The Small MRO Distributor: An Endangered Species?
Author(s):
Joel L. Thomas
Joel L. Thomas, Manager Site Purchasing operations, Monsanto Chemical Group, St. Louis, MO 63167, (314) 694-1065.
79th Annual International Conference Proceedings - 1994 - Atlanta, GA
In the course of preparing a paper for last year's 78th Annual
International Conference in San Antonio, it became apparent that there was a
difference in the respective ways smaller and larger MRO distributors were
adapting to information technology changes. That paper was based upon data
from a survey of 50 distributors, and entitled "EDI and the MRO Distributor: A
Report Card". Some of the survey responses, particularly appropriate to the
smaller MRO distributor, were:
- Smaller MRO distributors, with fewer in-house resources, are making only
minor changes in their operations to utilize EDI, not taking full advantage of
the productivity gains possible with this technology.
- Only 14 percent of the smaller distributors said that EDI reduced the time
to fill an order, and 29 percent said the cost to fill an order had increased
since implementing EDI.
- Just 26 percent of all MRO distributors surveyed utilize their existing EDI
capability to buy from their suppliers, and almost all that do are large
distributors.
Based upon the survey responses, it was concluded that implementation of
EDI by the buying organization was fueled by expectations of productivity
improvement, while EDI implementation for most smaller distributors (and some
of the larger ones) was sales driven. Since the MRO distributor's operational
side was not that involved, the practice appeared to be one of making only the
technology changes that the customer required and no more. That practice has
resulted in lost opportunities to gain in productivity.
That conclusion now leads to reflections about other trends now
occurring in the MRO distributor's world:
CURRENT EVENTS
Companies like yours and mine are trying to reduce the supplier base and
form closer operational and communication ties with fewer firms. A supplier's
data exchange capability, as well as service performance, both affect the
customer's full internal procurement cost. Both can also be improved by use
of information technology, and those capabilities are becoming evaluation
criteria for source selection equal to price issues. Obviously the larger
customers, with multi-sites, will tend to favor larger suppliers with
corresponding multi-site capability and good electronic communications
ability.
A pay on receipt process that improves productivity for both the supplier
and the customer is starting to expand in use. The Evaluated Receipts
Settlement Process, pioneered by Ford Motor Company, significantly reduces the
customer's internal non-value added cost to enter invoice data and investigate
data discrepancies. It does, though, require extensive use of EDI and
bar-code technology to communicate the order, plus shipment and receiving
information, to eliminate the need for an invoice. MRO distributors with the
technical skills to develop the EDI/bar-code capabilities required will have
an edge. Larger distributors have the skills and resources more readily
available than smaller ones. The larger distributors have also tied EDI to
their main-frame system, and have reduced the time to process orders rather
than increasing that time.
The drive for cycle time reduction calls for quick response from the
manufacturer and the MRO distributor. This push is magnified by the buyer's
JIT/MRP processes. Just a few years ago, the buyer would mail in the order
and expect delivery of most MRO items several days later. Now, using good
communications technology, MRO distributors can deliver most orders within 24
hours, and in many instances, within an hour or two. While the larger
distributors have better information exchange capability, the smaller ones
often have an edge in nearness to the using site.
Alternate distribution channels are gaining market share, primarily from the
small, local distributor. Catalog houses such as Grainger and McMaster-Carr
have made it easy to buy with reliability and quick response capability,
derived from good information systems. Home Depot and Office Depot sales to
industry are growing based upon many local outlets, delivery, and a full line,
category busting inventory -- and good prices from real volume buys.
Warehouse clubs, such as Sam's (Walmart related), now act as
wholesaler-distributor to many small service, financial, general office, and
retail businesses taking dollars from the smaller, locally owned distributor.
Customers are looking everywhere to reduce material cost in today's economy,
since the prices may not necessarily be passed on to the end user. Again, the
smaller distributor with less buying power is at a disadvantage.
Customer re-engineering efforts have produced demands for the supplier to
perform more value added services for the customer than in the past. Indeed,
many customers now want to outsource much of the tasks of material management
to the supplier, and get out of the inventory and parts chasing business. The
move toward integrated supply and outsourcing tends to place the smaller
distributor in the role of sub-contractor rather than prime contractor, and
can reduce direct contact and subsequently influence with the customer.
PROBLEM SUMMARY
A rapidly changing business environment prevails in the distribution
industry. As a mature industry, there has been a reluctance to adapt to those
changes. The smaller MRO distributor, with fewer technical resources, a
smaller market, and often more capital limited, is at a disadvantage to the
larger distributors more often than not. At the same time the customer is
actively seeking suppliers that can come forward and provide the new
requirements.
What can the smaller MRO distributor do to survive in an environment
that seems tilted in favor of the larger firms, that is experiencing buy-out
consolidation, where the share of the pie is getting smaller and net margins
historically low and getting lower?
