Market Center Distribution May Be The Key

October 13, 2004
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ST. LOUIS - In the eyes of Jim Truesdell, there is an eager sense of anticipation as wholesalers and distributors move deeper into what many industry insiders are terming a second industrial revolution.

The explosion in e-commerce technology promises to forever change the way most wholesalers-distributors do business. But there is fear and uncertainty, too, agreed Truesdell, who is president of Brauer Supply Co., a distributor of air conditioning, insulation, air filtration, and specialty fasteners with headquarters in St. Louis. Truesdell is part of a family management team including Chairman William H. Brauer and Vice Presidents William D. Brauer and Robert G. Brauer.

Key questions being asked include:

  • How do wholesalers-distributors realize the potential the new technology offers without sacrificing the personalized service and the efficient product distribution that has distinctively characterized the markets in North America?

  • Can the resources of the thousands of entrepreneurial distribution companies in the United States, Canada, and the world be brought to bear to fill in the gaps of developing Internet technology?

    The Model

    With the aim of effectively advancing the science of delivering HVACR products and supplies to the ultimate user, members of the Heating, Airconditioning, and Refrigeration Distributors International (HARDI) adopted a business model called Market Center Distribution (MCD). This system was developed, in part, by Truesdell, who was the 2002 president of then Northamerican Refrigeration, Airconditioning, and Refrigeration Wholesalers (NHRAW), which eventually consolidated with the Air-conditioning and Refrigeration Wholesalers International (ARWI) to become HARDI. He co-chaired the consolidation task force and wrote the summary proposal submitted to member vote to create HARDI.

    "MCD is quite simply the integration of information technology with regionally established distribution centers, staffed and managed by persons familiar with local markets and customers," said Truesdell, who developed the system with fellow NHRAW officers Jim McNeill, Leo Walsh, Karl Larson, Scott Nicholson, Doug Young, Randy Tice, and others.

    "This model is intended to bring order and efficiency to the distribution channel by eliminating redundancies through seamless information exchange among suppliers, distributors, and customers, and the use of appropriately trained distributor personnel."

    Truesdell gathered the thoughts of this group along with interpretations by numerous industry consultants and experts into a 50-page booklet titled "Market Center Distribution: What It Means, What It Takes." The booklet is available free of charge from the HARDI headquarters office.

    Market Channel Distribution is a business model designed to integrate information technology with regionally established distribution centers. This model is designed to bring order and efficiency to the distribution channel by eliminating redundancies through seamless information exchange among suppliers, distributors, and customers.

    Twofold Purpose

    According to Truesdell, MCD is designed to serve as a testament to the effectiveness of locally sited, independent distribution in an era when the function is under attack by new channel entrants "who would have us believe that the ‘middleman' is no longer necessary," he said.

    "MCD affirms the role of the independent stocking distributor and all he or she brings to the table as the key linchpin of the distribution channel."

    In addition, the system is designed to challenge the independent distributor to continually improve his performance in the channel. "This will be done by continuing identification of and strengthening of core competencies possessed by those distributors," said Truesdell.

    "To accomplish this, trade associations like HARDI must provide education and training programs to facilitate the process of distributor self-evaluation and improvement."

    This process results, in Truesdell's estimation, in a determination to identify the HARDI "brand" as "characterizing a distributor who is committed to this process of continual improvement."

    "For the manufacturer, MCD offers a commitment from distributors to work openly with them to reduce channel costs and maximize market share," he said.

    "For the contractor/end user, MCD offers a commitment from distributors to ensure product is made available to them in the most cost-effective, ‘total value'-oriented way. And, for the distributor, MCD offers a rallying point to perpetuate their pivotal role in the supply channel in the face of a changing marketplace."

    As the educational provider, HARDI's committees and councils are charged with the responsibility to identify and deliver to the membership essential educational services to support the MCD business model.

    This goal is accomplished through conferences, accredited distance learning, and the preparation of necessary studies and reports on the HVACR distribution business.

    Annual business statistics are gathered regarding sales trends, forecasts, compensation, e-commerce, and information technology services. MCD is also among the topics that will be discussed at HARDI's 2004 Annual Fall Conference in Chicago.

    The Evolution Of MCD

    In the spring of 2000, Truesdell met with his fellow officers of then NHRAW in Calgary, Alberta, to address the concerns of the wholesale-distribution industry. In this case, NHRAW had been a proponent of the traditional two-step distribution process - manufacturer to wholesaler to retailer - as the most efficient way to move products to the ultimate consumer.

    "With the realization that these consumers are seeking new avenues to fulfill their needs, and that the middleman's role may be overlapping with others in the supply chain, my compatriots and I searched for ways to marry the new technology concepts to the strengths that local and regional distributors have always brought to the marketplace," said the president of Brauer Supply Co.

    The result of these discussions was the evolution of MCD, which, in Truesdell's words, "embraces the idea that only regionally established business centers staffed by those familiar with local markets and customers can effectively maximize a product's market share - and that the more complex a product is, and the more it relies on a professional corps of contractors or retailers to deliver to the local consumer, the more these professionals will need the service of local distributors."

    What are those key services? "Convenient warehousing of parts and supplies, warranty support and administration, rapid delivery, the extension of trade credit, access to product information, and one-stop shopping for related accessories," answered Truesdell.

    "While some of these can conceivably be provided on a national scale, there is still a cost associated with them. These functions must be performed in some manner and the established network of independent distributors located in each market center provides the most cost-effective way to do so."

