Historically, the distributor was considered an extension of the manufacturer’s organization—certainly, they have always been customer advocates. However, disruptive forces in the marketplace today are making it necessary for distributors to get even closer to their customers. In many instances, this is transforming distribution companies into service businesses that also just happen to provide products.
By understanding the forces that have made this shift necessary, manufacturers can successfully adapt to new realities, thereby improving their offerings and strengthening their relationships with distributors. The five disruptive forces and how they impact the business of distribution follow.
1. Organizational disruption
The greying of the industrial workforce is a huge factor that has had a dramatic impact on the effectiveness of manufacturer marketing systems. For example, look at new product cycles. The cycle starts with the manufacturer designing products and putting together a marketing program. The next step is that products get handed off to the sales and marketing team of the manufacturer, which promotes or sells to management at a dealer to get the distributor’s commitment. The dealer management gets its organization on board and educates and incentivizes its sales force, which then works with customer purchasing and specifying departments to sell the product. Finally, the user customer is trained to use the product.
This is just the new product cycle; there still is the ordering and invoicing, inventory management and post-sales support. Each of these steps involves hundreds, if not thousands of people. As these people leave, years of institutional knowledge that helped to launch new products, set inventory levels and service products is lost.
Three dimensions of technology are affecting valve distribution. They are:
Information technology: This has been evolving since the days of the mini-computers in the 70s, accelerating with PCs and now with smart phones and tablets. New developments have made it possible to completely computerize inventory and logistics management, increasing inventory returns and reducing inventory investments. Information technology also increases the flow of information between manufacturers and distributors as well as distributors and customers.
Web technology: The Internet and the “cloud” have greatly expanded the ability to interact electronically. In industry, the net effect is that it makes it easier for customers to connect directly with manufacturers. The question is: does this development erode the value of the distributor as a source of information? The answer may be yes to some extent, and this access to information has resulted in some customers who are less willing to spend time talking to manufacturers or distributors. Some manufacturers worry that the Internet is basically turning everything into commodities.
But customers may simply be saying “don’t waste my time. Tell us only what impacts our businesses.” Thus, distributors that bring customers more services and are willing to spend more time helping them solve problems are moving closer to those customers. The Web has displaced the old manufacturer-to-distributor-to-customer flow of spec sheets, but opens new opportunities for the manufacturer, distributor and customer to share information in new ways.
Product technology: Smart connected products comprise the third layer of technology by providing information about product status and use, and improving productivity and product life. Because we now have the data that allows us to talk about the specific performance of an individual valve or positioner, such as the number of cycles it has opened, we can make maintenance recommendations based on these measured values rather than industry averages. The result is that these smart products will have a significant impact on customer value by enabling customers to extend product life or catch problems before failure, while creating new linkages between customers and suppliers to manage this information.
The impact on distribution is that the channels now must understand software, diagnostics, wireless networks, communications protocols and how to get information out of the system.
3. The Chase for Value
Every business wants to increase margins, so solution selling is on every marketer’s radar. Manufacturers are looking to sell broader solutions and are expanding to provide a larger piece of the bundle while distributors are providing baskets of solutions from technical support to integrated supply, project support and fabrication. They are developing marketing units to chase value propositions.
This could be an area open to potential conflict because the role of manufacturers and distributors could overlap.
4. Market Changes
Customers are going global, consolidating and shrinking work forces, and facing increased pressure to reduce costs. These market changes definitely present challenges for manufacturers and distributors, but good news counteracts those challenges. While multiple forces push markets further offshore, the North American markets have exploded in oil and gas, leading to a renewed interest in manufacturing in the U.S., particularly in the process industries. Overall, this points to more growth in U.S. markets, but also offers global growth as industries grow in other countries. This means the need for effective distribution in multiple markets will continue to provide distributors with opportunities to invest in growth outside of North America.
Consolidation is occurring among both manufacturers and distributors. Manufacturers are growing the breadth of their product offerings by acquiring other manufacturers. Distributors are acquiring other distributors to expand market coverage, both geographically and in terms of service capabilities. All of this is in reaction to customers pushing for higher value from their suppliers. Customers are looking to reduce cost and streamline operations, resulting in more outsourcing of functions they consider low value. To do this, they are increasingly leveraging their suppliers’ technical and logistical capabilities.
Both manufacturers and distributors see this as an opportunity to expand what they offer. Distributors, who are often closer to their customers both geographically and relationally, are leading the way by expanding the services they provide and capturing additional margins from these services.
The five disruptive forces that are moving distributors closer to their customers as service relationships intensify are also challenging distributors and manufacturers to deal with the rapid rate of technological change. These same forces are driving marketers away from the traditional distribution role to new marketing paradigms (see “Paradigm Shifts in Distribution,” page 42).
Manufacturers can successfully adapt to new realities by redesigning ecosystems (the entire network of organizations and relationships that impact a business) to provide greater value and to strengthen their relationships with distributors. Distributors can successfully adapt to this reality by increasing their level of engagement with their key suppliers while intensifying their customer service relationships.
The accelerating rate of technological change will continue to challenge manufacturers and distributors to build business models and relationships that provide value to their customers and each other. This technological acceleration will also accelerate the rate of change in the distributor’s role as well as manufacturer/distributor relations.
For more detailed information on successfully adapting to these changes, read the exclusive Web feature at VALVEMagazine.com.
PARADIGM SHIFTS IN DISTRIBUTION
The historic paradigms that have led our thinking about distribution strategy for the last 30-plus years are shifting; the changes coming about are because of changes in the marketplace. This is a picture of what’s occurring:
Historically the distributor was considered an extension of a manufacturer’s sales and marketing organization. This role is now shifting to one in which the distributor is more of an extension of the customer’s organization by providing services that integrate into the customer’s business.
The second paradigm, “A distributor’s window,” was a concept to help define how a distributor fit into a market and a manufacturer’s go-to-market strategy. Going forward, it seems more advantageous to pay much greater attention to the nature of a distributor’s relationships with the customer.
The third paradigm, the “market life cycle,” was a concept that helped manufacturers determine what type of marketing support and, therefore, channel organization was needed for success as the market evolved. This paradigm is also evolving to consider the nature of the relationship between the customer and distributor and how that is changing.
The fourth paradigm, “cost transfer,” was a model of the distributor’s economic role in the market, which was transferring costs out of the manufacturer’s business. Today, the cost the distributor is transferring out of the customer’s business also needs to be considered. How much and what type of cost is the distributor transferring from the customer?
The final paradigm—“Primary, secondary and tertiary products (PST)”—was a model of how distributors marketed specific product lines in their businesses. This may be the biggest change of all because competition is moving from a product basis to an “ecosystem” basis (see definition above).
The ecosystem will be different from company to company based on strategies and desired market role.
Those who are effective in building and managing value-
creating ecosystems will be the eventual market leaders. Those who are not in a position to build an ecosystem will need to learn how to thrive in new ecosystems that are based on effective information sharing.