial distributors service the entire United States and maintain extensive facilities: Associated Spring Corporation maintains 14 warehouses, and also serves Canada; W. W. Grainger, Inc., with major products as electric motors and accessories, maintains 134 branches; and Premier Industrial Corporation maintains 10 distribution centers [2]. Many customers desire rapid delivery, which accounts for the more extensive warehouse and distribution facilities developed and maintained by industrial distributors. There is also a tendency to shift inventory burdens to the distributor, especially in periods when material shortages do not exist. Because industrial products are becoming increasingly technical and complex, there is a greater need for precise information. Large distributors appear better equipped not to only meet this need but to lower inventory, transportation, and warehousing costs. Moreover, it simplifies ordering procedures for customers since only one distributor needs to be contacted rather than numerous distributors located throughout the United States.
CHANGES IN COSTS OF MAINTAINING A DIRECT SALESFORCE Two opposite trends have been developing in industrial distribution. One trend indicates that there has been a shift from selling direct to marketing through distributors due to escalated prices for gasoline, hotels, and on-theroad meals and changing industrial patterns. The other trend indicates an expanded role for manufacturers to bypass distributors in favor of selling to large users and to assume more of the warehousing function. Reductions in
manufacturers' local warehouse and salesforces and increases for those purchasing direct in minimum order quantities suggest that distributors are becoming more important in marketing strategies [3]. Although some purchasers are dissatisfied with higher prices due to distributors' markup and reduced technical support in problem solving, relatively few purchasers are able to resist the manufacturers' change in policy. Manufacturers maintain that the reduced inventories and faster deliveries offset cited disadvantages. On the other hand, for Ingersoll-Rand it was broader acceptance of its pneumatic tool product line that led to increased use of distributors. Before 1973, Ingersoll-Rand sold most of its heavy duty tools direct and the primary market was heavy industry. After 1973 air tools were demanded for both maintenance and production applications, and distributors were able to give local service to a broadened market. Moreover, changes in demand patterns in geographical locations has also led to the use of distributors. This has been true for the San/Bar Corporation, which designs and makes printed circuit boards with mounted components for telecommunication industry. They discovered a demand in rural areas. The Silent Hoist Company followed an expansion of heavy industry into the Southern States, whereas this firm previously primarily served the Cleveland, Chicago, and Philadelphia areas direct. Manufacturers have expanded their role by opening sales offices and branches. Examples are provided by the Westinghouse Electric Supply Company and the Crane Supply Company. Between 1967 and 1972, sales offices increased unit sales by 46% and sales branches by 85% [4]. It should be mentioned that the manufacturer may still elect to operate with an indirect channel system even though the firm has sales offices and-or branches. Furthermore, sales offices or branches may be located only in the most profitable market territories, and for the remainder of the geographical market the distributor may be handling the greatest share of the distribution functions.
CHANGES IN SERVICE REQUIREMENTS
RONALD D. MICHMAN is a professor of Marketing at Shippensburg State College. He is the coauthor of two books: Marketing Channels and Strategic Advertising Decisions. Dr. Michman has also edited two bibliographies: Market Segmentation and Marketing Channel Strategy published by the American Marketing Association. His most recent articles have appeared in Business Horizons and Managerial Planning.
214
The industrial distributor, the merchant wholesaler for industrial goods, offers an interesting example of the services provided by this type of wholesaler and of the organizational structure of this type of wholesaling firm. Many industrial distributors have made substantial investments in equipment in order to service the needs of their customers. Much of the equipment is electronic, requiring specialized maintenance. Equipment may in-
clude radio-equipped cars and trucks, computer mainframes, interfaces, terminals, Data-Phone installations, and electronic data processing for customer programs. Some small distributors may not have the resources to purchase such equipment. According to a survey made by Purchasing, a professional trade periodical, 65% of the respondents replied that stockless purchasing was the most important service offered to industry [5]. Under this system, distributors stock goods subject to buyers' releases; this relieves customers from inventory carrying costs, storage, handling, and obsolescence. Approximately half the respondents made certain that manufacturers' literature to customers is updated on a regular basis. Systems engineering involves distributors analyzing customers operations. More and more distributors are finding it neces-
changes in the industry. Role relationships in the channel system are evolving, based on changes in functions performed, customer requirements, and products handled. The goal of balancing internal and external requirements is universal.
