Progressive Distributor - E-commerce explosion

E-commerce explosion

Predictions abound concerning the potential for doing business electronically. What impact is e-commerce having on MRO distributors?

by Richard Vurva

In a few short years, the Internet has radically changed the way many companies are doing business.

In 1997, Internet-based business- to-business transactions totaled $7.5 billion, according to Forrester Research. Its expected to grow to $327 billion by 2001. Thats a 4,360 percent increase.

Despite these numbers, the manufacturing community has yet to catch the wave of excitement surrounding the Internet, as evidenced by the relatively small number of people turning to cyberspace to make MRO and other industrial purchases.

A survey by W.W. Grainger shows that a paltry 4 percent of manufacturing companies order MRO supplies online. Another survey by Thomas Regional Directory indicates 61 percent of industrial buyers prefer a print resource including directories, vendor catalogs, trade journals or the yellow pages when researching suppliers. The Internet is their first choice just 12 percent of the time.

However, both surveys predict a dramatic increase in Internet use by the industrial community in the next couple of years. That opinion is shared by others, who say the Internets ability to dramatically lower procurement costs will ultimately drive industry to adopt the technology.

Organizations that use the Internet, extranets and intranets for purchasing have reduced time by 50 percent, procurement-process costs by 30 percent and actual material costs by 20 percent, says Simon Taylor, a retail, distribution and managing consultant for IBM. With those kinds of savings possible, its only a matter of time before the Internet takes off among industrial buyers.

Sifting through the hype
Some of the earliest adopters of e-business viewed the Internet as a way to instantly expand their geographic boundaries. What distributor wouldnt be enticed into action after hearing about a distributor who set up a site on the World Wide Web and soon received a $90,000 order from Europe?

Today, however, distributors appear to be taking a more reasoned approach.

Six months ago, the feeling was, the Internet will bring me customers from all over the world, says Scott Deutsch, vice president of marketing for Prophet 21. Now, people are getting involved in the Internet because its good for their customers and good for their business. Its a customer-oriented solution that also provides tremendous value for distributors because it reduces the distributors cost per transaction.

While easy access to a wider customer base is what lures most businesses to the Web, the real benefit to distributors may result from internal cost savings. Consider how much money a company could save if customers essentially serve as their own order clerk.

Erica Rugullies, senior electronic commerce analyst with Giga Information Group, calls the Internet a relationship enabler, streamlining communications with customers and suppliers, reducing order-processing costs and offering more convenient billing for customers.

Yet, she cautions, dont expect immediate savings. In their first year offering customer service online, firms should expect no savings and perhaps cost increases because of dual phone-based and Web-based operations, says Rugullies.

By three years in, they may see 10 percent to 40 percent savings in customer service expenses, she says.

Let the customer do it
One way distributors are recognizing the Webs potential to help them reduce customer service costs is by offering customers an option for getting answers to their questions without calling on the phone.

On our Web site, we incorporated the ability for customers to generate queries, says Tonja Broadwell, information technology director for Kelly Supply Co., a distributor of industrial MRO, plumbing, electrical, hydraulic and other products headquartered in Grand Island, Neb.

With an ID and password, customers can look at open orders, quotes, invoice detail and sales history. It allows them to answer some of their own questions rather than making a phone call, she says. About 50 customers have opted to use the new system.

It saves time for the customer and also enables Kelly Supply to free up customer service representatives for other activities.

Broadwell says the company is simultaneously developing two e-commerce sites. One will allow existing customers to order products, check stock and access account details via the Kelly Supply Co. Web site (www.kellysupply.com). The other site will be called Integrated Supply Company. It has a totally different look and name but it points at the same database, Broadwell says.

While the Kelly Supply site will allow users to access the companys complete 30,000-item inventory, the second site may represent only a portion of the database.

The second site is intended for end-users who arent existing customers. Its a way to tap into new business and customers who place small orders who may not require additional services that Kelly offers traditional customers.

The company has invested nearly $100,000 in this new electronic storefront but anticipates that the bulk of the companys sales will continue to come through traditional channels, such as counter sales, outside sales calls and fax.

Devise a strategy
There are a lot of forward-thinking distributors who are trying to figure out how to use this technology to compete and win against the giants, says Deutsch. Because technology has come down in cost, a lot of risk has been removed. Because tool sets are coming to the marketplace much more rapidly now, youll see a much wider adoption of the mid-sized wholesale distributor to the marketplace.

Before spending money on technology for technologys sake, first sit down as a management team and talk through an Internet strategy, says Deutsch. For example, your strategy for this quarter might be to set up a bare-bones Web site that lists your products and services. Next quarter, your goal might be to add e-commerce functionality, so customers can see what inventory you have in stock and place orders in real time.

