In the old days, distributors operated as if all civilization ended at the edge of the piece of dirt they called their territory. Overlooking national trends, being caught off guard by new technologies and losing out on the opportunity to shape the future were all symptoms of this limited outlook. And even though industry associations offered up the opening to gain a detailed understanding of what was happening across the country, most saw the world through the rose-colored glasses of their own hometown.
Happily, those days are over. Associations like HARDI have provided the scientific tools for industrywide benchmarking. Tools like the Profit Report, Distributor Performance Dashboards, Regional Forecasts and the Supply Chain Scorecard all immediately come to mind. All of these provide excellent opportunities to fully understand the future HVACR environment. However, distribution is a fast and relentlessly changing business model. Still, I wonder if there might not be more to consider.
Allow me to share two axioms that shape the way I think. First, I don’t believe that wholesale distribution is a way of life. It’s a business model, and a rapidly changing one at that. The model used by our forefathers is nowhere near that of today. UPS and FedEx took away the advantage of geography. The utilization of fax machines, computers, cell phones and modern communications pushed our pace from comfortable to whirlwind. Even the cornerstone of our business, selling, has morphed from relationship oriented to value-added problem solving. The world changed, and so did our business model.
Secondly, our work is not judged against (just) the distributor down the street. We must judge the customer experience against every sales or service transaction, albeit business or personal. Going back to an often repeated quote of a mentor very long ago, “It’s not enough to suck less than the local competitor, we have to be as good as anyone in the distribution business.”
Where’s all of this going? This has forced some lines of trade to develop expertise greater than those of our home market. For instance, shifts in grocery purchasing forced the wholesale grocers to develop warehouses far more efficient than anything used in our business. This pressure forced healthcare and pharmaceutical product distributors to develop analytics and order tracking systems. Computer wholesalers nearly succumbed to big box stores, online sales and direct ordering, for the most part morphing into organizations with no resemblance to their former state. And, when we learn lessons from wholesalers in “more advanced” businesses, we gain competitive advantage.
For the sake of most of our conversation, I would like to reference three closely similar lines of trade; the electrical industry, the automation industry and the industrial supply business. The comparison could be with any part of the wholesale world, but I selected these for the following reasons. Experience indicates wholesalers in the electrical field are roughly the same size and profile as the HVACR industry. They work through the similar mixes of product with brand power and commodities as the HVACR industry. Their selling style is similar. Further, there is a mix of national chains, independents and small specialty houses. The automation industry is an offshoot of the electrical industry and mirrors the work that many members of HARDI perform in building automation. Finally, the industrial supply business is a mixture of both of these and because of competition from mega-distributors with extensive online presence has developed some survival skills, which could be of value to the readers of Distribution Center magazine.
With these thoughts in mind, let’s look at some examples of what distributors can learn from their brothers in another industry.
Supply Chain Scorecarding and Segmentation
Electrical and industrial distributors have been faced with a blizzard of vendor changes. New product suppliers and technologies have arrived on the scene faster than most can easily absorb the change. Further, vendor consolidations forced distributors to pick partners as important existing suppliers expand into areas once served by others.
With an average of 250-plus manufacturer brands on their line card, product expansions occurred faster than the sales force could deal with the situation. This created a situation where selling time had to be justified and sometimes redirected. Further, pressure on the gross margin had created profitability issues. Selecting where to devote selling resources led to supply chain score cards. Initially working to better determine the most profitable suppliers, the score card concept developed as a tool to issue in distributor-supplier transactions.
All of this happened at the dawn of the new millennium; remember 2000? Yet most HVACR distributors are just now discovering the need for the activity. In the July issue of this magazine, I highlighted some of the best practices around establishing a supply chain scorecard (if you missed it, you can find it here: (http://bit.ly/1SailUT) and many of the ideas came by way of hands-on experience in the electrical and industrial supply industry. But there is much more we can learn from these folks.
