Joel L. Thomas
Joel L. Thomas, Manager Site Purchasing operations, Monsanto Chemical Group, St. Louis, MO 63167, (314) 694-1065.
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:
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:
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.
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?
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?
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.
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.
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.