MANUFACTURER AND DEALER COOPERATION Distributor and dealer support is frequently crucial in establishing markets. Mitsubishi introduced their NYK lift truck line in the United States and established a dealer organization with definite marketing policies, promotional aids, and fields sales support. A major factor in the program was special distributor training, with emphasis on proper maintenance and servicing [6]. Mitsubishi used an approach that treated the marketing of I
Shift from selling direct to marketing through distributors. sary to provide guidance on regulation, which has made distributors and their customers more aware of government and environmental factors.
their product as if it were produced by a domestic manufacturer. From all accounts this approach appears to be very successful and has diminished potential sources of conflict.
CHANGES IN PRODUCTS HANDLED CHANGES IN SUPPLIER RELATIONS Shifts in the methods of distribution are occurring with electrical wholesalers. Buyers of such electrical products as wire and cable, motors, transformers, lamps, lighting fixtures, and heating equipment are primarily electrical contractors, industrial plants, and utilities. The expanded role of some manufacturers and agents has caused some distributors to discontinue selling to these markets, to serve customers in newly developed industries, and to extend credit and to provide services not offered by these competitors. The selling role has changed considerably as product specialization within electrical wholesaling firms has developed. Because some manufacturers and agents have assumed warehousing and selling functions in a price-dominated market, wholesalers have been forced to make alliances with manufacturers to insure sufficient profitability to continue operations. Wholesalers are also handling many new products in the rapidly changing electrical industry. A reassessment of the distributor's channel position becomes necessary due to the
Service has always been the emphasis on manufacturer-distributor relationships, but recently inflation and problems with delivery has interjected new meanings into the term. Purchasers desire distributors to help them resist autocratic measures formulated by original equipment manufacturer. This is especially pertinent with price-at-time-of-shipment policies. Thus, purchasing executives are viewing distributors more as extensions of their buying policies and distributors loyalty is increasingly valued [7]. Traditionally, fast service to local customers has been a strong feature of industrial distributors. However, some customers are willingly sacrificing delivery speed for other amenities such as lower prices and large product offerings. Industrial distributors are developing mail order as a means of satisfying customer needs for lower prices and larger product offerings [8]. A successful mail order business can be developed, provided that the goods offered are of the highest quality,
215
products do not require installation or specialized engineering expertise, and a liberal return goods policy is maintained.
CONCLUSIONS After World War II, industrial distributors remained largely unaffected by the trend among business organizations to merge, or to acquire other finns. Now, however, large organizations seek to become more efficient in serving their markets by acquiring independent industrial distributors. This new development may well mean the demise of the independent distributor, unless the independents themselves effect internal efficiencies that will make them a serious force in the distribution industry. Small distributors can surmount this trend of suppliers using the services of large-scale distributors by establishing a long-term relationship and developing a routinized and regular pattern of exchange with customers. This can be facilitated by small distributors extending problemsolving emergency service, extending accurate and timely price data, and maintaining an integral knowledge of the buyers' operations. Moreover, a willingness to support customers in conflict with the suppliers is becom-
216
ing more necessary. Large-scale industrial distributors usually do not have the same amount of flexibility or control within their operations as does the small distributor and this is an inherent advantage of those small firms that emphasize such efficiencies. In this manner, small distributors can hope to cope with trends that reveal distinct preferences for purchasers and suppliers to deal with large scale industrial distributors.
