second-tier supplier agreements have developed.
Service & Knowledge
Traditionally, distributors with expertise in specific production or process problems have always created effective barriers to entry. But as customers have gained more access to product information, how they value the nature and type of application knowledge has changed significantly. It’s become a tougher battle to differentiate from low-price providers as more products have gone to commodity status and alternate sourcing has mushroomed.
Most distributors need to upgrade their knowledge and service systems to reflect the new ways customers want to do business. That means training employees in different skill areas, creating product and process champions in high-value areas, and elevating the value your company represents. It may require a new commitment and investment to train in select areas, rather than continue as a generalist in many areas. That decision means making some difficult choices about the core strengths where you can dominate your competitors.
Tooling distributor C.J. Smith Machinery, Fulton, Mo., saw its fee-based safety audits take off after a request five years ago from the safety director of one of its largest customers. The service has strengthened Smith’s relationship with its customers and in some cases opened the door for sales to meet safety requirements uncovered during the audits.
The last great differentiator has been at work for years. Many distributors are sales-driven, and continue to live month to month without much attention paid to strategic planning or shifting requirements of customers. But as the examples in this article illustrate, some distributors have perfectly positioned themselves to offer customers additional services and capabilities to grow their business. Do your employees have the skills they need to thrive in the future and make your company successful? What do those skills look like? Based on the current shifts in distribution channels, the answer is centered more on managing relationships than product lines.
Process discipline is critical to help your company train and transition from your current model to a more flexible one. Your employees need new skills that include online marketing and communications, selling process improvement capabilities, and other services that enhance productivity or reduce cost. You’ll need more employees who can effectively sell the value your company offers outside the product boxes. Process discipline will in fact attract the best talent to flexible and innovative companies, which offer the best opportunities for employees to grow and succeed.
The Future Looks … Different
In spite of the challenges distributors have negotiated over the past decade, independent distribution channels have emerged relatively healthy and nimble. Most distribution sectors have enjoyed a few years of double-digit sales growth. This industry is still fragmented, entrepreneurial and, many would argue, crazy after all these years.
Many of the old rules are gone, replaced by new and sometimes confusing definitions of how the customer wants value delivered. And yet distributors who have invested in these four areas of differentiation have consistently outperformed competitors. They found profitable opportunities to deliver focused and flexible solutions to shifting customer needs.
The Four Ps of Differentiation
Build Your Brand, Build Your Future
Business Ethics as a Differentiator
Support a Differentiation Strategy
Six Degrees of Differentiation
How to Build a Customer-Care System
Create Powerful Message Content
Value of Differentiation
Distributors have had plenty of practice managing change over the past decade, thanks to a constant barrage of multi-syllabic trends commoditization, national accounts, integrated supply, consolidation, globalization, e-commerce, downsizing, offshoring, outsourcing and strategic sourcing. Cap it off with a deep recession with deflationary and inflationary threats thrown in. Beyond buzzwords, how do you sum up the key impact on traditional distribution channels? Customers today can buy anything, anywhere, at any time.
The Next Big Things
Change is a cruel taskmaster. No matter how well you adapt, it’s never enough. Customers continue to redefine the value of distribution in their quest to create frictionless (and sometimes profitless) supply chains. So now that distributors have proven their ability to weather storms, manage change and make a profit, what’s the next essential skill needed to extend competitive advantage? Where will you discover market share and profitability as competition increases and margins inevitably tighten?
The winners will be those who are best at extracting the most from their relationships up, down and across the channel over the next few years. Sounds simple, but it goes far beyond improving manufacturer-distributor relationships or creating strategic partnerships.
Distributors have to start thinking differently to protect their turf and grow new revenue streams. Unique and specific skill sets valued by customers will clearly differentiate your company from competitors. You need to offer compelling reasons to customers and suppliers why you should be the partner of choice.
Here are four critical skill areas where distributors have to effectively differentiate from competitors:
- Service & Knowledge
- Process Discipline
In each of these four areas, evaluate your company’s skills against local and national competitors. If you aren’t brutally honest about your weaknesses or downplay the importance of applying resources to one of these areas, you may be vulnerable to competitors that already recognize these emerging areas of competitive advantage.