    But, according to its co-creator, what makes MCD different from the old two-step concept is the realization that there are redundancies in costs among the different participants in the product supply chain.

    "It calls upon manufacturer, distributor, and retailer-contractors to each define their core competencies - those functions they perform better than anyone else - and to seek the support of other channel partners in providing their own respective core competencies," he said.

    Rather than thinking of the distribution process as a series of sequential steps, he said MCD "looks at the total process as a unified system, with each participant taking responsibility for the functions he or she does best.

    "This means that the different players in the supply chain will have to open communication to a far greater degree than has previously been the case. Strategic alliances will have to be developed based on mutual trust. To remove redundant costs, manufacturers, distributors, and retailer-contractors must be willing to face up to their strengths and weaknesses in assessing what are their respective core competencies. They must be willing to divest themselves of some of their functions if a channel partner can perform it more efficiently. They must be willing to step up to the plate and take primary responsibility for their logical role in the chain.

    "Negotiations between partners in these new alliances must center on defining and communicating the roles to be played by each. The party who negotiates with an eye to avoiding his responsibilities will soon find that he has lost his value to the alliance and will no longer be a player."

    Technology Has Its Place

    According to Truesdell, technology is at the forefront of MCD, as all participants will have to be on board with state-of-the-art electronic systems for communications, order fulfillment, and inventory control. In his estimation, industry associations and leaders must promote standardization so that partners can come together in integrated product delivery teams.

    "Online ordering, order status, and communicating customers' special requirements must flow instantly from the customer to the proper parties throughout the chain," he said. "Marketing, utilizing integrated customer and product data bases, will become a cooperative effort."

    These characteristics of MCD reflect some of the key trends in distribution identified in a study commissioned a few years ago by the National Association of Wholesaler-Distributors (NAW), which examined changes in the industry and the economy. (See the sidebar "Distribution Trends To Watch" below.)

    "Over recent decades, manufacturing has spurred the economic development of many emerging countries," said Truesdell. "Low-cost yet high-quality goods have made some of these countries players on the world stage. And yet, no one outshines North America in getting the product where it needs to be on time.

    "People coming to this continent marvel at the diverse products available in our stores and local markets. Such things as fruit being available in the cold of winter would be unheard of in some countries.

    "Our distribution system developed to a large extent when the first industrial revolution dovetailed with the taming of the American frontier. Businesses and transportation systems evolved to meet needs in a cost-efficient way.

    "Now we embrace both a technological revolution and a globalization of markets which promises to provide incredible opportunities. MCD, utilizing the strengths of the past, the innovation of the future, and the best talents of all supply channel partners, promises a road map for industry."

    Truesdell notes HARDI has established its Center for Advanced Technology (HARDICAT), which provides resources and assistance to wholesalers and their supplier partners in taking advantage of developing technology.

    Meeting, Beating The Trends

    Wholesalers must develop strategic visions to capitalize on the changes which will be brought about by these trends, said Truesdell.

    "Each of these trends presents problems as well as opportunities," he said. "Strategic visioning identifies the problems and determines how they will be overcome and also identifies opportunities and determines how the wholesaler will take advantage of them."

    For example, said Truesdell, if customer relationships are be-coming increasingly critical, then specific customer-by-customer plans will need to be made to protect existing accounts and target new accounts.

    "If value-added services are expanding to meet customer needs, then we must identify what services we can presently provide and plan to develop new needed services to meet the customer's needs."

    As the HVACR markets mature and wholesaler-distributors find a surplus of product and suppliers fighting for a shrinking or stable demand, wholesalers-distributors may find it harder to increase their respective value offerings to customers "because of shrinking margins which limit our ability to invest, a fragmented customer base which gives us too many market segments to aim our plan at, and a shortage of management and sales talent."

    According to Truesdell, power shifts in a maturing market from the manufacturer towards the consumer. The wholesaler-distributor who wishes to enhance his power in the channel of delivery will, however, find ways to add value for the ultimate customer, and in so doing will increase his value to the manufacturer, he said.

    "Since the wholesaler cannot economically provide every service and value, the only option is to focus on differentiated service levels to attract customers. The wholesaler might decide, for example, to focus on providing superior product availability, creative credit arrangements, customized dealer programs, training for customers, or promotions. The main thing is to do certain things that have value to the customer better and more economically than the competition."

    Sidebar: Distribution Trends To Watch

    According to the National Association of Wholesaler-Distributors (NAW), a number of trends are driving the need for a new focus in distribution. These trends include:

  • Customer relationships are increasingly critical.

  • Gaining access to customer information yields marketplace power.

  • Value-added services are expanded to meet customer needs.

  • Channels of distribution are evolving and changing form.

  • Distributors are forming alliances with suppliers to reduce costs and increase power.

  • Business is becoming "North Americanized" and trade borders between the United States, Mexico, and Canada are dissolving.

  • Products are being introduced from Europe and Asia that influence North America in terms of application and design.

  • Multi-branding is commonplace.

  • Consolidation continues.

  • Deregulation is opening markets.

  • There is more professional ownership of distribution and fewer family-owned businesses.

  • E-commerce is enabling 24-hour, 7-days-a-week business.

  • The consumer is now more educated based on availability of information via the Internet.

  • There is great interest rate volatility.

  • Great intergenerational wealth transfers are occurring or about to occur.

    - Mark Skaer

    Publication date: 10/18/2004

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