OLMs signal changes for MRO distributors

by Bob Segal

Online Marketplaces (OLMs), a new breed of Internet-based marketing channels, will capture 17 percent of the total business-to-business market within the next five years, according to a recently released study by Frank Lynn & Associates Inc. OLM market share will approach 50 percent in some markets. Fragmented industries, such as electronics, healthcare, paper, chemicals, food service and hardware are particularly suited for OLM success.

OLMs are Internet sites where numerous buyers and sellers of business-to-business products can exchange information, transact and handle technical support. Nearly 2,000 industry community sites exist today, and about 325 process transactions.

Today, almost a dozen OLMs are focused on the MRO market space. Examples include EqualFooting.com, FindMRO.com, iProcure, MarketSite, MRO.com, OnlineMRO.com, OrderZone, ProcureNet, PurchasingCenter.com and TPN Register. Other broad-based OLMs that sell MRO products include Ariba Network, Batomic, mySAP, Oracle Exchange and PurchasingGuide.com.

Several Online Marketplace models exist today. The most prevalent perform an auction function, establishing prices for used or surplus equipment.

Although most OLMs are small start-up companies, our research confirms that OLMs have the potential to dramatically reshape conventional sales and marketing strategies within the next two years. OLMs pursue a many-to-many philosophy. Their goal is to sign up as many buyers and suppliers as possible because this creates marketplace liquidity, the ability for buyers to quickly find what they want from suppliers in one place at a reasonable price. Traditional distributors, on the other hand, pursue a some-to-many strategy, carrying a limited number of brands in any category.

With significant venture capital and corporate funding (W.W. Grainger has invested more than $25 million in electronic commerce), broad product access, great efficiencies and technological expertise, OLMs pose a potential threat to all MRO distributors, particularly small ones.

However, OLMs also represent an opportunity for MRO distributors if they are willing to make the necessary shifts in their businesses to succeed in a market where new players have changed buyers and suppliers expectations and options.

MRO distributor strategies
" Create a new Online Marketplace, perhaps in conjunction with other distributors, or even manufacturers.

" Use or partner with OLMs as new suppliers or buyers of information and/or products.

"Reinvent the business to focus on value-added services and support, such as education, training or consultation.

Each strategy offers pros and cons with distinct implications for MRO distributors. Already, some distributors are implementing the first two options, which dont require them to dramatically change their businesses. We believe the third option, which does not get as much press as e-commerce solutions, is a trend of the future.

An OLM of your own
The if you cant beat em, join em option is being implemented in three key ways today:

1) Individual distributors are using internal funds or venture capital to start their own OLM(s).

2) Large distributors are banding together on the Internet to leverage their strengths.

3) Small distributors are aggregating their resources on the Internet to spread funding costs and meet market needs.

Many distributors already have Web sites. Few actually book orders this way. Furthermore, these Web sites only include the brands currently offered by the distributor.

To start an OLM, a distributor needs to create a separate business unit, seek appropriate funding and develop a business plan with a unique proposition. Rather than emulating the OLMs already targeting the MRO space, a distributor might focus on a specific segment, such as safety or electrical products. Or, the distributor might use its sales knowledge to create online tools for configuring systems, routing orders, approving budgets, etc.

Recognizing that an e-commerce strategy is necessary, distributors are linking together to create greater cost-efficiencies. Rather than individually investing in an end-to-end e-commerce capability, these groups spread development costs over multiple organizations.

Joining together also enables members to offer one-stop shopping to end-users, an increasingly important value proposition given end-users vendor standardization initiatives. This strategy incorporates e-commerce into the marketing mix without altering the long-standing, local customer relationships the distributor has built over years.

For example, in the electronic components market, Arrow, Avnet and Marshall Industries banded together to form an OLM called Chipcenter. Similarly, W.W. Grainger partnered with Grainger Industrial Supply, Lab Safety Supply, Cintas (uniform rentals), Corporate Express (office supplies and equipment), Marshall Industries (electronics) and VWR Scientific to form OrderZone.com. While OrderZone.com may sign additional suppliers, the intent is to keep suppliers from bidding against each other by maintaining one supplier in major product categories.

Another example is supplyFORCE.com, an OLM launched by Affiliated Distributors, a buying and marketing group of more than 280 small- and medium-size distributors with combined sales of $14 billion (see A-D goes e,). A-D eventually plans to offer access to value-added services and more than 2 million MRO items.

