The China syndrome: An interview with Scott Benfield

The effects of the U.S. manufacturing decline on industrial distribution

This interview took place in October 2003 with the launch of the study, The China Syndrome. The study takes a hard look at the U.S. manufacturing exodus to China and other countries and its effect on distributors selling to the industrial MRO and OEM markets. The study can be purchased by clicking here.

The interview was conducted by Rich Vurva, editor and associate publisher of Progressive Distributor and Scott Benfield of Benfield Consulting, the study’s primary author.

Vurva: Why did you decide to do the study? After all, aren’t the effects of the industrial decline well known and haven’t distributors suffered the worst of the decline?

Benfield: I was told that very same thing by an organization that does research for distributors. The answer to both questions is an emphatic no! First, the effects aren’t well known. The survey points to the fact that a significant percentage of the lost plants were a complete surprise. Beyond this, there are key industries, key products, types of companies and other signs that can be used to predict which customers are at risk from moving overseas.

Also, the idea that distributors have suffered the worst of the decline is simply not true. Distributors have suffered recently from a poor economy and a lack of capital spending. The manufacturing exodus, when separated from the poor economy, shows that 20 percent to 40 percent of the recent decline is due to domestic plant closings. The findings of the survey also expect that trend to continue well into the future.

Vurva: What can you say about the survey and its validity for industrial distributors?

Benfield: We posted the research instrument online for two months. We sent messages for input to 10 key vertical markets of industrial distributors including cutting tools and abrasives, electrical, power transmission, safety supplies, PVF and a host of other companies that sell to industrial manufacturing facilities. We received more than 200 responses, and 60 percent of the respondents were at the executive level. In essence, we obtained very specific, high-level data about the manufacturing exodus. The survey was more than 40 questions long and we even include a section on how to interpret and use the data.

Vurva: What is the biggest challenge for industrial distributors emanating from the research?

Benfield: The biggest challenge for industrial distributors is that they absolutely cannot sell themselves out of this situation. The plants that are remaining stateside all want severe reductions in cost. Most have adopted the newest products, technologies and supply chain reduction including integrated supply. The big channel cost that’s left is a reduction in distributor operating expenses, especially the sales force.

Vurva: Isn’t this kind of talk suicide for a consultant? After all, most distributor outside salespeople hold the keys to the proverbial kingdom.

Benfield: When I started this business six years ago, I would agree with you. Back then, saying anything about an overcapacity in the outside salesforce was the best way not to get business. Since then, however, there has been a slow but steady change in attitude. For example, I did some research several years ago that showed there was an overcapacity of up to 40 percent in the industrial distributor salesforce.1 I also asked a very ugly question of industrial purchasing agents and user buyers. I asked them, “If you had a choice between a sales call and a 4 percent price break (the average cost of an outside sales force as a percent of sales) what would you choose?” More than 70 percent of the respondents chose the price break. I presented the preliminary data at an I.D.A./ISMA Fall Convention three years ago. There were a lot of sellers and sales managers in the audience and the conversation got lively.

But I am pretty sure I’m on the right track. Since taking this stance, I have steadily begun to receive requests from distributors to wring the excess capacity out of their sales force and drastically improve productivity. More than 60 percent of my business is in sales restructuring, which is triple what it was just a few years ago.

Vurva: What do you specifically mean by wringing the excess capacity out and improving productivity?

Benfield: A lot of people think this is simply a head count reduction move. And so they go ahead and reduce their sales forces and end up in worse shape than when they started. Increasing productivity and aligning capacity is really nothing like that. I carefully review territory design, job design, service allocations, activity thresholds, comfort zones, segment composition, compensation and sales force structure. This is complex work and it’s just not something the average sales manager can do by reading up on it. I then reassign, rework and reallocate sellers based on the lowest-cost method to market.

To be honest, there are often some sellers who aren’t around after the process. But I didn’t create this situation and I’m doing my best to help clients through it in a smart, studied fashion. The customer research that I and others have done pretty much points to a glaring seller overcapacity (35 percent to 45 percent) and low productivity in sales per employee. When I do sales audits, it is no coincidence that I find overcapacity in the range of 30 percent or more. From there, it is how do we redeploy this sales force to grow the business at the lowest cost?

I know it sounds like apostasy but much of the old belly-to-belly just isn’t as valid as it used to be. Distribution was one of the leading job loss categories of the last two years with over 140,000 lost positions. Many of these jobs were in sales and they aren’t coming back anytime soon. The most profitable distributors are those that are soliciting with low-cost methods including catalogs, e-commerce and hybrid sales structures. The average earnings for many distributors are at an historic low point. To get earnings back, distributors are going to be forced to lower the service cost and, since 40 percent of expenses are in the sales force, the leverage is going to be there.

