Manufacturer and Distributor Relations in the Electronic Age

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Buying Groups

In the early 1990's the concept of the buying/marketing group took hold as privately held, independently owned distributors looked for a means to compete with the publicly traded national distributors. The independents reasoned that if they pooled their resources, i.e. buying power, they could exact better discounts and service from their supplier partners. One of the first of these groups for industrial distributors was IDOne. Early on, members and non-members of IDOne broke into two opposing factions, placing manufacturers, who didn't want to alienate either side since both where customers, squarely in the middle. Despite this rocky start, IDOne paved the way for numerous other groups, including Evergreen and Affiliated Distributors (AD).

I personally remember joining Evergreen and then subsequently AD and pushing suppliers to embrace the idea that small, independent distributors needed every advantage against national distributors, and it was in the best interest of the manufacturers to support the small, independent distributor in every way possible in order to keep them alive. I believed then and still today, that small, independent distributors provide unique services that cannot be duplicated by the slower moving, larger national players. In addition, from a manufacturer's viewpoint, not putting their eggs all in one basket can insulate them from later dependency. However, the world became a lot more cumbersome for suppliers as they were forced to pick and choose between certain groups and ultimately give up margin to satisfy membership requirements.

Integrated Supply

The next trend that followed immediately on the tail of marketing/buying groups was the integrated supply movement. Brought about by end-users looking for ways to cut costs, integrated supply destroyed many long-time relationships as customers turned to a single distributor to supply them with products they had previously purchased from several distributors. Of course the losing distributors pressured manufacturers not to grant their competitors access to product lines. Once again, manufacturers were placed in the middle of a feud of which they wanted no part.

Consolidation

With the trend towards integrated supply heating up in the mid 1990s, many distributors felt the need to be bigger in order to compete for business from end-users who were turning from their local distributors to regional, and then to national distributors. Thus began the consolidation trend in the distribution industry that lasted through the late 1990s and again resulted in partnerships and loyalties being torn apart and redrawn. As distributorships were purchased, manufacturers had to evaluate whether they wanted to support the new ownership, which may carry rival lines. I experienced this situation many times as loyalties I had developed in my family business suddenly ended when MSC purchased my company. The conflict occurred not only because MSC offered competitors' products, but because of a difference in selling philosophy and end-user relations between MSC and my former supplier.

The common thread through all these changes in the distribution industry is that the end-user customer is always looking for ways to drive down costs. All too often, distributors reactively embraced initiatives endorsed by end-users in an effort to be customer friendly. A more effective route may be to proactively search for new and more efficient ways to serve customers. This puts distributors in a better position to understand the dynamic up and down flow of the supply chain since distributors, by virtue of their position in the middle, have a complete perspective of the supply chain - from manufacturer to end user.

EDI

Distributors can proactively bring efficiencies to the supply chain that will benefit all participants and ultimately help achieve the end-user customers' goals of lowering costs and increasing efficiency.

Distributors thought they had the solution 20 years ago with the promise of electronic data interchange (EDI).

The intent of EDI was to streamline information and product flow, but it never occurred for several reasons. First, part number conformity posed a problem. Many industry committees have set out to create standards, but none have been successful. Distributors do not want part number conformity because it devalues their services and allows end users to use common codes to seek out the lowest prices. The demise of the dot.com marketplace concept was due, in part, to the inability to force part number conformity upon the supply chain.

The second reason that EDI failed to produce the expected results was that standards for communication, like standards for item codes, could never be established.

E-Commerce

Fortunately, there currently exist trading exchanges that fulfill the promise of EDI without the problems. By harnessing the power of the Internet to provide all participants in the supply chain the power for computer-to-computer connectivity, and recognizing that some business practices are better left unchanged, e-commerce is rapidly emerging as the means to strengthen and streamline the relationship between manufacturers and distributors.

This issue of item code conformity is solved by the development and maintenance of translation tables, and today's technology allows different communication standards to be translated between computers.

Now a distributor can, from his enterprise software solution: accept an end user's order directly over the Internet into his back end system; order the item directly from the manufacturer, and have the manufacturer's backend system supply ship dates to populate the distributor's original purchase order, ship the product, and electronically invoice the distributor; the distributor can receive the product from the manufacturer; and ultimately ship the product and electronically invoice customer. Electronic fund transfer can even apply all payments from the end-user to the distributor and the distributor to the manufacturer.

Supply Chain Collaboration

While document sharing certainly streamlines the process, the real potential of e-commerce is supply chain collaboration. By connecting their enterprise resource systems, distributors and manufacturers become partners - tearing down the barriers of communication and dramatically lowering costs.

Supply chain collaboration gives distributors and suppliers the ability to view one another's inventory or other information in real time. The cost savings here is dramatic if for no other reason than eliminating the time- and resource-consuming chore of sourcing by phone. But the savings can be significantly increased when it includes viewing dead stock. Instead of dead inventory being locked away in an individual company's business system, it can now be viewed and sold at the point of demand, turning dead inventory into cash.

Interconnectivity also enables suppliers to automatically update pricing and delivery information in a distributor's system, saving distributors the personnel hours otherwise spent keying in price changes and ship dates.

Of course, not all communication has to occur between computers. Meetings can take place over the Internet. Manufacturers can introduce and explain new products to distributors online in an interactive, real-time environment.

In the final analysis, the supply chain - from manufacturer to distributor to end-user customer - must continue to evolve and become more efficient as end-user customers persist with their demands for lowering pricing and more efficient business practices. Distributors and manufacturers risk being caught up in the next consumer-driven fad if they don't proactively work together to embrace the technology that will help them meet customers' requirements for high-quality service at low prices, while still maintaining a healthy bottom line.

Eric Holloway, channel relations manager for Prophet 21, has spent his life in the distribution industry. His experience includes management positions with an independent distributor, a publicly traded national distributor, and a dot.com venture.