And, there is SourceAlliance.com, an OLM created by Rockwell Automation and the distributor networks of Allen-Bradley and Rockwell Software. It will act as an OLM and an integrated supplier for electrical products. Local distributors will provide service and support. Since most areas only have one Allen-Bradley distributor, conflict between distributors will be relatively low.

In the long-term, e-commerce will represent a low-cost means of transacting. However, in order to deliver low costs to customers, the entire supply chain must be cost-effective. This supply chain includes the internal operations of suppliers, not just their customer interface. Large distributors are in a strong position to add efficient logistics to the efficient front-end systems offered by OLMs. However, smaller local distributors that lack economies of scale will find their relatively higher cost structures make it increasingly difficult to retain end-users business and simultaneously maintain profit margins.

Whether large or small, many distributors may be challenged by the band together strategy. Internal disagreements over funding, delayed start-up times, compensation issues and other factors will make this option more difficult to implement successfully.

Use or partner with OLMs
Instead of creating their own OLM, distributors could use OLMs as a source of information or products. This strategy allows distributors to reap the cost structure and convenience benefits of an OLM without facing the set-up costs or potential conflicts. After all, OLMs are information brokers, but they still need someone to provide the product.

Some distributors are entering into exclusive or semi-exclusive agreements with OLMs, in which OLMs essentially outsource the distribution function to them. This relationship may be requested, if not demanded, by customers who want to buy from one source. This kind of arrangement hasnt occurred in industrial markets yet, but is happening in industries such as food and electronics.

NetBuy, for example, an independent OLM and the worlds largest source for electronic components, has signed on seven top distributors in the electronic components industry. Similarly, Instill Corporation relies on distributors to fulfill orders booked through its food service site.

OLMs offer distributors efficiency, new sources of revenue and market reach at a relatively low expense. However, distributors may lose some power in this market relationship, as the OLM becomes the prime customer interface. The key question distributors must ask is, What is my core defensible strength, and can I use an OLM to do peripheral things to support that strength?

Another tact at implementing this strategy may be to use the OLM as a supplier. For example, an MRO distributor desiring to be a sole-source provider may turn to an OLM as a low-cost channel for spot buys. OLMs are particularly suited for low-volume or inefficient sales situations such as spot buys, emergency buys, used equipment and products in under-supply.

In highly fragmented markets, OLMs (such as Shoe.net and FurnitureShow in the consumer arena) are forming solely to sell to resellers, rather than end-users.

Reinvent the business
The future may bring dramatic changes to a distributors business as it sheds unnecessary roles that are better and more efficiently handled elsewhere and focuses on its core defensible strengths. E-commerce is not the only trend influencing this shift. The growth in integrated supply, the rise in third-party logistics (3PL) firms, distributor consolidation, catalog marketing, master distribution and other factors also contribute.

Will some distributors sell their warehouses and reinvent themselves as consultants? Perhaps those with extensive knowledge about brands, applications and costs (and consider knowledge their core competency). They may no longer employ purchasing managers and may also reposition their sales force as consultants.

Other distributors may re-emerge as sales agents or traditional manufacturers representatives. They, too, will sell the warehouse, but will probably keep the sales force in its traditional role. As e-commerce grows, customers will continue to need faces and human relationships. The human touch may be a long-term void in the marketplace.

Jomat Industries of Romeo, Mich., is an example of a company that shifted part of its focus to deal with market change. Like other distributors, Jomats business with the Big Three automotive manufacturers was threatened by downsizing, vendor consolidation, and new modes of procurement such as integrated supply. Jomat, which primarily sold power tools and some material handling products, responded by taking a systems approach.

Rather than simply selling products, Jomat designed systems that considered what tools workers used, what platforms they stood on and how they transported fixtures such as car doors.

Profitable pre- and post-sales support activities some distributors may turn to in the future are consulting, design, education, training, installation, design configuration, repair, monitoring and maintenance.

The bottom line
The Internet changes everything. It allows companies like OLMs to form, target long-tolerated industry inefficiencies and obliterate them. In the process, distributors need to grab hold of the OLM trend and reformulate their businesses.

In the next several years, we will see a simultaneous explosion and consolidation in the number of OLM sites. OLMs will form in various niches around the MRO market, yet market share in the broad MRO market will consolidate into just a handful of OLMs. Now is the time for MRO distributors to quickly learn about the OLM trend, analyze their own businesses, and develop a strategy that leverages their core competencies.

Bob Segal is with Chicago-based Frank Lynn & Associates. Reach him at or .

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

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