The new report recently released by NAW DREF suggests how distributors can plan for an uncertain future. Purchase the report online at www.nawpubs.org.

The sixth edition in the National Association of Wholesaler-Distributors Distribution Research and Education Foundation study titled Facing the Forces of Change: Future Scenarios for Wholesale Distribution provides distributors with a planning methodology to help them prepare for the future. The study’s author, DREF fellow Adam Fein of Pembroke Consulting in Philadelphia, spoke with Progressive Distributor editor Rich Vurva about the latest report. The text of that interview follows.

Q. Much has been made of the focus on scenario planning in the new Facing the Forces of Change study. Can you explain the concept of scenario planning and how it can benefit distributors and manufacturers who read the study’s findings?

A. Sometimes forecasts are right and sometimes they’re wrong. Over and over again, we have seen companies “bet their company” on a single future and are caught off guard when the world evolves in a different direction.

Scenario planning explicitly acknowledges that the future is unpredictable, whereas traditional planning focuses on extrapolating existing trends into a single future. In Facing the Forces of Change, we give distributors and manufacturers four different crystal balls about how the future might play out (see sidebar, “The Four Scenarios.” This has two direct benefits. One, we can identify reasonable possibilities even if we can’t precisely predict the future. Whether the scenarios actually unfold exactly as we describe is less important than understanding the driving forces behind each scenario and preparing a response. Scenarios will also help you plan for the present because there are always hints of tomorrow in today.

A second benefit is the new report goes far beyond previous editions in identifying which scenarios will be most important to different types of industries. We analyze survey answers, forecasts and scenarios separately for five different types of wholesale distribution operations — contractors, MRO buyers, OEM buyers, retail customers and institutional buyers. We then describe how each of the four scenarios could apply to these five different types of customers. So, distributors and manufacturers can use the report to build specific plans for their industry.

Of course, different customers — or even the same customers at different times — have different needs. Your specific customers differ in their preferences, requirements and profitability. That’s why we also wrote an accompanying workbook to help executives put the report to work in their businesses.

Q. Previous Facing the Forces of Change studies predicted the growth of e-commerce and greater use of technology by customers. But then the sudden Nasdaq drop and the closings of online marketplaces and trading exchanges took the wind out of the sails of early e-commerce proponents. Should distributors and manufacturers continue to expect to see an increase in e-business activity?

A. Absolutely. Many predictions from the past few years were not grounded in the reality of industrial distribution channels. Think of these forecasts as individual scenarios. For example, many pundits gave us a scenario in which technology gets adopted quickly, distributors lose relevance, and dot-coms are wildly successful. As we know, that particular scenario didn’t come to pass. But it challenged many people to think about their business.

In the new Facing the Forces of Change, we take a very real-world approach to technology based on the surveys, interviews and our own consulting expertise in the industry. All four of the scenarios show technology being used in different ways in the supply chain.

But there is a common theme — technology is a tool, not a strategy. Customers will use technology when it benefits them (searching, ordering, and sourcing) and limit its use when it does not. For instance, we predict the Internet will be a common, but not dominant, method for receiving orders from customers. By 2006, the Internet will be another way in which a customer can communicate with a wholesaler-distributor, just as the introduction of the fax machine and EDI systems created additional options. The Internet will not replace other modes of communication, but will simply add to them.

Q. How might e-business change the role of the traditional distributor salesperson?

A. Technology will expand the role of the sales force beyond just order-takers. The distribution sales force must be comfortable selling through new technology as well as ready and able to teach customers how to gain information and order. Sales reps will need to teach and encourage customers to access a distributor’s or manufacturer’s Web site for product information and marketing promotions.

Even so, the role of the sales rep is one of the key strategic uncertainties we identify in the research. In the industrial channel, distributors are the primary players who organize, coordinate and manage the flow of information between buyers and sellers. In the future, some or all of these information and customer management functions may migrate from distributors to manufacturers or to new online competitors.

This traditional sales and marketing role will be under greater pressure in the future. Manufacturers are still open to the idea that the Internet can replace distributors as a way to provide product information to customers. In contrast, distributors strongly believe the Internet will not replace their sales and communication functions — an important difference of opinion.

