Progressive Distributor - Clicks & mortar

Clicks & mortar

Its the newest trend in distribution. And it may have an even bigger impact on MRO distributors than integrated supply.

by Richard Vurva

Just when you figured out how to compete against national chains, consolidators and integrated suppliers, a new form of competition comes crashing on shore like a tidal wave. Its electronic commerce, and it promises to reshape the industrial distribution marketplace.

Theres going to be a dramatic increase in the number of purchasing professionals that turn to the Internet for product information and to complete product acquisition transactions, says Gary Buffington, executive vice president of the Industrial Distribution Association.

He cites a recent survey commissioned by ASMMA/I.D.A. and conducted by Texas A&M University in which distributor, manufacturer and end-user respondents agreed that e-commerce will become an important channel of supply in the next two years.

The Texas A&M study shows that while only 3 percent of end-user respondents purchase products via the Internet today, that number is expected to rise to 22 percent within two years.

A separate exclusive study by Progressive Distributor and Omni Consulting Group LLP of Davis, Calif., offers further evidence that the fuse is lit for an e-commerce explosion (see the story, The emerging e-economy ). It shows that distributors expect double-digit sales growth on the Internet next year.

Further evidence still comes from Grainger Consulting Services, a division of W.W. Grainger Inc. In a study conducted for SAP, an enterprise wide software provider, Grainger found that buyers averaged between 245 and 400 percent return on their investment to acquire and implement an e-procurement solution. Sellers saw a 10 to 15 percent increase in incremental sales and increased Internet sales of more than 300 percent annually.

The study findings confirm big manufacturers can achieve greater efficiency in procurement practices by buying from fewer suppliers over the Internet, says Steve Bowen, general manager of Grainger Consulting Services.

New competition
The potential for sales has caught the attention of companies outside of the traditional MRO distribution industry. Why? You need only look at the size of the market: Grainger Consulting estimates that U.S. businesses spend $456 billion on MRO supplies today and $314 billion on MRO services.

Hungry to carve out their piece of the MRO pie, several e-commerce companies have recently set their sights on the MRO marketplace. They include:

Ariba Inc., which offers a global business-to-business electronic commerce network that enables buyers and suppliers to automate transactions on the Internet.

Commerce One, which developed what it calls a Commerce Chain Solution, including a BuySite that automates the internal procurement process from requisition to order, and MarketSite, which automates supplier interactions from order to payment.

iProcure, owned by Datastream, a computerized maintenance management software company. It links customers of its popular MP2 and MP5 maintenance management software to Applied Industrial Technologies, Fastenal and Wesco Distribution.

MRO.com, which links an online community of MRO suppliers and buyers. It is owned by PSDI, a provider of the Maximo enterprise asset maintenance software. Grainger owns a 5 percent share of MRO.com.

ProcureNet, which developed a procurement solution targeting Fortune 2000 companies. It recently announced an agreement with Fastenal to provide fasteners, hand and power tools, cutting tools, fluid transfer components and other industrial products on its OneSource PurchasePlace at contract-pricing levels.

PurchasingCenter.com, a newly formed business-to-business Internet service that raised $5 million in private financing to develop an online procurement service targeted toward the industrial supplies and services market. The company was founded by former executives of Grainger, Open Market and American Express.

Pick your strategy
E-commerce companies tend to follow one of two strategies. They either set up exclusive arrangements with hand-picked distributor partners, such as Datastreams iProcure solution. Or, like MRO.com, theyre developing Internet marketplaces where industrial buyers can seek information and place orders from a larger group of distributors.

Grainger has taken an active role on several fronts. It has its own Web site, Grainger.com, where customers can order products. It developed OrderZone.com, a single-source solution with six other distributors of diverse products that include office supplies, safety products, lab supplies and other indirect materials. And it cooperates with enterprise software vendors such as Ariba, SAP and Commerce One.

Jim Roots, vice president of marketing for Grainger Internet Commerce, says the companys strategy is to provide a solution for a variety of customer types.

Its being where our customers are, he says. If you are an MRO-focused buyer, Grainger.com will continue to be the site youll utilize. If you have a wide variety of indirect materials needs that extend beyond MRO, OrderZone.com allows you to purchase them in one place. If youre looking at enterprise software vendors, our strategy is to make Grainger.com and OrderZone.com inter-operable with these third-party software companies.

A new dress on the old gal
The term clicks & mortar was recently coined to describe a partnership between Internet businesses and traditional distribution companies.

