Progressive Distributor - Putting "e" in distribution

Putting "e" in distribution

Distributors sift through the hype to develop sensible e-business solutions.

You've undoubtedly read the predictions and seen the hockey stick-shaped graphs depicting the coming explosion in e-commerce. If industrial and construction distributors don't develop Internet-based sales plans soon, warn the spin doctors, they'll stand on the sidelines and watch as dot-com companies and online marketplaces steal away their customers, mouse click by mouse click.

Despite the hype surrounding e-business and the sense of urgency technology providers try to convey, distributors shouldn't be concerned if their e-business strategy is still in the incubation stage, says Bob Segal of Chicago-based Frank Lynn & Associates. He says customers won't shift all of their purchases to the Internet overnight.

That doesn't mean distributors can ignore developing an e-business strategy altogether. Segal says large, publicly traded distributors must be able to articulate to suppliers and stockholders how they are formulating e-business plans, and small distributors must address the needs of customers who are early adopters in building an e-procurement process.

Before distributors align themselves with every dot-com company knocking on their door promising to help them join the digital revolution, Segal advises them to examine their own value proposition and their customer base. Unless a dot-com can demonstrate how its solution can either drive down a distributor's costs or ratchet up sales, don't take any techno leaps.

"The challenge for distributors and manufacturers is to truly understand buyer behavior," he says. "E-business doesn't change basic marketing principles." While Segal expects up to one-third of the industrial marketplace will be transacted over the Internet by 2004, it's not clear how much of that business will be directed through online marketplaces.

"We originally thought that online marketplaces would account for about half of that e-commerce," he says. "We're a bit more bearish now, but we still think online marketplaces will be a big percentage of the industrial world."

Will buyers flock to online marketplaces to buy goods and services? If so, which marketplaces will succeed? What role will distributors play in a marketplace environment? No one knows for sure the answers to those questions. The ultimate winners will be those that merge the disparate needs of the marketplace, the distributor and the buyers.

What do online marketplaces want?
The goal of online marketplaces is to create a one-stop source where buyers will want to return again and again. One of the companies touting its method for aggregating buyers and sellers is TotalMRO.com, the newest Internet initiative of W.W. Grainger. Launched in March, the company lists 16 distributors in its growing network, including Grainger, Cameron & Barkley, Motion Industries, Wesco, Carlton-Bates, Precision Industries and Briggs-Weaver, and is negotiating with dozens of other distribution companies. TotalMRO.com president Liz Olig says the company's main revenue source currently is transaction fees paid by distributors.

For years, the MRO industry has been tagged with being a very inefficient, highly fragmented supply chain, Olig explains. Thousands of manufacturers interact with tens of thousands of distributors that range from local, small distributors to very large national players. They're all trying to serve the 8 to 10 million customers who use their products and services.

"We believe that through e-commerce there is a much more efficient model that leverages a Net market approach," she says. "Bringing together and aggregating all of the information flows that exist within MRO, customers and distributors can much more efficiently interact at a much lower cost."

TotalMRO.com targets Fortune 1000 companies that have invested in Enterprise Resource Planning (ERP) systems and in e-procurement software from companies such as Ariba and SAP.

"Companies that have made a major investment are going to be committed to ensuring that this is how things are procured in the future," Olig says.

Few companies have successfully tied their indirect materials procurement processes to their ERP systems. The reason for the delay: most suppliers lack the technical sophistication to do so. Although the vast majority of industrial distributors and manufacturers have Web sites, Segal estimates that only 11 percent of manufacturers and about 7 percent of distributors offer fully enabled e-commerce technology. For sellers, market offerings such as TotalMRO.com offer a turnkey method for distributors to become enabled quickly. For buyers, it provides a source for one-stop shopping, if enough distributors can be persuaded to jump on board.

That's why TotalMRO.com is bending over backward to help distributors participate.

"We're working with distributors to collect their disparate sources of data," Olig says. "If one of our distributor partners only has paper catalogs and doesn't have their content in a database, that's no problem."

TotalMRO.com takes the separate sources of data, sorts and classifies it and puts it into a single database. Customers can then access a single user interface to search for product and service information and place their purchases.If a participating distributor has an existing contract with a customer, filters built into the technology limit end-user access to those distributors with prenegotiated contract pricing. When there are no pre-existing relationships, customers have access to any distributor on the site and can place orders accordingly.

"It's up to the customer to decide the best source given the situational need. Within TotalMRO.com, customers have access to all major MRO distributors such as Grainger, Wesco, and Motion Industries," says Olig. "The customer is going to drive who they buy from and how they buy from them."

What do distributors want?
Distributors are looking for several things from online marketplaces. They want to be visible on the Internet, yet they fear doing so will make it harder for them to differentiate their value-added offerings. Ultimately, they fear, it will become easier for customers to shop them around for price. They want to utilize all that technology offers, yet they don't want to make huge cash investments. They want to be Internet savvy like the dot-coms, yet they're reluctant to change their traditional business model.

Ross Elliott, vice president and general manager for BuildNet, which recently acquired distribution software provider NxTrend, says distributors needn't fret about turning themselves into dot-com companies.

"Distributors need to consider how to make themselves 'dash' companies, not dot-coms," he says. He describes a "dash" company as a digitally aligned supply house. He says distributors should ask themselves, "How do I take my business and bring it into the digital world in a way that makes sense for my customers and my bottom-line profitability?"

Some dot-com companies offer to put themselves between the distributor and the customer by taking orders, billing and collecting payment from the customer and passing that money back to the distributor, minus their service fees. The distributor handles fulfillment.

