Progressive Distributor - A cooperative venture

A cooperative venture

Hardware giant TruServ's goal is to be king of industrial distribution. Strategic alliances and e-commerce are its tickets to passage.

When most industrial distributors think of TruServ, they think of the company that has merged several retail hardware chains into one operating unit. Still others think of it as an also-ran in industrial distribution, with its base strongly rooted in retail and light commercial or industrial accounts; not really a player in the true industrial distribution market.

Think again.

Change is underfoot at the Commercial/Industrial (CI) division of TruServ. Here, the Induserve Supply group is leading the charge in developing alliances with heavy-hitting product suppliers and working to develop efficient, paperless ways to fill end-user product orders.

Once developed, this system could become a working model of the master distributor concept forwarded by Frank Lynn & Associates in his 1997 study of the industrial distribution channel.

We believe Frank Lynns vision of the master distributor concept is the wave of the future, says Dan Fazio, general manager of TruServ CI and responsible for the Induserve Supply division. In the long run, we feel we will have the capability to be the product/service provider in all facets of the business. It will help us be one of the leading master distributors in the country.

As a cooperative, TruServs focus on industrial distribution is key to its future success, says Don Belt, executive vice president of TruServs markets and emerging businesses.

The consolidation taking place in the do-it-yourself market has been 4 percent per year, he says. The top 100 own 60 percent of the business; this has doubled in eight years. Our growth opportunity is not in hardware. C/I is the bright star of our future.

Adds Fazio: In the next three to four years, we will be the captain of the supply chain. We look to have breadth and depth in 20 categories of MRO. It will be a full range of MRO products and it is very doable.

Tall order . . . or tall tale?
How can a cooperative thats made up, predominantly, of retail establishments make a go, much less a killing, in a world as competitive as industrial distribution?

Its strategy relies on building an effective network of medium-sized distributors throughout the United States that can tap into a master database of items offered through TruServs own supply chain. TruServ is developing alliances with national manufacturers and large distributors who will, in many cases, ship product directly to end-users. It aims to have a product offering with nearly 600,000 SKUs available for next-day delivery at the click of a mouse button.

TruServ recently inked an alliance with Airgas for selected tools and safety products as well as welding supplies. Its aggressively developing alliances with other suppliers that make hand tools, electrical supplies, material handling supplies and equipment, HVAC supplies, tooling, and firms with integrated supply expertise.

We have people coming to us asking to be a part of the alliance, says Belt. The alliance concept between us and the suppliers is very out-of-the-box thinking.

It is based on the following parameters:

" cost-plus pricing

" profit sharing

" alliance members manage product shipment to end-users

" alliance members work closely with Induserves C/I division
on promotional and catalog support as well as on database
management.

By the end of 1999, the master item database will have 600,000 SKUs. Of those, our alliance members will be responsible for nearly 200,000 SKUs, says Belt. TruServ sales will be $4.5 billion and only $2.4 billion will be handled through our conventional distribution network.

e-commerce is key
The cornerstone of TruServs master distribution concept is to digitize the line card and make it extremely easy and efficient to order products via the Internet.

This ordering system will be driven by the master item database that lists the specs and distributor pricing of all SKUs.

This will be updated weekly, says Belt. Customers will access it directly from their personal computers. It is a major step forward in the presentation of our product assortment and pricing. We will provide significantly more at less cost to the end-user customer.

The local Induserve Supply distributor will focus on service and support. Items not stocked by local distributors will come direct to the customer from TruServs warehouse or from the alliance partner.

The drivers of
Induserve's strategy
Don Hoye, CEO and president of TruServ, the parent of Induserve Supply, cites the following trends driving the changes in the industrial sector and opening doors for Induserve Supply:

1) End-users want
one-stop shopping.
Customers dont want 1,000 suppliers, he says. To that end, TruServ is developing an electronic database through the Internet which will offer 600,000 SKUs in 20 categories. The Internet will be the source for communication. All distributors will establish a home page; TruServ will develop the relationships with vendors to improve response/fill times and will use the database to offer their products.