REFERENCES 1. Parts for All Seasons, Forbes, p. 44 (February 15. 1976). 2. The Chain of Events in Industrial Distribution, Marketing News, p. 7 (January 20, 1976). 3. Somerby Dowst, Manufacturers Turn More to Distributor Sales, Purchasing, February 22, 1977. pp. 47-53. 4. Wholesale Trade Area Statistics 1972, Bureau of the Census. 5. John Cavnar, They Buy, They Sell pp, 32 37 (May 8, 1973).
Here's What They Tell, Purchasing,
6. Dealer Support is Key in Mitsubishi's U, S. Markets, Industrial Marketin t~ 61, 68 69 (January 1976). 7. Middlemen Are Out, Problem-Solvers Are In, Purchasing. pp. 62-65 (September 13, 1978). 8. Robert Selivity, "Mail Order: More $$$ for Distributors," Industrial Distribution 68, 35-39 (August 1978).
Industrial distribution has only recently been affected by the trend of large distributors to merge, acquire, and expand. Independent distributors are confronted with new challenges that threaten their very survival. Major efficiencies must be developed in order for independent distributors to remain an important force in industrial distribution.
INTRODUCTION Existing methods of distribution in industrial markets are being challenged because of • • • •
changes changes changes changes
in in in in
size of distributors costs of maintaining a direct salesforce service requirements products handled
There were approximately 7,600 industrial distributors ten years ago; by 1975 it was reported that there were only 6,500. Although large chain distributors account for only 5% of the market, they are the fastest growing segment. Smaller firms are frequently acquired, and by
Address reprint requests to: Ronald D. Michman, Shippensburg State College, Shippensburg, PA 17257. Industrial Marketing Management 9, 213-216 (1980) © Elsevier North Holland, Inc., 1980 52 Vanderbilt Ave., New York, New York 10017
this means the remaining finns become integrated distributors. American industry spends about $40 billion a year on such products as ball bearings, hose clamps, lubricants, fan belts, and replacement parts for machines and equipment. The larger firms and their sales volume were reported for 1975 as: W. W. Grainger, $165 million, Curtis Noll, $120 million, Motion Industries, $80 million, Lamson Products, $40 million, and Kar Products $30 million [1]. The average five year annual dollar growth rate for these corporations was 19%. The changes taking place are causing ferment among smaller industrial distributor firms. On one side, manufacturers are confronted with higher costs of maintaining a direct salesforce and now desire their distributors to perform this function on a wide geographical basis. Moreover, some manufacturers have found it more efficient to perform part of the distributors' warehousing functions. On another side, contractors and industrial customers are exerting pressure for more costly technical services. Nevertheless customers are demanding a higher level of expertise and this results in greater product specialization. Unless the small distributor is able to form close alliances with manufacturers that enable him to learn how to serve these changing requirements, large industrial wholesalers will grow dominant.
213 0019-8501/80/030213-04/$01.75
CHANGES IN SIZE OF DISTRIBUTORS Using economics of scale, integrated distributors are able to reduce unit costs for inventory, transportation, warehousing, ordering, supplier selling, and distribution buying. Increased efficiency seems to be the results of integrated distributor networks. Many of these integrated industrial distributors service the entire United States and maintain extensive facilities: Associated Spring Corporation maintains 14 warehouses, and also serves Canada; W. W. Grainger, Inc., with major products as electric motors and accessories, maintains 134 branches; and Premier Industrial Corporation maintains 10 distribution centers [2]. Many customers desire rapid delivery, which accounts for the more extensive warehouse and distribution facilities developed and maintained by industrial distributors. There is also a tendency to shift inventory burdens to the distributor, especially in periods when material shortages do not exist. Because industrial products are becoming increasingly technical and complex, there is a greater need for precise information. Large distributors appear better equipped not to only meet this need but to lower inventory, transportation, and warehousing costs. Moreover, it simplifies ordering procedures for customers since only one distributor needs to be contacted rather than numerous distributors located throughout the United States.