"I'm not saying there's anything wrong with that model, but look inside your value proposition to determine if your logistics capacity is good enough to live on logistics alone," says Elliott. "Because that's what you're going to be competing on."

Elliott recalls a conversation he had with a distributor who said the single biggest challenge he faces in this new economy is to figure out how to be better at asset management. Eventually, if the dot-coms are successful at aggregating the buyers, the distributor's selling opportunity will be reduced. Buyers will simply shop for the lowest price.

"If this transparency concept is real, my ability to transmit information as a value-add is going to go down," the distributor said.

"So I have to become fantastic at managing the procurement process and managing the movement of goods through my warehouse. I have to make that my competitive differentiator."

Some distributors, like Winona, Minn.-based Fastenal, participate in more than one online marketplace. Fastenal e-business development manager Brian Fihn says Fastenal has made its catalog content available to about a dozen marketplaces, including iProcure, EqualFooting.com, PurchasingCenter.com and OrderZone.com, the horizontal marketplace founded by Grainger that recently merged with Works.com.

"Everyone takes a different approach to the way they display products, the way their Web site works, looks and feels," says Fihn. "Who is to say that every buyer out there is going to like the look and feel of Fastenal.com? We recognize that's not the case, so we came up with the strategy to put our data and our content wherever it made sense."

Like many distributors, Fihn becomes nervous whenever another company inserts itself between him and his customer. Even though he recognizes that some customers will like the convenience of a marketplace, he'd prefer they come to his site. So far, most of Fastenal's sales via electronic commerce, on average about $2 million a month over the past few months, come from the company's own Web site, and from electronic data interchange relationships with large national accounts. Regardless of how orders are received, they all get routed through a central clearinghouse and pushed down to the branch level for fulfillment.

"Distribution occurs at our 850 locations," he says. "It's automatic, seamless integration into the point of sale."

Fihn doesn't believe Internet sales will ever totally replace the traditional salesperson. But he thinks it can be a valuable tool to get salespeople where they couldn't go before. For example, a Fastenal branch salesman on the East Coast used to call on a particular company once a month. Despite his efforts, he could never get past the gatekeeper or receptionist. The purchasing agent wouldn't give him the time of day.

"At 9 o'clock one night, a guy in the shop ordered a reamer from us," Fihn says. "The next morning, the salesman took the product and hand-delivered it. He walked past the receptionist and past the purchasing agent right to the shop guy who ordered the product. It turned into a minimum $1,500 a month account. So, the Internet is opening up some new opportunities for us."

What do buyers want?
Buyers want to be able to order products and services from their desktops or the plant floor. They also want price visibility (how much will it cost if I buy from Distributor A vs. Distributor B), yet they don't want to give up control of the relationship with valued suppliers.

"Most companies don't want their purchasing departments surfing the Net discovering new suppliers, for fear of jeopardizing their existing vendor relationships," says Bill Sullivan, vice president of industry marketing for PurchasingCenter.com, an e-solutions provider and creator of an online marketplace for industrial supplies. "What they really want is to utilize the Internet to further facilitate and nurture their existing supply chain."

What is required from buyers to become e-business enabled? First, they must adopt Internet-based business processes. They have to put down the phone, return the catalog to the shelf and boot up a desktop ordering system to place orders. They also have to define workflow. Who gets to buy what? How often? How much? From whom? What are the rules of engagement?

The promise of e-business technology is that it streamlines the buying process and eliminates costly procurement practices. Of course, you still have to convince end-users. It isn't easy to wean buyers away from a catalog, a phone or fax machine. And don't even think about telling a customer he can't do business with his favorite local distributor who saved his bacon last month when a production line went down and Joe got out of bed to deliver a critical spare part.

"This is still MRO," says Sullivan. "Local relationships are still viable as certain products are more readily and immediately available from your local supplier. Somehow, the Internet solution must accommodate for this reality."

Sullivan says traditional best practices are still relevant. Just because it's the Internet doesn't mean everything else goes away. Business process redesign, supplier consolidation and the importance of local relationships can't be ignored.

"Implementing technology is the easy part," says Olig. "The real work is in making users feel comfortable with the new process."

To help change end-user buying habits, TotalMRO.com holds cyber seminars on the Internet where users view an interactive demo, develops step-by-step instructions for use on the worksite and makes plant visits to explain to new customers how the system works.

Fastenal discovered that one of the most popular features of its Web site is the ability to print out a purchase order. Many customers like the convenience of online ordering, but still need to staple a purchase order to a materials requisition form and route it through the traditional approvals process.

"We also have a lot of users who go to Fastenal.com just for information about products and then fax orders or traditionally place orders," Fihn says.

Some might argue that's not totally seamless, integrated electronic ordering. But in many cases, it's all the customer wants.

The jury is still out on which companies (if any) have developed the best business model that satisfies the needs of online marketplaces, distributors and buyers. The market will undoubtedly continue to evolve.

"Some dot-coms, e-marketplaces and exchanges will eventually fade away, as they have not developed a true value-add for buyer, distributor and manufacturer," Sullivan says. "What may have been a great idea on paper, that also generated venture backing, doesn't always translate successfully into the electronic world."

Unlike traditional distribution companies, however, dot-coms are nimble and quick.

"They may not have the best business model today, but based on their backing and venture capital funding, they could change very quickly," says Fihn. Says Olig: "We're still in the early stages of the game, but the solutions that will win are those that are very customer-centric."