Vurva: Is your position on getting cost out of operations supported elsewhere in the study?

Benfield: Absolutely. The remaining manufacturing companies want cost out and the distributor executives know it. We asked a question, on an agree scale, if distributors needed to move from a mode of top line selling to one of getting costs out of their operating structure. The overwhelming majority (70 percent) agreed. And, the study is right in sync with the observations from other nationally known sources. Of the 20 manufacturing industries we reviewed, 10 represented 75 percent of the loss. This is exactly in line with the government figures on which industries have declined in the last several years.

Vurva: Are there other findings from the study that are eye opening or unexpected?

Benfield: Distributors are beginning to sell and invest in services more than they were in years past. To give you a perspective on this, I did a proposal for a national research group back in 1997 on unbundling and selling services. It got nowhere. They didn’t know what I was talking about and they found the whole idea rather amusing. Today, you will find more associations and distributors researching new services and how to unbundle and price service offerings. So, in six years, we have seen a big change in the attitude toward unbundling and selling services.

Distributors are slowly, and I mean s-l-o-w-l-y, beginning to develop consultative sellers and charge for consulting calls or giving the customer a discount if they don’t want to see a salesperson. I mentioned this idea recently to a group of industrial wholesaler execs, and one blurted out, “That’s total b.s.” About a week later, I spoke to a distributor operations manager whose company had a huge distribution center in Chicago. He mentioned that they began a fairly recent policy of giving the customer a 2 percent discount if they didn’t want to see the seller and that it was going well. We will see more of this and hard-line sales intensive guys will be silenced.

Also, one of the more surprising findings is that distributors plan to invest in foreign manufacturing and bypass long lived brands.

Vurva:  Don’t you think that kind of talk is a lot of bravado? Many of the major brands have solid market positions.

Benfield: Again, if I was looking at yesterday’s environment, I would agree. But what we are facing with globalization and the decline of manufacturing as a job producer is unique. Today, many companies can manufacture goods with fewer people than just a year or so ago. A recent study in the Wall Street Journal found that manufacturing employment is declining worldwide. The availability of quality global manufacturing is truly amazing, and the productivity increases are astounding. The ability, and cost necessity, of distributors to source the lowest global cost is very real. So, it is not surprising to find that many distributors can’t support a high-cost domestic brand. The end customer really isn’t in a position to pay a premium price for a demonstrably neutral product.

Vurva: What do you see as the major obstacle in distribution coming to terms with the China Syndrome?

Benfield: I’ve said this before but, in so many words, it’s that the average distributor is so ingrained with using a sales force to solve and sell their way out of problem(s) that they don’t pay attention to changing the marketing mix or rearranging the cost structure to suit the customer.

Let me give you a final example. I recently did a day-long seminar in Boston with a group of distributor executives. These guys served three distinct markets, with the most profitable being industrial manufacturing. I ran some of their numbers for them and found that not only was the industrial segment declining, but other segments were cost-intensive with small orders, low margins and self-contained simple products. I pointed this out and suggested that the high cost/order intensive segment(s) needed a lower operating base and perhaps less costly ways of selling. One of the execs said the lowest margin segment needed the best sellers because of the proliferation of marketing programs and the lack of sophisticated buyers. Not to cause a fuss, I backed off the idea and went on with the seminar.

Several hours later, I gave an example of a Transactional Wholesaler where the model is to gut the service cost, put the items in a catalog or Web site, and have customer service people as sellers. The model is the lowest cost method of distribution, think Wal-Mart or Southwest Airlines, and it works very well with self-contained, simple products. The same exec who earlier talked about the need for high-priced sellers began lamenting the rise of a Transactional Distributor that lowered the operating base and was taking share. In short, he never connected the fact that the customer and the structure of the segment demanded cost out. And, if this meant a lower-cost method of selling, then that’s what was going to happen. He was so into his idea of highly trained, expensive sellers that he never once ran the numbers on getting the cost out and what the Transactional Distributor was doing.

Vurva: It sounds as if you are saying that there will be some that just don’t connect and will keep on doing things the same way.

Benfield: That pretty much sums it up. Those that don’t work to lower their operating cost to serve, and try to sell their way out, will pay for it in the future the way they have in the recent past — out of earnings.

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1 See Valuing the Outside Sales Effort, ProgressiveDistributor.com, Parts 1 and 2.

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