Craig DeNoce, vice president with Isadra, a software company that enables business-to-business electronic commerce, offers this advice to distributors thinking about doing business on the Net: Dont change your business model. Implement your business model exactly as you currently have it, but use the Web as an additional sales channel.

Isadra, based in Palo Alto, Calif., is targeting its Internet services to distributors that belong to alliances and buying groups. In a nutshell, the Isadra model works like this: Distributor A publishes its Web catalog on an Isadra hub. Customers access the Web site to order products and look for information.

Suppose, however, that the customer wants a product that Distributor A doesnt carry. The customer can simply click on an icon to search an extended product catalog. It links the customer to the databases from other distributors that also maintain catalogs on the same hub.

DeNoce says the hub is different from an industry-wide data warehouse concept. The data warehousing approach requires an individual member to give all of its data to some third party that warehouses it and uses it to produce a catalog, he says.

The problem with such an approach, DeNoce says, is data is obsolete before the catalog is published. The Isadra system searches the inventory systems of alliance members in real time.

It doesnt matter what legacy system the alliance member uses, he says. We can talk to these systems interactively. Therefore, a customer can place an order through his or her distributor of choice. The order is filled from the inventory of the appropriate alliance member, yet the customer receives just one invoice.

A new channel
Kelly Supplys approach to its Web site is similar to how most distributors view Internet commerce. Others in the industry are taking a more drastic approach.

Three months ago, I made a decision to never publish a hard-copy catalog again, says Jerry Whitlock, who markets himself as The Seal Man on his Web site at www.epm.com. Whitlock is anything but a traditional distributor. He has no warehouse and stocks no products. His entire sales and service staff is comprised of himself and his wife. Virtually all of his $1 million-plus annual sales are conducted via the Internet, e-mail and fax. His gross margins average around 60 percent.

Whitlock sells seals and gaskets. He started a seal-making business in his basement in 1978, eventually merged with an Austrian company and grew the company to 67 branches and 300 employees. But he tired of the daily grind and quit in 1993.

A lot of people in the sealing and gasket business have a big building, a monument built to themselves, Whitlock says.

Like most distributors, they have a huge inventory. But if they ran the numbers on their inventory, theyd die because it turns over 1 1/2 times a year instead of the five times they think it does, he says. Theyre tying up capital with dead stock on the shelves. I did it. I know. But I dont think they know. Im not going to do that again. Im not willing to put inventory on my shelves just to make me feel good when I walk in the warehouse because Ive got boxes full of stuff.

Instead, the Seal Man built a virtual inventory on the Internet. He listed his site with search engines so customers can find him when they enter key words such as seal or gasket. When they locate him, Whitlock relies on his own product knowledge and an extensive collection of catalogs, binders and brochures from seal and gasket manufacturers to locate the products the customer needs.

I know where to buy anything or where to have it made anywhere in the world because Ive been in this business for 27 years. If someone calls me with any kind of sealing problem, I might buy three different components from three different manufacturers, make an assembly out of it and send it to him.

Most of the people who access Whitlocks site are engineers who feel comfortable with Internet technology. They tell him they like to use the Internet because its quicker and easier than sifting through catalogs.

There seems to be a surge in interest lately from industrial buyers, Whitlock says. Buyers are using the Net as a reference source of choice in many cases instead of printed catalogs and directories. Many times, Ill get an engineer or a maintenance man on the phone while he is looking at my site.

A year ago, his site averaged about 15,000 hits a month. He doesnt want to reveal exact numbers, but the site today averages tens of thousands of more hits each month. His site includes more than 400 pages today and may grow to 1,000 pages before the end of the year.

Im reading a book called The Power of Simplicity, by Rick Trout, says Whitlock. One of the things he says is, If you are not different, you better have a low price. I believe that in the industrial distribution business you can make more profit if you are different.

Whitlock is certainly different from the typical industrial distributor. In fact, he thinks of himself more as a marketer than as a distributor. He bridges the gap between the hundreds of small, specialized seal, gasket and component manufacturers in the United States and end-user customers who have problems to solve but dont know where to turn. So they turn to the Seal Man.

By the end of the summer, I will have the biggest collection of information about seals and gaskets in the world on the Internet, he says.

In that statement, Whitlock reveals the key to his success. He understands that the most important thing he has to offer customers is information. I sell solutions and I happen to be in the seal business, he says.

When more distributors catch on to the Internet as a medium for transferring information to customers, its use will skyrocket.

The key to making the Internet a more rewarding experience is providing purchasers with more detailed information on products and sources, including specifications and prices, says George Short, publisher of electronic products for Thomas Regional Directory. E-commerce, including e-business the process of doing research, pricing and analysis on the Web will increase as more real-time information services allow for sourcing, recommending, specifying and purchasing of goods and services. Industrial suppliers need to place all relevant information about their products on the Web, so informed buying decisions can be made and executed, whether online or offline.