CHANGES IN COSTS OF MAINTAINING A DIRECT SALESFORCE Two opposite trends have been developing in industrial distribution. One trend indicates that there has been a shift from selling direct to marketing through distributors due to escalated prices for gasoline, hotels, and on-theroad meals and changing industrial patterns. The other trend indicates an expanded role for manufacturers to bypass distributors in favor of selling to large users and to assume more of the warehousing function. Reductions in
manufacturers' local warehouse and salesforces and increases for those purchasing direct in minimum order quantities suggest that distributors are becoming more important in marketing strategies [3]. Although some purchasers are dissatisfied with higher prices due to distributors' markup and reduced technical support in problem solving, relatively few purchasers are able to resist the manufacturers' change in policy. Manufacturers maintain that the reduced inventories and faster deliveries offset cited disadvantages. On the other hand, for Ingersoll-Rand it was broader acceptance of its pneumatic tool product line that led to increased use of distributors. Before 1973, Ingersoll-Rand sold most of its heavy duty tools direct and the primary market was heavy industry. After 1973 air tools were demanded for both maintenance and production applications, and distributors were able to give local service to a broadened market. Moreover, changes in demand patterns in geographical locations has also led to the use of distributors. This has been true for the San/Bar Corporation, which designs and makes printed circuit boards with mounted components for telecommunication industry. They discovered a demand in rural areas. The Silent Hoist Company followed an expansion of heavy industry into the Southern States, whereas this firm previously primarily served the Cleveland, Chicago, and Philadelphia areas direct. Manufacturers have expanded their role by opening sales offices and branches. Examples are provided by the Westinghouse Electric Supply Company and the Crane Supply Company. Between 1967 and 1972, sales offices increased unit sales by 46% and sales branches by 85% [4]. It should be mentioned that the manufacturer may still elect to operate with an indirect channel system even though the firm has sales offices and-or branches. Furthermore, sales offices or branches may be located only in the most profitable market territories, and for the remainder of the geographical market the distributor may be handling the greatest share of the distribution functions.
CHANGES IN SERVICE REQUIREMENTS
RONALD D. MICHMAN is a professor of Marketing at Shippensburg State College. He is the coauthor of two books: Marketing Channels and Strategic Advertising Decisions. Dr. Michman has also edited two bibliographies: Market Segmentation and Marketing Channel Strategy published by the American Marketing Association. His most recent articles have appeared in Business Horizons and Managerial Planning.
214
The industrial distributor, the merchant wholesaler for industrial goods, offers an interesting example of the services provided by this type of wholesaler and of the organizational structure of this type of wholesaling firm. Many industrial distributors have made substantial investments in equipment in order to service the needs of their customers. Much of the equipment is electronic, requiring specialized maintenance. Equipment may in-
clude radio-equipped cars and trucks, computer mainframes, interfaces, terminals, Data-Phone installations, and electronic data processing for customer programs. Some small distributors may not have the resources to purchase such equipment. According to a survey made by Purchasing, a professional trade periodical, 65% of the respondents replied that stockless purchasing was the most important service offered to industry [5]. Under this system, distributors stock goods subject to buyers' releases; this relieves customers from inventory carrying costs, storage, handling, and obsolescence. Approximately half the respondents made certain that manufacturers' literature to customers is updated on a regular basis. Systems engineering involves distributors analyzing customers operations. More and more distributors are finding it neces-
changes in the industry. Role relationships in the channel system are evolving, based on changes in functions performed, customer requirements, and products handled. The goal of balancing internal and external requirements is universal.
MANUFACTURER AND DEALER COOPERATION Distributor and dealer support is frequently crucial in establishing markets. Mitsubishi introduced their NYK lift truck line in the United States and established a dealer organization with definite marketing policies, promotional aids, and fields sales support. A major factor in the program was special distributor training, with emphasis on proper maintenance and servicing [6]. Mitsubishi used an approach that treated the marketing of I
Shift from selling direct to marketing through distributors. sary to provide guidance on regulation, which has made distributors and their customers more aware of government and environmental factors.
their product as if it were produced by a domestic manufacturer. From all accounts this approach appears to be very successful and has diminished potential sources of conflict.
