There’s Still Room for the Independent Distributor

Progressive distribution companies are finding new ways to add value and reduce costs
By Steven Ellinwood, BMD
April 15, 2004
FEATURE ARTICLE | Management, Channels

The demise and even death of independent distributors has been predicted by experts for years. Even today the jury is still out. A recent IBM report on distribution said: “Depending on to whom you listen, the distribution industry will be disintermediated into extinction by a direct channel between manufacturer and consumer or it will emerge as the ubiquitous connective tissue holding the entire re-engineered supply chain together.” In truth, it will be neither.

Independent distributors (those not owned by a builder, a manufacturer, a retailer, or co-op owned by a group of retailers) can add economic value in almost every product, geographic market and customer segment, no matter how large the manufacturer, retailer, or end user. There are many distributors that have identified successful strategies and are executing business plans that are providing their customers with valued services, allowing the manufacturers they represent to prosper and providing acceptable returns for themselves.

My early career was with a national retailer, and I admit I had some doubts about the cost/value relationship of independent distribution. But after spending more than 20 years running a distribution company, I’ve concluded that the value of independent distribution is determined by the strategy and execution of the distribution company.

Distributors face many new challenges. Manufacturers provide their own distribution. Large chains provide their own distribution. E-commerce provides the interconnection for end users to seek suppliers direct and hybrids of each of these. Most industries are undergoing significant and rapid change, and as the power shifts from the manufacturer to the consumer, distributors need to adjust their business models to reflect these changing dynamics.

Let’s focus on what is happening with some of the best or leading distribution companies. Keep in mind the goal for distributors and manufacturers alike is to provide all the seamless services necessary to meet the needs of the dealer and/or consumer. The creative programs or best practices developed by lending distributors include:

  • Supply chain management–The distributor coordinates all product movement from the manufacturer’s dock to the jobsite, consolidating where possible. When done properly, excess costs are driven from the system because of duplicated logistic expenses and carrying costs.
  • Regional marketing–The distributor provides brand building opportunities at the regional and local levels. This type of program is funded primarily by distributors and local dealers. Dealers are eager participants as these programs allow flexibility with messages tailored to audience segments, product preferences and geography.
  • Post-sales service–The distributor performs warranty service as part of a a complete service program. This activity includes education programs for dealers and installers to lower the frequency of installation problems.
  • Value-added fabrication or manufacturing program–Certainly nothing new in many markets, the distributor has been performing such functions as pre-hanging doors for many years. Now we are seeing these kinds of value-added manufacturing operations expanded by distributors. Examples include packaging, specialty product manufacturing, panel production, and custom sizing. Many distributors have made major investments in these activities.
  • Installation of products in new construction—In many markets, the large home builder is becoming more of a developer of real estate and marketer. The actual construction is subcontracted. Dealers are now involved in selling products installed for new construction as well as remodeling. Distributors are being asked to perform the installation function for some of the largest home builders by the manufacturer. We have seen some acquisition activities as dealers and distributors seek to acquire the skills to handle this function.
  • Merchandising service–Again, nothing new, but the best distributors are separating themselves with a more extensive merchandising services program. These services might include weekly/biweekly visits by a distributor employed merchandiser responsible for stocking or fronting shelves and merchandising displays in the dealers showrooms.
  • Purchasing alliances–The formation of purchasing alliances by noncompeting distributors is growing. Size is important when purchasing products, especially commodities, on a global basis. Consolidation of the industry will continue but independent distributors are also forming buying alliances to reach volume levels needed to purchase effectively.
  • Selling alliances–These alliances, formed by distributors to sell regional and national chains, are primarily focusing on commodity or private label products. Selling alliances, still in their early stages, are much more difficult to perfect but not impossible. More disciplined processes are being implemented, improving performance and increasing success rates. A question remains whether or not there are opportunities using this approach for name brands.
  • Business segmentation–Because of the demands of the manufacturer, distributors are segmenting their business activities to provide focus on key product categories. This segmentation goes beyond separate sales specialists to include separate senior management, customer service/inside sales, and logistics systems, as well as separate facilities in some cases.
  • Product specialists–Some distributors have added product specialists to assist their territory managers in getting a featured product into the dealer base. The product specialist provides more focused marketing, education and technical support.
    Looking beyond building products at an example in the liquor industry, the largest producer has formalized five-year agreements with its distributors. The agreements provide exclusive distribution by state, but the distributors are required provide a dedicated sales force (trained by the manufacturer), full implementation of a specific marketing campaign and they must link into an electronic system providing profiles of customers and up-todate purchasing data.

