different item codes from whomever they buy from. I think the efficiencies gained would far outweigh the loss of a little bit of competitive advantage by having standardization of nomenclature.
MDM: So what's going to make it happen?
DL: End-users are so fragmented and so are distribution channels. There isn't a Wal-Mart buying wholesale distribution items. A distributor like Grainger or MSC might be able to drive their suppliers to standardize. Industrial manufacturers could drive it, but I don't think we'll see a high level of adoption until the mindset changes. It might be a generational shift. Or perhaps competitors come in from global markets to force the issue. Then U.S. manufacturers might realize they can make their channel more efficient and compete better by creating standards.
MDM: Is the starting place cleaning up your database? If a smaller distributor devotes the resources, will they really gain any competitive advantage?
DL: Absolutely. There are a few areas of payback. With clean data, they can communicate with their partners effectively, so in some cases they can go into larger end-users who are probably using some type of standardized purchasing system. Beyond that, a clean database yields big benefits in the normal, everyday transactions. All of a sudden, customer service reps are selling customers the right items. They didn't realize how many errors were caused by their data not being correct.
They also received tremendous benefit managing their inventory because, instead of having five different items that were really the same item, they now have one item. There are stories where distributors go from 10,000 SKUs to 3,000 SKUs. They really only had 3,000 SKUs, but they were managing 10,000. The cost is tremendous, so there's this side benefit of getting your database cleaned that you don't think about it, but once it is done, you say, "Wow, it just seems that things are going a lot smoother."
It also flows to the vendor and customer sides. When you start these database cleansing projects, you often take the next steps to clean up the customer and vendor database. You start putting standards in place on how to set up vendors and customers. And again you reduce errors because standards are in place.
MDM: How will the Web and online purchasing tools change customer and vendor relationships?
DL : Where the Web becomes very powerful is as a tool for engineering, for example, to find out what products are available. Instead of having to call a distributor they can get all the information over the Web. But from a buying standpoint, you're going to buy from the guy that brings you the most value. Sure, you will have multiple places to buy so you can keep people honest, but I don't think the technology will end up doing price shopping for you, because there is so much more than price that can affect your overall profitability. Good buyers understand this and will buy the product for the business that brings them the most value.
However, I think we will see more of the online purchasing tools that are very powerful, like an Ariba or CommerceOne. In some cases you can eliminate buyers and let your engineers and end-users do the procurement. The portal software takes care of your specific business rules of who is allowed to buy and how it is sourced. If an engineer buys something not authorized, it automatically alerts their manager to approve it or not. Distributors need the technology to integrate into those customer systems so the order goes directly into the distributor system to get the full efficiencies.
Right now it's the largest customers who are using these tools. As that technology becomes more available, that's going to be a huge value-add that a distributor can offer to their customers or in some cases the larger customers will buy themselves and then want to integrate it to the distributor system.
MDM: What are the key challenges you see for both software providers and distributors in the next few years?
DL: From the software-provider standpoint, I think the biggest challenge is going to be addressing the 10- to 20-percent specific needs for a niche market. The needs of a fastener distributor are 10-20 percent different than those of an electrical, plumbing or medical distributor. The biggest challenge is balancing development efforts, sales efforts, support efforts across those 10-20 percent differences, because those differences are 80 percent of that distributor's core needs.
The second biggest challenge will be adapting to new technologies such as software-as-a-service because you really have to build your product from scratch. It's difficult to take an existing legacy technology and make it work effectively over the Internet.
For the distributor, it's how to react and adapt to a global economy. Not only are they dealing with global manufacturers, but now customers are overseas. Do they follow their customers and how do they work with suppliers that are overseas and vice-versa?
The next issue would be making sure they're running their businesses as efficiently and as effectively as possible. Don't buy more technology until you're using everything you have! Investigate the cost of getting your existing technology to do something that you might think, "I need to buy a whole new system to get that," because it probably will be less expensive to take your existing technology and make it do what you want.
From a functionality standpoint, the race is a tie. Almost all systems have the same functionality these days. These companies have been in business long enough to build all the features a distributor wants. Look at that 10-20 percent of functionality that might be specific for your industry. So then the next two key questions are these: "Which technology provider is going to be around for the long haul?" and "Who is going to provide the best implementation and support services long-term?
There is no silver bullet that all of a sudden is going to make your business much more efficient. Focus some resources in using the systems, getting the data to be optimal, getting the data set up properly and getting everybody trained on the best way to use the technology. That approach will produce the biggest ROI with the least amount of dollars spent.
Doug Levin currently provides business consulting services to both technology companies and distributors. He may be reached at 215-327-8232 or DougLevin@comcast.net.
Doug Levin has been involved in distribution information technology for more than 20 years. He is well known in many distribution sectors as the former executive vice president of Prophet 21 software company, acquired by Activant Solutions in 2005. In this interview, the guy who sold a lot of technology systems urges distributors to optimize current systems first. Here's Levin's perspective on IT best practices, standards, consolidation and challenges ahead.
