Five technology trends for industrial distributors

by Adam J. Fein

Technology investments by distributors represent an opportunity to solve genuine problems for customers while driving continuous improvement in the business. As a result, wholesale distribution is one of the most technology-intensive industries in the U.S. economy.

The industry accounts for one of every five dollars spent by businesses on computer hardware and software. IT spending per employee surpasses all industries except financial services and telecommunications. Based on our research from Facing the Forces of Change: The Road to Opportunity, we estimate that spending on computer hardware and software by wholesalers and distributors will exceed $80 billion by 2008.

While distribution executives today have more technology choices than ever before, the hard work of applying technology correctly and cost-effectively remains. Based on our research, we highlight five key technology trends facing industrial distributors, their suppliers and technology providers over the next five years. In the coming months, Progressive Distributor and Pembroke Consulting will be conducting and reporting on new specialized research to help industrial distributors develop their technology strategies.

Trend 1: Online ordering grows sharply
Online ordering by industrial distributors will grow dramatically, tripling to more than one-third of revenues. (See Exhibit 1.) The strongest growth will occur in orders placed directly on a distributor’s Web site instead of by phone or fax.

In the near term, online ordering will not dominate other ordering methods: Traditional methods will account for roughly two-thirds of all orders. Distributors selling to industrial customers receive 13 percent to 14 percent of their orders electronically, compared to less than 10 percent in 2001. Walk-in and counter sales will remain a small but crucial portion of MRO distributors’ business for customers with urgent repair needs. In-person orders placed through an outside sales representative will also be somewhat higher for MRO products than OEM products.

These forecasts represent the mainstreaming of online technologies. A distributor’s online presence will continue to complement its other ways of interacting with customers. Distributors will provide customers with multiple transaction options to retain and nurture customer relationships. The Internet will not soon entirely replace traditional ordering approaches such as the phone, fax, in-person or counter sales.

Smaller distributors will catch up to larger companies in the application of today’s technology by 2008 as costs and complexity drop. However, larger distributors will attempt to retain a technological lead by investing in emerging technologies such as business intelligence solutions, Web services and advanced product content management systems.

About 40 percent of the distribution executives in our study expect their customers to regularly combine online and offline channels. For instance, many customers will rely on the Internet as a means of obtaining information about products and sources of supply, regardless of whether they plan to buy online or via traditional methods. A customer may research and interact online, but then place a call to a sales representative or visit a branch to make a purchase.

The use of electronic data interchange (EDI) systems is also expected to grow, especially for smaller distributors. This forecast reflects the ongoing appeal of legacy technologies that can still perform at acceptable levels and costs. EDI transactions continue migrating to the Internet away from proprietary one-to-one systems.

The Internet language XML will eventually replace EDI as the technology coordinating distributors with their customers and suppliers. XML allows companies to securely share much more sophisticated information in real time over the Internet, whereas EDI is still essentially an electronic means of sharing static product catalog data.

Trend 2: Self-service reaches critical mass
Industrial customers will accept more responsibility for performing activities they previously expected their distributors to handle. Our research found that industrial distribution executives expect customers will increasingly want to:
• Communicate with a sales rep via e-mail.
• Gather product information and specifications from a Web site.
• Obtain product prices and availability information online.
• Access post-sales technical support information online.
• Review their purchasing history online.

Distributors should expect to offer a range of self-service options to customers. Today, the most intriguing tools with application to wholesale distribution are being pioneered in retail markets.

Online account information provides the most basic self-service functionality. Product payment, order placement, order tracking and delivery planning are activities that customers will increasingly perform themselves. Customers will have more control to service their own account and handle routine inquiries online.

Self-help options provide customers with access to the same information databases used by your internal sales and customer-service representatives. Static, text-based knowledge bases are not always the best solution for customers, especially those with complex service or support needs. These tools will be used less frequently because customers will simply find it easier to phone and ask for help.

Connectivity refers to a set of tools that enables customers to interact with employees of your company in new and different ways. For example, many smaller distributors still do not provide a corporate e-mail account for all their employees. This position will be hard to maintain given the ever-dropping costs of the technology and increasing customer expectations.

Trend 3: Customers demand integrated sales channels
Customers will increasingly expect their distributor suppliers to treat them in a consistent, integrated manner across numerous points of contact in your organization. If customers use both conventional and online methods to communicate with you, they will not want to repeat themselves just because different parts of your organization do not share information.

Review your own company’s activities throughout a customer’s buying process. Common inefficiencies for distributors include:
• No linkage between your online presence and inside sales, forcing customers to repeat themselves when interacting with your company.
• Duplicate steps, such as a salesperson writing up an order and sending it to order processing for re-keying.
• Activities that do not add value to your customer, such as having to verify orders with the warehouse before shipping.

E-mail will be the foundation of many conversations with industrial customers. Manufacturers communicate internally by e-mail. Distributors who want to be part of routine conversations, must adopt e-mail as a standard practice, too. Corporate e-mail accounts for every employee will be required to meet increasing customer expectations.

OEM buyers are adopting e-mail communication faster than MRO buyers. OEM purchase cycles are characterized by intensive communications spread over long time periods, culminating in predictable, high-volume runs. Customers value communication, but are learning they do not need face-to-face meetings. E-mails provide a record of conversations and commitments, which phone conversations and personal visits lack.

Post-sales technical support from online sources will grow more modestly than other online service methods. This will also be slightly more important for MRO customers than OEMs, reflecting the fact that MRO applications are driven by high-priority “break fix” situations requiring immediate help as well as ongoing efforts to improve labor productivity and operational efficiency.

Trend 4: Online survivors specialize
Third-party online exchanges will not play a significant role in the industrial channel. Contrast these forecasts with 2000, when start-up online exchanges crowded into the industrial supplies industry. Fueled by free-flowing capital, venture capitalists and owners were less interested in demonstrating long-run profitability than in creating a compelling story so they could cash out.

Today, fewer than 25 percent of those third-party Web sites are still operating. The surviving exchanges focus on niche businesses, such as hard-to-find items, liquidating excess inventories and facilitating transactions between existing trading partners.

The failed exchanges misdiagnosed their relative advantage in industrial markets. Industrial customers have been focusing on improving efficiencies in their supply chain by consolidating supply contracts and reducing their number of suppliers. The exchanges went against these fundamental trends by emphasizing lowest price instead of lowest total procurement cost. The sites also did not foresee the dramatic downturn in the U.S. domestic manufacturing base.

Trend 5: Technology remains a tool, not a strategy
Technology is a tool that provides distributors and customers with mechanisms to reduce costs associated with order processing, inventory management, customer service, order accuracy and administrative processes. However, technology alone can neither remedy customer satisfaction problems nor replace a clear business strategy or provide specific business requirements.

As a result, distribution executives will invest most heavily in technologies that improve productivity, enhance existing service offerings and meet new demands for customer self-service. Key application areas include online ordering, customer relationship management (CRM), sales force automation and warehouse management systems.

The nature of IT investments provides another reason to drive adoption in the business. As customers adopt self-service technology, distributors will find their operating expenses shifting away from variable labor costs and toward fixed-asset technology investments. Information technology spending now makes up 50 percent of all fixed-asset investments in wholesaling, vs. only 16 percent in 1980. To get the benefit of these investments and ride the self-service wave, distributors will need to encourage adoption to spread costs among many users.

This article originally appeared in the November/December 2004 issue of Progressive Distributor. Copyright 2004.

back to top                                    back to e-business archives