An example of a major change in distributor business practices was highlighted in a recent issue of Progressive Distributor. A group of non-competing industrial distributors opened a large central warehouse for foreign-made goods. The distributors, assailed by cost pressure from a shrinking client base and foreign competition, were tired of paying high prices for domestically manufactured goods. Their answer was to develop a series of joint ventures with manufacturers in mainland China.

The distributors established contact, tested the product designs, signed agreements and imported the goods in at prices substantially less than those for domestic products. Their warehouse has grown substantially. Through less costly products, the distributors increased their ability to compete and enhanced their margins. The idea worked so well that it is the envy of the industry and new members are knocking down the doors to get in on a good thing. There are many creative things taking place as the distribution industry evolves.

NO ONE STRATEGY FOR SUCCESS
But no universal prescription for surviving and prospering in distribution exists. The guiding principles leading to these strategic plans include a desire to fill a market or customer need, an attempt to find new needs of the customer and/or manufacturers and to fill the need at a cost less than the beneficiary would pay otherwise. Many of these activities also include considerable expenditures including sizable technology investments.

The E-commerce revolution has not overturned the business model as rapidly as predicted, but an investment in technology remains critical for distributors to survive. Distributors have sometimes been slow to adapt to new technologies, but the two major issues facing distributors—improving service and reducing costs—means they no longer can afford to be slow in making the changes necessary. The interconnectivity spawned by the Internet will drive suppliers to establish relationships with distributors that can support international requirements. Conversely, distributors can seek products from international sources establishing a new level of control for themselves.

Obviously the historical boundaries for distributor/manufacturer relationships no longer exist and are no longer clear. Distributors that want to survive and succeed are transforming themselves. They are providing value-added services that distinguish them from the 10 other wholesalers carrying the very same product lines. They are providing rapid replenishment. They are providing “just in time” inventory delivery. They are managing customer inventory. They are providing their customers with new ways of entering and tracking orders.

There are also some fundamental issues to consider. Both the manufacturer and distributor need to know the cost of each activity and the exact cost of each business transaction. Both need to improve or add systems for more effective logistics, better customer segmentation for optimal profitability and continuous examination of the fundamental business processes. Distributors that plan to succeed consistently over a protracted period of time need to revisit the basic services they offer and formulate plans for delivering these in faster, more efficient electronic forms. What distributors have long provided to their customers are services that few manufacturers are either capable or desirous of delivering. These include:

  • Aggregation of goods from multiple manufacturers
  • Cost savings for dealers by lowering procurement costs, saving them time
  • Natural selection among product offerings
  • In-depth market knowledge
  • Discounting as a result of large quantity purchasing from multiple product lines
  • Formal and informal customer education services
  • Identification of distributors for complimentary products
  • Specialization and local presence

The building product distribution industry continues to evolve but the top 150 distributors and co-ops grew at a rate of 6.9 percent in 2002 and generated sales of over $56 billion. We see many building products manufacturers reversing course and re-establishing distributors to service certain market segments. Even the big boxes have expanded their business with distributors and with distribution consolidation and marketing alliances that trend will continue. These are interesting times and the best distributors will survive and even prosper.
 

Steve Ellinwood is president of Building Material Distributors, Inc., Galt, CA. Established in 1943, BMD is a global wholesale distributor and exporter of specialty and commodity building materials. It services independent lumber yards, regional building material dealers, national chains, window and door specialty retailers, hardware retailers and home centers throughout the entire state of California and northwest Nevada. This article is based on a presentation he made at the summer meeting of the Window & Door Manufacturers Association. More information about his company can be found at www.bmdusa.com or by calling 209/745-3001.