SURVIVAL KEYS
We have discussed the weaknesses of the small MRO distributor, and they
are serious ones--lack of capital, unavailability of technical resources,
failure to take advantage of productivity enhancing technology, limited market
area, and a "wait and maybe it will go away" attitude toward some of the
issues. Further, we have talked of the trends of customer driven change that
are fast taking place and how weaknesses of the smaller distributor place
their business at risk. Aren't there some strengths inherent in being a small
distributor? Aren't there some trends that can help survive?
- Flexibility: Once change is decided upon, there are fewer organizational
levels and fewer people to communicate with and train to get started. A
smaller firm can tailor service to the needs of customers easier than larger
firms with more fixed procedures. That very adaptability and flexibility can
allow a smaller firm to put in near seamless operations with a good customer,
and reduce the overall cost of doing business. The small firm can more easily
let you have it "your way".
- Location: Being locally located provides advantages that, if communications
are good, the larger but further distant supplier cannot overcome. Delivery
in one to two hours; carrying inventory rather than having it in the
customer's storeroom; midnight calls; and let's not forget being part of the
local economy and participation in local events and charities.
- Service: Let's fact it, the MRO distributor doesn't really sell electrical
supplies, office supplies, and other goods. That's what the distributor buys.
After it's all said and done, the MRO distributor sells service -- on-time
delivery, correct items, technical assistance, and understanding of the
requisitioners' specifications, completeness of order, quick response, lower
all in cost.
The smaller distributor certainly has the ability to compete in that
product, and build on that service when and if they want to. I feel that if
the small distributor leads the way in adding the capability to perform
superior service, and continually works to improve that quality, the larger
firm will not find the door open. However, if the smaller firm reacts to
improve service only when the bigger firm is taking over the business, it's
too little, too late. If the bigger firm gets in, the smaller firm will find
it almost impossible to regain that business. That's why I am somewhat
disappointed in the tendency of the smaller firm to "wait until we have to" to
implement technology improvements in data exchange with the customer and to
take full advantage of possible productivity increases to reduce cycle time
and operating cost.
- Integrated supply: Why does it have to be the larger firm that manages a
customer's full supply of a material category (i.e., electrical supplies),
subcontracting out to others items it does not or cannot stock? Why can't the
smaller firm build on its closeness and its long term relationship with the
customer and initiate this growing trend? Some companies are now doing
integrated supply across commodity lines, for example all electrical and
mechanical items. Again, if the smaller distributor waits until they have to,
it can be too late. To do this properly, the customer will want to place all
orders electronically with that one firm that manages the business, to pay
that one firm, and to work with that firm to measure and improve overall
supply channel communications and cost effectiveness.
- Supplier consolidation: By taking the initiative and becoming active in
integrated supply situations, the smaller distributor protects their business
from the trend toward supplier consolidation and reduction. The smaller MRO
distributor acts, in all customer related aspects, as if they were a much
larger supplier, reducing the customer's supplier base without a noticeable
decrease in the manufactured products available to the customer.
For this approach to be effective, any increased costs to the customer
and distributor coming from this network must be offset by decreases in the
cost of processing transactions through the full distribution channel. Pay on
receipt technology can lower the customers' internal cost by eliminating most
of the redundant and wasted effort that goes into processing invoices from the
supplier.
Know your niche: The smaller distributor is a part of the largest group of
business people in the world, a group composed of all the other smaller
businesses that provide products and services everywhere. These businesses
have the same restrictions as the small MRO distributor and are as slow to
change. The demand for technical improvement in the supply chain is not as
prevalent in that group as in that of larger manufacturing and service
businesses, and it will take a longer time for the business trends to become
demands. This is an opportune market, but one that can lull the small
distributor into inaction.
To combat the volume buying advantages that go with size, many small
distributors are becoming members of buying groups that consolidate their
requirements. The National Association of Wholesaler-Distributors writes that
the small distributor makes 14 percent of their purchases today as members of
buying groups, and forecast purchases of 20 percent by 2000.
CONCLUDING REMARKS
Purchasing and its relationship with MRO distributors is undergoing step
changes in what is expected of that relationship. The trends are established,
and the technology and the business climate have coincided in the drive toward
decreasing the transactional cost of doing MRO business. These trends are
reflected in specific initiatives such as supplier consolidation, pay on
receipt, cycle time reduction, inventory reduction, and integrated supply.
The tools to achieve the results are those of improved communication
links from the requisitioner, through Purchasing, to the distributor and the
manufacturer--the full distribution channel network. Knowledge resources as
well as capital resources are prerequisite.
This business environment favors the larger, multi-site MRO distributor
that has better access to those knowledge and capital resources. In order to
survive, to not be swallowed up by larger distributors, the smaller
distributor must first recognize the potential of the problem. To survive the
small MRO distributor must take the initiative with the customer to effect the
changes that are going to occur.
REFERENCES
- N.A.W., Distribution Research and Education Foundation, Facing the
Forces of Change, 2000, 1992.
- Thomas, Joel L., "EDI and the MRO Distributor: A Report Card", NAPM 78th
Annual International Purchasing Conference Proceedings, 65-70.
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