Visibility is the new version of the question about how easy it is to do business with your company. It’s measured in how well distributors can use technology tools to increase service capabilities with customers and suppliers. How fluent are your employees with email? Email offers capabilities for instant access and service that clearly differentiate the level of care and commitment.
Are you a seller or a resource to customers? Can customers check order and inventory status online in real time? Those are key indicators today, based on benchmarks established by Amazon.com, EBay, Grainger and other technology innovators. Do you have a virtual library of product and technical information that prospects and customers can access?
If your customers are not online today, watch and ask them often. If you are positioned to help as they become online savvy, there may be opportunities to lock in their loyalty. Better visibility will be critical to building deeper and stronger relationships with customers, and necessary to fight low-price providers and other alternate sourcing options a click or call away.
Better visibility with manufacturers will be mandatory sooner than most people think. Can you access product/technical literature online? Have your key suppliers established customer service tools online to cut down on costly and time-wasting telephone exchanges?
Are you actively working with manufacturers to standardize pricing update formats? The Product and Price Information Format, developed by the Power Transmission Distributors Association and Bearing Specialists Association, is a prime example of better visibility. PTDA member Bearing Belt Chain Co. Inc. is even using the PPIF as a factor in supplier evaluation.
An electrical marketing group (Imark) has established a three-year incentive program for its 180 members to get them to use more e-business tools. The starting level of a three-tier program includes high-speed Internet access at the workplace, email addresses for key people, and a basic level of e-commerce with the group’s preferred suppliers. (This includes exchanging 810 and 850 transaction sets, transmitting flat files by email, or using supplier e-business portals.) The highest level includes use of EDI transaction sets with more suppliers.
Point of sale information, often a point of contention, has provided manufacturers with visibility into end-user buying and application behavior, spawning new products and shifts in marketing programs that have resulted in greater sales and profitability for all channel participants. Point of sale information is a key way manufacturers can leverage the unique visibility distributors have into end-user customers. As relationships up and down the supply chain get more complex and confusing, distributors and manufacturers need all the leverage they can get to stay competitive.
Doing more with less has become standard operating procedure at all points in the distribution channel. Lean thinking is not only working its way into distributor operations as ways to cut internal costs, it has become an effective sales tool. Many distributor salespeople have shifted from pushing product to creating cost-saving solutions or production efficiencies. Regular cost-saving reports have become standard industry practice for power transmission distributors. All these activities are leading us to one of the new rules in the new distribution landscape all relationships must be strategic. Transactional relationships are too expensive today.
Fewer distributors have explored how to leverage their customer relationships to find new revenue streams. But in the fight to get paid for services instead of bundling services into product cost, some distributors have partnered with innovative customers on pilot projects in the areas of repair, refurbish, inventory management, commodity purchasing, and other non-traditional distribution functions. These distributors found opportunities at innovative customers who were open to exploring the benefits of a deeper relationship.
Safety supplies distributor Safety Today, Columbus, Oh., has been offering onsite inventory management to customers for ten years, and introduced vending machines three years ago, helping with customer efforts in lean practices. The systems the distributor has installed have yielded an average 35 percent in cost reduction for customers. Not only have these systems elevated the distributor’s value at the account, but the increased data collection has helped the distributor reduce its costs as well.
Just as customers have reduced their vendor base, more distributors and manufacturers are reducing their supplier/partner base to reduce costs and leverage the specific benefits of fewer business relationships. These strategic partnerships leverage the specific skills and expertise to achieve the business goals of both partners. At another level, marketing and buying groups have effectively given many smaller distributors critical leverage in their purchasing and marketing power.
An emerging area for distributor leverage is the external talent they can tap into through peers, marketing groups, technology partners and other service providers. Distributors competitive in some cases are putting together deals where a customer opportunity has defined a clear value in a relationship. The most interesting examples emerging have been in complementary products, or even certain branded competing products, where master distribution relationships or