Growing a Web Presence
Both the electrical and industrial industries are under pressure from alternative channels via the Web. The 900-pound gorilla of the industrial world is W.W. Granger, which has publically reported expenditures of more than $300 million in e-commerce infrastructure. Obviously very few companies can slug it out toe to toe with such a large-scale expenditure. Distributors in this industry are banding together to create programs of value to most everyone in the industry.
For instance, electrical distributors have created an entity called IDEA. The main thrust of the group is their Industry Data Warehouse, which they define as:
“The Industry Data Warehouse (IDW) enables you to securely access accurate and timely product and pricing data directly from manufacturers—in one place and in one standardized electronic format.”
What’s the big deal about this? When all distributors and their partners use the same data types and formats, the speed and cost to build a credible web-based e-commerce site is greatly simplified. You have removed the need for costly data scrubbing and new data entry. Distributors move more efficiently towards a meaningful web presence.
In a world where most agree there will be pressure generated by Internet-based businesses encroaching into other industries, including the HVACR market, looking for a meaningful way to simplify the efforts makes sense. But this is not the only lesson that we can learn from other industries.
Moving from Free Value-Adds to Fee-based Services
Since the mid-1980s, distributors in the electrical and automation industries have engaged in what most refer to as value-added selling. In the early days, this model served the distributors well. Services added around the products they sold differentiated their company from competitors. Yet as other distributors added similar services, price crept back into the buying equation. Along the way, the amount of services demanded from customers increased due in part to the explosion in complexity of devices sold; nearly everything in the automation industry requires some type of programming and configuring. Adding insult to injury, margin strain in both the electrical and automation business has been exacerbated by sharp declines in the functional cost of the technology. Products selling for $10,000 in 1990 now sell for below $1,000. And the call for services has grown due to product complexity.
Distributors in these lines of trade are rapidly migrating to a fee for service model. Industry insiders point to well over 80 percent of automation distributors charging for services and close to 40 percent of electrical distributors following a similar pattern. Of important note is the speed of this phenomenon; just five years ago, the numbers hovered at less than 10 percent.
Are there opportunities for migrating some HVACR distributor value-adds to fee-based services? I believe our industry is ripe with examples of services performed for free for which at least some customers should be charged. If you are still in doubt, remember before the last recession most distributors in the electrical sector felt the move was too difficult to manage. Yet today, services not provided to customers have become competitive advantages, even with fees attached.
Customer Inventory Management and Supply Contracts
Distributors in the industrial supply arena have become experts in managing their customer’s inventory in return for major purchasing commitments. Here’s how it works: A senior salesperson identifies a customer with potential for large volume. The result is that we gather numbers via routine sales calls and create a detailed understanding of the customer’s cost for managing, ordering and replenishing inventory. Presenting the customer with a plan for the distributor to control in-house inventory, the distributor leverages services for added business and a slightly higher gross margin via a “Supply Contract.”
Once the contract is in place, a lower compensated member of their sales team visits the customer location on a regular basis to determine what new supplies are needed to maintain a mutually agreed upon service inventory. Typically, this is handled by blanket order and parts are shipped to the customer. In order to drive down the cost of administration, the distributors have automated much of the process using bar code systems, mobile devices and electronic exchange with their business system. Proving the point of cross industry benchmarking, many industrial distributors confess they modeled their approach after the tobacco and sundry distributors (the guys who sell tobacco, candy and miscellaneous knick-knacks to convenience stores).
Again asking the question, could this approach work with the contractors of our market space? I believe the answer is yes. Managing everything from shop supplies to stock carried on service trucks allows for automating and leveraging for additional profit sources.
A couple of final thoughts…
Looking back, we could have selected any one of a number of wholesale industries to compare against. The HVACR industry significantly leads other lines of trade in many areas; examples might include government interaction, customer training and certifications. But the best lessons we learn are from those who were forced by economic events to morph their model ahead of our home model.
I believe we should search for excellence in three areas outside of our industry: analytics, technology and human capital. Now is the time to broaden the scope of your network. If you happen to operate in multiple lines of trade, i.e. electrical, industrial, plumbing or something else, think about doing your own cross industry best practices. Somewhere there is a place you can adopt and adapt an idea to give yourself a competitive advantage.