Battle For The Middle

Battle For The Middle

Copyright 2004, Traffic World, Inc.

Caught between business-hungry manufacturers, confrontational buyers and growing competition from 3PLs, wholesale distribution is under siege. But savvy companies are fighting back by discarding traditional practices and taking up new competitive weapons such as supply chain management.

"We see our customer base differently today than we did four or five years ago," said Jerry Schlesinger, president and CEO of Aerospace Products International. A change in its business model helped to take the Memphis-based aviation parts distributor from number eight to number two in its market. "We try to lessen our dependence on traditional wholesale distribution," he said.

A few years ago traditional distributors were thought to be an endangered species. Analysts predicted the Internet would put buyers in direct contact with sellers, rendering the middleman''s role redundant. Those predictions proved overly pessimistic. The doomsayers underestimated the importance of trading relationships that wholesaler-distributors have built up over the years.

Total sales of wholesaler-distributors reached $2.9 trillion in 2003, according to Philadelphia-based research and consulting firm Pembroke Consulting. The industry employs one in 20 U.S. workers and contributes 7 percent to U.S. private gross domestic product.

Still, the industry is not out of trouble. Although wholesale-distribution is still a major market, the Internet has chipped away at its competitive base and, in combination with other market forces, is again threatening the industry''s viability.

There are several key strategies for fighting back. Wholesaler-distributors can offer customized, fee-based services boosting customers'' profitability. They can use Web-based technology more effectively, for example, by developing self-service options that cut costs and increase productivity. "Wholesaler-distributors expect to receive 32 percent of their revenue from online orders by 2008," the report said. Offering supply chain services is another way in which companies can move away from their traditional role.

API takes this route. "We take 2,000-plus calls a day in our call center and that results in 1,000-plus orders," said Schlesinger. The organization represents 150 to 160 original equipment manufacturers in the aerospace industry "and so do our competitors, so it''s tough to differentiate ourselves," he said. After cutting margins as far as possible, the two main differentiators left are availability and service, "but at some point there are diminishing returns" in these areas, he said.

The solution is a fundamental shift away from product-based business towards a service-based model, using supply-chain management as the primary vehicle. "We are making a conscious effort to solve our customer''s problem as opposed to just plying him with generic product," he said.

That means fee-based supply-chain services that lock customers into long-term agreements. For example, API has developed PDA - personal digital assistant technology - it is launching as part of a 10-year deal it signed with a major OEM. The distributor will consult for the OEM and set up an automated warehousing operation for aftermarket spares replenishment, said Schlesinger. When parts are taken off the shelf they will be scanned using a PDA. Shipment information and inventory levels will be transmitted electronically to API. Using a "blanket purchase order" the distributor will release product against the PO and bill the OEM electronically.

The system cuts costs for both parties, said Schlesinger. Moreover, it enables API to "give them the parts at my cost and charge them a monthly management fee," he said. It also commits the customer to minimum yearly purchase levels.

This kind of arrangement gives API another crucial competitive advantage: "it takes the customer off the street for an extended period of time," he said. Customers under multiyear service agreements are not making constant calls to API''s competitors and the distributor only has to make a single sale, assuming it successfully manages the relationship. And supply-chain consulting relationships often turn into long term contracts, he pointed out.

"We look at logistics companies as competitors," said Schlesinger. However, there are some barriers to entry in the regulated aerospace industry, he noted, particularly in areas such as parts tracking and tracing.

Chemicals distribution is another industry where specialization represents an entry barrier. Product stewardship is a critical issue and "many times the logistics requires more sophistication than a traditional fulfillment-type business," said Thomas H. Coyne, president, George S. Coyne Chemical, a distributor based in Croydon, Pa. Coyne also is chairman of the National Association of Chemical Distributors.

Even so, chemical distributors do bump up against 3PLs. According to Coyne, a number of chemical manufacturers have outsourced activities such as terminal operation and repackaging, areas in which both 3PLs and distributors compete. And chemicals distributors are using the Internet to improve information flows and order tracking, he said.

Although traditional distribution limits profitability in today''s business environment, Schlesinger believes it should not be jettisoned entirely. Distribution and the fee-for-service approach "reinforce each other because the infrastructure in a lot of cases is the same," he said.

"The traditional ways distributors make money and grow will be rewritten through a combination of external forces of change and the strategic responses of wholesale-distributors," said Pembroke. Better-informed customers will shop around more, expect immediate information flows, and "simply refuse to pay the costs for a wholesaler-distributor''s outside sales force." Suppliers/manufacturers will aggressively manage contract compliance, use the Internet to more accurately evaluate the cost-effectiveness of wholesale distribution, and look beyond for new business opportunities, according to the report.

As for competitors, 3PLs are moving into the middle ground. "Logistics companies will go head-to-head with wholesaler-distributors for control of the supply chain," the report said. It pointed out that 160 of the 200 largest logistics companies are in direct competition with the pick-and-pack services they offer. "Fifty-four percent of suppliers to distributors expect logistics companies to be competitive with wholesaler-distributors for customer order processing," it said.

The Pembroke report, "Facing the Forces of Change: The Road to Opportunity," was published on behalf of the National Association of Wholesaler-Distributors. It is based on interviews with 100 experts including wholesale distribution executives, manufacturers, customers and analysts, and nearly 1,000 survey responses from wholesale distribution executives in 95 NAW member associations.