2) End-users are shifting procurement responsibilities
to distributors.
To meet that customer demand, TruServ offers special order capability and strategic alliances with major distributors for small- to medium-sized distributors that will greatly increase their sourcing capabilities.

3) Large, multi-location end-users have been pursued by alliances focused on building national accounts.
Consortia of distributors have successfully pursued large, multi-location plants. Through e-commerce, Induserve Supply believes it can compete effectively with these distributor alliances, providing access to product at a lower cost and fast delivery time without sacrificing product expertise.

4) End-users want the ordering process streamlined.
E-commerce will pull the complexity and cost from the requisition channel. By the end of 1999, users should be able to order from a list of 600,000 SKUs that will be delivered within 48 hours; most within 24 hours.

5) End-users will increasingly get their shipments directly from vendors.
We dont want to touch the product unless we can add value to it, says Hoye.

6) A distributor network captained by a master distributor.
I think we look a lot like what Frank Lynn envisions for the future of industrial distribution, says Hoye. We offer e-commerce, an electronic order clearinghouse, master item database, and a national account program that positions TruServ as a master distributor.

But who buys on-line? Thats the tricky part. While Internet shopping in the consumer arena (amazon.com or gateway.com are good examples) is catching on like wildfire in a dry prairie, there are plenty of rain clouds hanging over industrial MRO purchases.

Most industrial end-users are not yet ready for Internet-based e-commerce. The Industrial Distribution Association estimates that only about 1 percent of its member sales will be conducted over the Internet in 1999.

But in two years, it will absolutely be here, says Jim Olsen, director of national accounts at Induserve. In five years, 20 percent or more of industrial-based MRO business will take place over Internet-based systems. We are investing heavily in this future. Our planned electronic clearinghouse system will allow transactions to be completed many ways, depending on how the customer would like to place orders and pay for them.

TruServ is confident that customers will prefer to order electronically. Its first foray into a CD-ROM catalog has proved successful, and the cooperative is using it as a stepping stone to its fully interactive Web ordering process, says Olsen.

Our first edition InduSource CD-ROM had 75,000 SKUs on it with just a list price, Olsen says. When it was released, we saw a blip in our sales numbers. Just having a CD-ROM catalog increased national account-sized companies interest in doing business with us.

The 1999 InduSource CD-ROM catalog has more than 145,000 SKUs. InduSource Online, which will include the full industrial product database, will be launched on the induserve.com Web site as a first step in its e-commerce strategy.

By eventually merging CD-ROM and Internet technology, we expect even greater interest, Olsen says.

End-users will log on and connect with the local Induserve Supply distributor that services them, place their orders and have products delivered in as little as 24 hours.

Building the distributor infrastructure
Could e-commerce and a streamlined product delivery channel be the beginning of the end for the small- to mid-sized distributor? Olsen thinks not. In fact, most Induserve members fall into that category.

Our distributor members average $6 million to $7 million in sales, three or four outside salespeople and two to three inside salespeople. We have found that companies prefer to do business locally. We offer these mid-sized distributors access to the tools and technology to compete effectively with the catalogs and even against some of the large distribution chains. We pool the resources of all these distributors to offer services and pricing structures that this sized distributor couldnt otherwise afford, says Olsen.

Collectively, these distributors sold $820 million of product in 1997 and more than $1 billion in 1998. Induserve added 38 distributors in 1998 and aims for more than 400 Induserve Supply members and more than 2,000 retailers serving some portion of C/I end-users within five years. The Induserve Supply sales staff is concentrating on developing its distributor network west of the Mississippi River.

As Induserve plows the ground developing the alliance and e-commerce initiatives, TruServ plans to leverage that investment into other areas of the cooperative. Commercial/Industrial customers of True Value, Servistar and Coast to Coast stores will also be able to tap into the master item database and order products.

We believe we are leveraging the power of the ants of the world to be more powerful than an elephant, Belt says.