Progressive Distributor - Fighting back

Fighting back

Confronted with growing competition from consolidators, Production Tool Supply introduces "America's Tool Crib," a nationwide alliance of independent distributors.

by Richard Vurva

Production Tool Supply (PTS) of Warren, Mich., has watched with growing interest as one distributor after another entered the merger and acquisition fray. Since 50 percent of the company’s $210 million in sales is generated by small- and medium-sized distributors nationwide, consolidation can have a major impact on business.

Seven thousand distributors rely on PTS as either a primary supplier or as a fill-in source for items that complement their existing product lines. Distributors also purchase customized catalogs, promotional fliers and a wide selection of direct-mail marketing materials.

Although some distributors spend more than $500,000 with PTS each year, the average distributor spends less than $50,000 annually.

Mark Kahn, PTS president, recognizes that many small- and medium-sized distributors may feel pressure to merge with larger companies. So PTS recently unveiled a new program called America’s Tool Crib to help distributors maintain their independence.

“It’s becoming increasingly difficult for the local distributor to meet the needs of the customer,” he says. “We believe we have a solution that allows them to compete, and be successful, against the large consolidators.”

America’s Tool Crib already includes 108 member companies with aggregate annual sales of more than $1 billion, representing more than 50 branches in 32 states. It held its first formal gathering at a breakfast meeting at the ASMMA/ I.D.A. fall convention in Chicago.

Kahn’s strategy is based on his belief that a customer prefers to do business with a local distributor. However, this requires that the product offering, price and delivery be the same, or better, than what they can get from national competitors.

“Customers still value technical support that is best provided by a supplier familiar with their operation,” Kahn says. “A catalog without a trained professional to go with it does not offer the same benefits.”

To address the trend toward vendor consolidation, PTS offers distributors access to its inventory of 170,000 items from more than 1,200 manufacturers worldwide. With no stocking or minimum order requirements, PTS gives the distributor a way to compete for integrated supply and single-source contracts without the inventory expense, Kahn says.

David Francis, PTS director of sales and marketing, views America’s Tool Crib as an alternative for distributors that were concerned about the consolidation trend.

“Distributors see certain companies in the industry getting bigger and bigger, and they’re feeling the effect of more competition,” Francis says. “It has created some anxiety. They’re looking for ways to align themselves with strong partners in order to compete with these consolidators.”

America’s Tool Crib creates just such a partnership, Francis says.

“What we’re trying to do is promote the idea of being national — through advertising in end-user publications, through public relations and with customized catalogs and direct-mail fliers,” he says. “It enables distributors to say to customers, ‘You don’t have to give up anything by doing business with me vs. a large catalog company. I can deliver everything they can deliver, plus I’m here locally.’”

Aligning, not acquiring
Having purchased distributors in the past — the most recent being Houston-based Rex Supply Company — PTS could compete in that arena and step up its acquisition efforts. But Kahn knows how much of a drain it can be on margins to support additional employees, build or maintain warehouses, and hold duplicate inventory on shelves in company-owned branches.

Kahn also believes that when a national chain acquires a local distributor, the distributor can lose control of decision-making to its new owner. That can have devastating effects on customer relationships, he contends.

The America’s Tool Crib alliance, Kahn says, provides the benefits of teaming with a large, national organization without succumbing to the pressure to merge or sell to competitors.

“The bottom line is the local customer would rather do business with someone he knows,” he says. “Our purpose is to give that local distributor the means by which they can compete effectively against big warehouses.”

Kahn believes the role of the independent distributor is to develop and nurture the relationship with the local customer.

His company’s role, he says, is to provide a variety of support services to local distributors.

Those services include distributor discounts, same-day shipping and customized drop-shipments with no reference to PTS on the packing slip or shipping label. This creates a seamless transaction, so the order appears to have come from the local distributor to the end-user customer.

“Our job is to help distributors get all of the product they require, in a timely way, and back it with a full array of marketing services to help maintain that distributor’s local presence,” Kahn says.