CHANGES IN PRODUCTS HANDLED CHANGES IN SUPPLIER RELATIONS Shifts in the methods of distribution are occurring with electrical wholesalers. Buyers of such electrical products as wire and cable, motors, transformers, lamps, lighting fixtures, and heating equipment are primarily electrical contractors, industrial plants, and utilities. The expanded role of some manufacturers and agents has caused some distributors to discontinue selling to these markets, to serve customers in newly developed industries, and to extend credit and to provide services not offered by these competitors. The selling role has changed considerably as product specialization within electrical wholesaling firms has developed. Because some manufacturers and agents have assumed warehousing and selling functions in a price-dominated market, wholesalers have been forced to make alliances with manufacturers to insure sufficient profitability to continue operations. Wholesalers are also handling many new products in the rapidly changing electrical industry. A reassessment of the distributor's channel position becomes necessary due to the
Service has always been the emphasis on manufacturer-distributor relationships, but recently inflation and problems with delivery has interjected new meanings into the term. Purchasers desire distributors to help them resist autocratic measures formulated by original equipment manufacturer. This is especially pertinent with price-at-time-of-shipment policies. Thus, purchasing executives are viewing distributors more as extensions of their buying policies and distributors loyalty is increasingly valued [7]. Traditionally, fast service to local customers has been a strong feature of industrial distributors. However, some customers are willingly sacrificing delivery speed for other amenities such as lower prices and large product offerings. Industrial distributors are developing mail order as a means of satisfying customer needs for lower prices and larger product offerings [8]. A successful mail order business can be developed, provided that the goods offered are of the highest quality,
215
products do not require installation or specialized engineering expertise, and a liberal return goods policy is maintained.
CONCLUSIONS After World War II, industrial distributors remained largely unaffected by the trend among business organizations to merge, or to acquire other finns. Now, however, large organizations seek to become more efficient in serving their markets by acquiring independent industrial distributors. This new development may well mean the demise of the independent distributor, unless the independents themselves effect internal efficiencies that will make them a serious force in the distribution industry. Small distributors can surmount this trend of suppliers using the services of large-scale distributors by establishing a long-term relationship and developing a routinized and regular pattern of exchange with customers. This can be facilitated by small distributors extending problemsolving emergency service, extending accurate and timely price data, and maintaining an integral knowledge of the buyers' operations. Moreover, a willingness to support customers in conflict with the suppliers is becom-
216
ing more necessary. Large-scale industrial distributors usually do not have the same amount of flexibility or control within their operations as does the small distributor and this is an inherent advantage of those small firms that emphasize such efficiencies. In this manner, small distributors can hope to cope with trends that reveal distinct preferences for purchasers and suppliers to deal with large scale industrial distributors.
REFERENCES 1. Parts for All Seasons, Forbes, p. 44 (February 15. 1976). 2. The Chain of Events in Industrial Distribution, Marketing News, p. 7 (January 20, 1976). 3. Somerby Dowst, Manufacturers Turn More to Distributor Sales, Purchasing, February 22, 1977. pp. 47-53. 4. Wholesale Trade Area Statistics 1972, Bureau of the Census. 5. John Cavnar, They Buy, They Sell pp, 32 37 (May 8, 1973).
Here's What They Tell, Purchasing,
6. Dealer Support is Key in Mitsubishi's U, S. Markets, Industrial Marketin t~ 61, 68 69 (January 1976). 7. Middlemen Are Out, Problem-Solvers Are In, Purchasing. pp. 62-65 (September 13, 1978). 8. Robert Selivity, "Mail Order: More $$$ for Distributors," Industrial Distribution 68, 35-39 (August 1978).