MDM: What's your perspective on the consolidation you've seen in distribution software over 20 years, some of which you actively drove in your role with Prophet 21? Have distributors benefited?
Doug Levin: It has probably gone from 30 companies that focus specifically on distribution to maybe six or seven. And of those six or seven, there are two that are large; the other four or five are smaller, in the $5-million range from a revenue standpoint. The two large acquirers, Infor and Activant, have done a nice job staying focused on customer service. There are also some larger technology providers now focusing on distribution, such as SAP and Microsoft. What I see right now, because it is still highly competitive, service levels remain high with both the smaller and larger companies. That could change over time as there is more financial pressure on the larger companies.
MDM: So what should distributors do?
DL: As there is less competition, the risk is that you might see some fall-off on the service levels. But I think we'll see newer companies pop up, very similar to what has happened in distribution. Some guy sells his company and either his sales manager or he starts a new distribution company a few years later. You inevitably lose some of the personal service when you become part of a larger company. Also, your ability to bring new technology out gets harder, because you're just less agile. It's the same dynamics in any industry.
With these new companies emerging, you should see some new technologies. Probably the biggest example is a product built/designed from the ground up more as a software-as-a-service or an ASP model, where the technology will be delivered over the Internet.
MDM: Will we see more specialty software providers develop more focused applications or add-ons rather than complete systems?
DL: I think as new companies enter the market, they will focus more on specific niches. If you look at wholesale distribution as one market, as a technology provider you'll never make it. There are really a lot of little niches and you have to almost manage your functionality to all those different niches. Even the exact same terminology can be different -software to handle rebates in medical distribution is totally different than for electrical products distribution. Let's take a market like fastener distributors. First, take the large fastener distributors out of the picture. They will likely buy technology and have their IT group build it out for their exact needs.
Once you pull out the big guys, the fastener marketplace isn't huge from a technology company's view; this segment may only spend a few million dollars a year on new technology. So a smaller technology company can focus on that market and be profitable. A large technology company wouldn't see an impact to their P & L when compared to the investment they would need to make in their product. You'll always have providers that offer specific functionality, such as third-party logistics, warehouse automation or CRM solutions.
MDM: How should distributors think about managing IT resources through this period of consolidation?
DL: The biggest thing I would suggest to distributors would be: Don't look at new technology. If what you have is working, focus more on using what you have 110 percent. I have seen so
many distributors move to the next generation of technology for technology's sake, when really they are buying features they might already have; they just either don't know it or don't use it. They would get the biggest bang for their buck by investing in training and education for the products they already have.
By doing this, I feel most distributors will get nice gains in their businesses from an efficiency standpoint, so they can afford to sit back and watch the marketplace settle out. When we acquired Trade Power (Array), some of the customers panicked and spent hundreds of thousands of dollars on Eclipse, only to have Activant buy Eclipse a few years later. Hindsight is 20/20, but the Trade Power customers that focused on using their current technology better were the real winners.
MDM: There's a lot of hype and jargon about the emergence of the Web, standardization and use of EDI. What are the real issues?
DL: Anybody with a system bought in the last ten years probably has the capability for EDI or connecting to the Internet. They might need to spend some money on their current technology to make it all happen. This connectivity is critical to the survival of a distributor's business. They should focus on connecting their business through the supply chain -the ability for customers to connect to them and for them to connect to their suppliers.
The danger is that some people will buy that new system just to gain this capability, spend a year or two implementing, and then find out their old system had the ability to connect. So by buying a new system, they end up where they wanted to be but with a lot more cost and disruption to their business.
MDM: So what's best practice for improving your ability to communicate up and down the supply chain? Is it standardization or is it just the wiring?
DL: It's probably a combination of both. For example, when we worked with 3M, the wiring could be done instantaneously; all you needed was an Internet connection. 3M had very good data. That typically was not the case with distributors'data. So it would take six months to a year to get the distributor's database cleaned up. And when I say cleaned up, it's not that they didn't have the correct UPC codes, it's that often they had the same items in their database four, five or six times.
When they set their data up 15 or 20 years ago, they didn't have a way to handle multiple units. So they set that item up four or five times. Or they didn't know how to handle customer-specific items; if they sold the same item to five different customers and the customers called it five different things, they would set the item up five different times. The important point is that new technology won't automatically solve these housekeeping problems.
MDM: A number of trade associations have tried to drive the adoption of standards and data-sharing. How important is that?
DL: When you look at Wal-Mart, Home Depot and the grocery industry, it appears to me that those industries are almost 100-percent compliant with standardization of items and being able to communicate. There really is no 600-pound gorilla driving this in distribution, either at the end-user, distributor or manufacturer level. It would be a huge efficiency gain if people would adopt standards, but we're having the same discussion as ten years ago and it doesn't seem like compliance has increased more than a couple of percentage points.
MDM: Aren't there too many proprietary competitive reasons to not promote standardization for most players?
DL: That's the argument, but the efficiencies you gain would overcome that. You have to be competitive on your value-add as a distributor or a manufacturer. A smart buyer, if they are just buying on price, is going to figure out the