Distributors react positively
Francis began contacting distributors about the concept of a nationwide alliance in the spring of 1998.

Mark Hill, president of I.M.C. Supply Company of Memphis, Tenn., a cutting tool specialist, says his company orders in excess of $100,000 worth of products a year through PTS.

I.M.C. is one of the 108 companies that has signed on to be an America’s Tool Crib distributor. His company has been a PTS customer for about 10 years.

“If an order comes in too late for our manufacturer to ship or it doesn’t meet the manufacturer’s minimum, we get it from PTS,” Hill says.

He says most of the sales generated through the PTS catalog are add-on sales.

“It’s not something we’re out working on and spending a lot of time developing,” he says. “If we didn’t get the product from Production Tool, we probably couldn’t get it for customers.”

Kahn says he doesn’t expect distributors to stock PTS inventory locally to support their catalog and flier programs.

“Our interest isn’t for distributors to build their inventories from our inventory,” says Kahn. “What we want them to do is buy what they need to support their advertising programs and the advertising programs we provide them and spend the rest of their resources on growing their customer relationships and marketing their services.”

Other distributors tout drop-shipping services as a major benefit of dealing with PTS.

“We can place an order with them, have it shipped direct to the customer and it’s done,” says Gerry Pelltier of Butler Bros. Industrial Supply, Lewiston, Maine. “We don’t have to touch it.”

The arrangement minimizes the cost for Butler Bros. to service accounts.

Having access to a catalog with 170,000 SKUs is another benefit that Pelltier sees.

“One of the big things we contend with in this neck of the woods is the overnight delivery promised by national catalog houses,” he says. “With the America’s Tool Crib program, we should be able to do one- or two-day delivery.”

Aligning with more than 100 companies nationwide also boosts his buying power.

“It’s difficult to compete against national catalog houses because they have buying power that we don’t have,” he says. “Combining with Production Tool and the America’s Tool Crib distributors gives us more buying power.”

Idea appeals to vendors
Pooled resources also benefit vendors, according to Kahn. The pooled vendor purchase program enables PTS to offer distributors additional discounted pricing if they place, say, a $1,000 order.

“Then we can go to the vendor and say, ‘We’ll guarantee you $100,000 or a quarter-million dollars in orders.’ All they have to do is break it into $1,000 or $2,000 packages and drop-ship,” Kahn says. “That’s a small price (for a vendor) to pay to have a $100,000 or $250,000 order handed to them.”

Kahn says the suppliers he has spoken to about the consolidated purchase program are excited about the possibilities.

Jack Naugle, Midwest sales manager for CooperTools, says consolidating distributor orders through Production Tool is appealing.

“We’re not looking for that $5,000 or $6,000 sale,” he says. “We just don’t have the time and resources to deal with it. Their program seems to fill a need in the marketplace.”

Dave Thompson, president of Kennedy Manufacturing Co., Van Wert, Ohio, agrees that PTS fills a critical need for his company.

“In the last 20 years, we’ve reduced our distributor base by more than 90 percent,” Thompson says.

Thompson says Kennedy has gone from dealing with several thousand distributors to several hundred.

Because orders from small distributors are funneled through PTS, Kennedy can focus attention on serving the needs of the larger distributors in a given market.

“Production Tool enables us to do business with smaller distributors that may have an interest in some of our products, but not in our entire line,” Thompson says.

Kahn adds that a growing number of suppliers have expressed interest in PTS functioning as a kind of master distributor.

“The vendors can’t support their small, local distributors because of the size of orders and the support they require. The cost to do that takes all of the profit out of the manufacturer’s sales,” he says.

Kahn believes his company occupies a unique role in the channel.

“I see this program as a win-win-win situation,” he says.

“The distributor can use it as a way to grow business without committing to new product lines and excess inventory. We see it as an opportunity to do more business without adding incremental overhead. And the manufacturer sees it as a chance to maintain their presence in all markets and grow their business without having to incur excessive costs to support thousands of small distributors.”