This issue plays out differently in each of the four scenarios. For example, the distributor salesperson will become more important as technology penetrates the channel in the “Bricks and Clicks” scenario. In the “Common Platform” scenario, the role of the distributor salesperson will become less critical for some of the traditional functions they perform.

Q. In addition to e-business, will there be other new forms of future competition that distributors should be aware of?

A. Yes. An important uncertainty for the industrial channel is the extent to which new competitors will compete with distributors to perform supply chain functions for manufacturers and customers. This threat has been emerging during the past few years. Today, many third-party logistics companies have thriving materials-management businesses performing traditional wholesale distribution functions, such as pick-pack-ship of the products of multiple manufacturers. In most cases, these services are provided on a fee-for-service basis rather than a gross margin on product cost.

Many traditional third-party logistics companies, such as Ryder Logistics and UPS, are setting up subsidiaries or have large and growing operations that provide these materials management functions. Some distributors are also creating operations separate from their traditional business to compete with these companies. Master distributors in the industrial channel also provide some of these same functions.

In the “Unbundled Supply Chain” and “Common Platform” scenarios, we explore what would happen to the distribution channel if these organizations grow and then describe action strategies for distributors.

Q. We’ve heard of third-party logistics providers. What are 4PLs?

A. 4PLs are companies that go beyond simply providing logistics and transportation. They also provide many supply chain services, such as inventory handling, product management and warehouse functionality. In other words, 4PLs provide all the wholesale distribution functions that distributors provide, but don’t provide any of the demand creation and sales functions of the distributor.

Q. What will become of the small, local distributor?

A. The future of the small distributor looks good. There will always be a role for the small distributor in the industrial channel. Most have solid customer relationships and deep product knowledge that they can provide on a local basis. That said, I think small distributors are going to be pressed about the relative competitiveness of their cost structure and logistics infrastructure.

In the “Unbundled Supply Chain” scenario, we describe a future in which small distributors will thrive by focusing on what they do best, such as holding fast-moving inventory, working with customers to solve problems and providing technical advice and support. However, they will outsource many of the inventory and logistics functions that they cannot provide on a cost-competitive basis. Master distributors and 4PLs play a significant role. I think all industrial manufacturers and distributors should study the Unbundled Supply Chain scenario very carefully.

Q. We have written several articles about the need for distributors to shift from a transaction-based, product focus to a service marketing approach. Is it likely that distributors will figure out how to begin charging for their services?

A. Shifting from a product markup margin to a fee-for-service model is very difficult and will not always pay off. Our research found great uncertainty surrounding the future of fee-for-service. Some of the uncertainty regarding service fees relates to the many plausible barriers that could slow or stop their adoption. For example, customers may not be interested in compensating distributors based on service fees because they consider distributors to be a reliable fulfillment channel instead of service provider. In addition, distributors may not be able to explain or market the concept of service-fee pricing as compensation. Current markup pricing models may be perceived to be relatively fair and understandable by some customers.

In two of the scenarios we describe in Facing the Forces of Change, fee-for-service is a viable model. But in two of the other scenarios, traditional gross margin product markup pricing still dominates. Anyone who advocates a complete and total switch to fee-for-service is encouraging distributors to bet on a single scenario, which can be a dangerous way to plan.

Q. In summary, what are the key critical success factors that distributors may want to think about?

A. There are three keys to success in distribution. One, be customer-focused. Understand where the customer is going, what they want today and what they might want in the future. Two, be fact-based. Get the facts before changing your strategy or even keeping your strategy. Many distributors believe that they “know it all” and are afraid to test their understanding with external, objective data from customers. Three, know where the money is. What proportion of your profits do the top 20 percent of your customers account for? What are three reasons that non-customers choose you over a competitor?

Distributors also need to help their manufacturers think in terms of channels, rather than in terms of products. Distributors build competitive advantage by understanding customer’s purchasing priorities today and in the future. Some manufacturers are insulated from end-users by their channel relationships. Other manufacturers devote their management energies to designing and marketing top-quality products without regard to the process by which customers might purchase the product.

This article originally appeared in the ISMA/I.D.A. '01 issue of Progressive Distributor. Copyright 2001.

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