A-D goes e

Affiliated Distributors launches supplyFORCE.com to focus on national contracts, integrated supply and electronic commerce. It plans to generate $1.3 billion in sales by 2001.

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A spin-off company emerging out of Affiliated Distributors (A-D) is being touted as an answer to challenges threatening independent distributors. A-D, based in King of Prussia, Pa., is calling supplyFORCE.com an integrated supply and e-business solution that will enable distributors to compete in the highly competitive world of Internet commerce.

The companys goal is to become the leading provider of end-to-end supply chain management solutions for the industrial and construction industries and launch the distribution industrys most complete e-business portal site. Scheduled to go live late in the first quarter of 2000, the site eventually will offer customers access to more than 2 million products.

The new company begins operations with an initial base of around $400 million in sales, obtained by acquiring A-Ds $250 million national accounts program and the business of A-D Northeast, a regional integrated supply provider comprised primarily of A-D affiliates with sales volume of approximately $150 million. The company expects 2000 sales to reach $485 million and anticipates sales of $1.3 billion in 2001.

Affiliated Distributors was created to help strong independent distributors compete on a national scale, says president and chief executive officer Bill Weisberg. supplyFORCE.com takes that concept to the next level by providing the technology and expertise required for local and regional distributors to more effectively service national accounts. Furthermore, supplyFORCE.com will provide the opportunity for these same successful distributors to engage in a sophisticated Internet commerce strategy without incurring the major costs of going it alone.

A new business model
The idea for the new company originated from meetings of A-Ds NA2000 project team, a group of affiliate members assembled in early 1999 to discuss how the organization should respond to major trends impacting the distribution industry.

Those trends include the move toward single-sourcing, national contracts and integrated supply by major customers, the influx of alternate channels of competition siphoning business away from independent distributors, and the intense interest being exhibited by technology companies and others who believe the MRO marketplace is rife with opportunity for an electronic commerce solution.

Developing a separate company to focus on national contracts, integrated supply and electronic commerce frees the supplyFORCE.com team to focus on that business without drawing resources away from A-Ds traditional business.

During the last couple of years, A-D has focused on the integrated supply and national contracts side of our business, says Chris Hartmann, who was named president of A-D to enable Weisberg to spend more time on the new company.

This new structure will enable A-D to focus more on the relationship between distributors and suppliers.

Operating at Internet speed
A-D wasted little time establishing the new business model, laying the groundwork for the new company and hiring an experienced management team.

The A-D board approved the plan to spin off the new company in early August. It then enlisted the help of several experienced consultants and advisors, including Katalyst, a company with expertise in helping businesses devise and execute e-commerce business strategies.

The plan for a spin-off company was unveiled at A-Ds annual North American meeting in September.

We are moving exceptionally fast, Weisberg told A-D members at that meeting. We have to act quickly because the competitive challenge is that significant.

In a series of meetings during November, A-D released details of the supplyFORCE.com strategy to affiliates and suppliers and also offered A-D member companies a chance to invest in the new company.

Launching a new company is never easy. Its especially difficult when the effort requires management to get buy-in from nearly 300 affiliate members and suppliers spread across North America.

Complicating matters further, A-D decided to forego traditional sources of financing, despite considerable interest shown by venture capitalists and private equity sources to help fund the launch. Instead, A-D elected to raise seed money from among its membership.

The strategy paid off.

In less than six weeks, 244 distributors signed on and supplyFORCE.com raised $35 million in a private offering.

What prompted A-Ds desire to move so quickly?

For starters, several studies predict that sales of MRO products and services will quickly migrate to the Internet. One research project conducted by Texas A&M University for the American Supply & Machinery Manufacturers Association and the Industrial Distribution Association indicates 22 percent of end-users plan to buy via the Internet within two years.

Additionally, research indicates that it will take a major capital investment for companies to compete on the Internet. A study by the Gartner Group of Stamford, Conn., suggests leading e-commerce companies are spending $15 million to $20 million on technology annually.

The threat is real, Weisberg says. The reason it is a threat to distributors is because, individually, they have a very limited capacity to address what the customer wants in terms of electronic commerce. Distribution has
very thin margins. The net profitability for distributors is 1 to 1.5 percent before taxes. So its difficult for an independent distributor to make a significant investment in a solution.

The company expects to invest up to $20 million in Web site development and technology in the next 12 months, plus make additional investments in brand development and marketing, working capital and other operating expenses.

Three-part ownership
Ownership of the company initially will be split between participating distributors, company management (a strategy designed to recruit and retain world-class executives) and strategic investors, including suppliers and distributors that choose to make additional investments.

Participating distributors will receive an initial equity position in the company just for signing up and additional equity over the next several years based on their sales through supplyFORCE.com.

Dave Crum, president of Crum Electric Supply of Cheyenne, Wyo., a member of the supplyFORCE.com board of directors, says granting distributors an equity position in the new company without requiring them to make a cash investment was a wise decision.

It recognizes the value of distributors at the fulfillment level, he says. Its also a way to reward distributors for the investment theyll be required to make from a technology standpoint.

Adds Weisberg, Making distributors owners of the business motivates them to drive customers to the Web site. Were giving them a positive incentive to help write national contracts and drive customers to our Web site.

Weisberg says the company ultimately plans to go public and may file an initial public offering of stock by 2001.

If the new company is going to succeed, it needs to have the same kind of resources that our major competitors have, he says. The only way to achieve that, ultimately, is to take it to the public market.

New competitors
Several companies will compete against supplyFORCE.com to establish Internet procurement solutions. They include traditional distributors and others planning to develop online marketplaces, such as Ariba, Commerce One, MRO.com, and PurchasingCenter.com.

There are companies that some of us never even heard of a few months ago that are targeting MRO and construction supplies, Weisberg says. According to their business plan, theyre going to make their living as dominant players in MRO and construction supplies.

Some of the companies competing for e-business are public companies with massive market capitalizations. PSDI, parent corporation of MRO.com, has annual sales of $145 million and a market capitalization of $848 million. Commerce One generated just $2.6 million in sales last year yet has an $8.2 billion market cap. Ariba has $45 million in sales and a $9 billion market cap.

Weisberg says A-D was approached by more than one Internet company hoping to establish a relationship with the marketing group.

They would love to have us sitting on the other end of their system, he says. Theyd love to tell the customer we have this tremendous distribution network.

He says A-Ds network of 300 distributors, representing more than $14 billion in sales, gives it a leg up on the competition.

What makes our business model very compelling is that we have the inventory and distribution network in place, Weisberg says. Were combining the best of traditional distribution and the best of virtual distribution into a clicks and mortar strategy.

This article originally appeared in the January/February 2000 issue of Progressive Distributor magazine. Copyright 2000.

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