Amazon.com and furniture.com are examples of clicks, a new kind of company where customers go to buy products. EthanAllen.com and Barnes&Noble.com are examples of clicks and mortar companies, where purchases originating on the Net are fulfilled through a traditional distribution network.

Without a clicks & mortar partnership, distributors run the risk of being cut out of the channel. The clicks companies run the risk of being unable to fulfill on delivering products and expertise to customers.

A report from Forrester Research predicts that the demand for order fulfillment solutions will reshape the existing landscape as logistics suppliers evolve to serve the small-package, individual-oriented needs of commerce site operators. As more products are sold via the Internet, it will put new pressures on order fulfillment systems.

No one is prepared for the exponential growth in parcel deliveries that online sales will generate, says Stacie McCullough, business applications research analyst at Forrester. Firms that fail to attack order fulfillment with the same vigor as online selling will experience customer defection, funding attrition, and distribution nightmares.

Their expertise in order fulfillment is a primary reason why distributors will make good partners with e-commerce providers, says I.D.A.s Buffington.

Given the expertise distribution has in this arena, when it links the use of an electronic commerce marketing approach with its expertise in order fulfillment, it has a significant competitive advantage over those players that dont have expertise in managing inventories and order fulfillment, he says.

But order fulfillment expertise alone isnt enough for distributors to maintain their foothold in the supply chain.

If distributors bring nothing more to the channel than traditional inventory order support functions, they still run the risk of losing the battle for customers, says Rich MacInnes of Net Results, a business performance consulting and technology firm specializing in supply chain management. He believes third-party logistics providers may some day catch on to the huge potential in the industrial market.

Right now, politics is keeping distributors in the game because manufacturers are concerned about losing the business they get from the distributor, MacInnes says. But I sat in on a meeting with a large corporation the other day that believes the coming model will involve an independent third-party integrator that has its own inventory, logistics capabilities and buys direct from manufacturers.

Ross-Willoughbys Bud Pritchard, president of the Industrial Distribution Association, says e-commerce puts more pressure on distributors to enhance their performance capabilities.

If we as distributors dont start bringing value-added to our customers and suppliers, then manufacturers are going to have a lot of e-commerce sites, he says.

Can a digital marketplace ultimately replace distributors? Will the phone and fax be replaced by the mouse as the preferred way to order products?

E-commerce is not going to replace the middle man, says Mark Kahn, president of Production Tool Supply (PTS) of Warren, Mich.

He says ordering industrial supplies over the Internet isnt as easy as ordering from Amazon.com.

Ordering a drill isnt as simple as buying a book over the Internet, he says. If youre drilling 500 holes and youre trying to improve productivity, someone needs to be there to tell you how to increase rpms, or to use a different coolant or a better quality drill.

The Internet cant replace the local point of contact between a distributor salesperson and an end-user, Kahn says. What it can do, however, is enhance the relationship.

Graingers Roots agrees.

I think distributors will play an even stronger role in the digital marketplace, he says. Not only will they be distributors of product, theyll also be facilitators of relationship management and distributors of information.

What about distributors that have invested in electronic data interchange (EDI) technologies? Will the Internet render those systems obsolete?

Brian Thompson, chief information officer for Cameron & Barkley Company, Charleston, S.C., doesnt think so.

What our customers want is to continue to order through their legacy systems and be able to check availability and shipping status via the Web, he says.

Thompson says distributors need to think about how the Internet will change their existing business models before they leap into action with a digital marketplace strategy.

Thats also the advice from Richard Roth, managing director of AnswerThink Consulting Group, which recently completed a study evaluating the impact of e-business on knowledge-worker functions.

In forward-thinking companies, a strategic approach to e-business is allowing companies to rethink entire business models, he says.

E-business is breaking down traditional boundaries between internal functions, customers and supply chain partners.

Based on what weve seen so far, most companies are still looking for the e-business silver bullet that will painlessly deliver competitive advantage without requiring any changes to existing organization or process, he says. A look at companies that have already realized the rewards of competing in this new business arena shows that e-business success demands a rethinking of ones relationships with customers, suppliers, employees and shareholders.

Roth compares the current state of business over the Web to the Gutenberg press when it was introduced 500 years ago. The adoption of the printing press was initially slow, yet it revolutionized how information was disseminated.

E-business is experiencing a similar reception, as potential users assess how the new technology can impact and improve the profitability of their companies. Study findings show theres a window of opportunity for organizations to determine whether an e-business model is an opportunity or a threat.