Can The Wholesaler Survive In The Supply Chain?
By Bob Boyles, Principal
Smarter Distribution

If your company is involved in selling MRO material to the Fortune 500 market place then place your phone on “Do Not Disturb” and finish reading this article.

I recently attended a presentation by an MRO consolidator to a group of purchasing managers for several Fortune 500 companies. What worries me most is not the competition from an MRO consolidator it was the reception that this idea of cutting out the middleman got with this group of purchasing managers.

The idea here is not new and has been around for more than 20 years. The process goes by several different names you may call it “integrated supply” or “Vendor Managed Inventory” or “MRO Consolidation” depending upon where you are in the supply chain. For the purposes of this article I’m going to use “MRO Consolidator” since it speaks to exactly what this vendor was trying to do and what the purchasing managers at many American plants are trying to do.

The basic sales pitch of this particular MRO consolidator was one of cost savings. What’s different now is that the MRO consolidator is using technology to combine the cost savings in purchasing with cost saving in operations for the MRO purchaser. This is at the same time that most MRO purchasing companies are under increased pressure to reduce the number of vendors and reduce cost. The consequences for the traditionally focused wholesaler could be ominous.

Lets agree on some terms so we can understand what’s going on.

“MRO Products are indirect products (non-capital goods), purchased on a regular basis and necessary for the production process, but not part of the end product. MRO products are purchased and consumed in plant or facility operations and not resold to customers” (1)

“Integrated Supply is a seamless supply channel where a selected distributor is the primary source for all MRO products to the customer/partner under a long-term agreement, with linked computer systems and the responsibility of managing the supply chain to ensure world-class service at the lowest total cost.” (2)

The Bait

The consolidator’s sales pitch was interesting. They will come in and do a total needs assessment for a plant and their MRO purchasing. Their resulting proposal will offer some savings for the MRO buyer that could be very tempting.

First, they will offer to substitute their consignment inventory for the inventory that the plant has normally carried. The savings for the MRO customer are obvious. They will not own the inventory until they use it and will save on inventory investment.

Second, they will offer to substitute the one-by-one invoices for a consolidated billing approach. This will save the MRO customer man-hours in the A/P department.

Third, they will offer to manage the inventory for the MRO customer and thus reduce his purchasing demands. The 80-20 rule applies to purchasing just as it applies to most everything else. 80% of a purchasing managers job is spent buying 20% of their purchases. Typically the 20% that is taking up 80% of the time are the exact MRO items that the consolidator is looking to takeover. This savings is twofold. First, they don’t have to buy the MRO goods any more and can reduce their purchasing staff. Second, this allows the purchasing agent to focus on buying the materials they need for manufacturing. The savings are a combination of man-hours and a renewed focus on 80%

It was obvious to me that these purchasing managers were frustrated with the amount of time it took to do their MRO purchasing.

The basic approach these consolidators use is to substitute information for inventory. This should sound very familiar to wholesalers because it’s what we’ve been doing with computers since internally. Now along comes someone that is taking that approach to the customer level. The savings being offered to the MRO buyer is in process cost and not in purchasing cost. My bet is that these consolidators can not buy their inventory significantly cheaper than the vast majority of wholesalers out there today. They are offering savings in how the plant manages its’ inventory not in the cost of the inventory itself.

Can They Keep Their Promises?

There are number of problems with the consolidator approach that the presenter glossed over.

First, when they approach a company and promise to supply all of their MRO needs they typical only handle half of the lines (manufacturers) that the plant has traditionally bought. As a part of this process there is a tremendous amount of cross referencing to lines where the consolidator has access to the manufacturer. These cross referenced parts may or may not satisfy the MRO customer.
However much wholesalers want to think that they have built a brand loyalty with their customers it was obvious from this presentation that those brand loyalties can be challenged.

Second, for the parts that the consolidator does not have direct relationships setup with the manufacturer they are left to buy from the traditional wholesalers at often higher prices. This lowers the overall return that the consolidator can offer the MRO customer.

Third, the wholesaler has traditionally depended upon four attributes to survive in the marketplace. They were, local stock, credit, sales relationships and product knowledge. In comes an MRO consolidator that has access to several thousand product lines, they are also offering local stock and credit relationships Their weaknesses appear, to me at least, are the remaining to parts of the wholesaler formula. There is no way that this company is going to be as knowledgeable about the products they are offering as a focused distributor.

One of the most interesting things about the presentation was not the details, those are well known to you and anyone else that is involved in the supply chain, but that the reception this presentation got with the purchasing managers was warm. Their basic complaint was that MRO purchasing was taking up to much of their time. As I reflected on this I wondered what this said about the sales relationship that wholesalers depend on. Here were a bunch of purchasing managers willing to give up their relationships with their traditional wholesale salesmen. Your thoughts may be different but I took this response to be that purchasing managers are under increased pressure to lower cost in this recessionary environment that we are in and they are willing to look at new avenues to deliver those savings to their plant managers.

Wholesalers Are Survivors

As a group, If wholesalers are one thing it is survivors. Over the past two decades the changes that have been thrown their way have been tremendous but they’ll still in there slugging it out. Wholesalers have survived because they have adopted new technology and adapted to the changing landscape. The same will be true with this latest challenge.

The focus in the past has been on buying systems and lowering cost internally to respond to the pressure on margins. In the future the focus will be on taking internal systems and marrying those with your customers’ operations. Learning a lesson from the MRO consolidators and develop a closer relationship with the ultimate customer.

Second, MRO consolidators are just buying and pushing parts. The lesson many distributors are learning is that to survive they are going to have to add value in the supply chain. The marketing strategy of buy-it, hold-it and sell-it is getting old and beginning to show its’ age. The new strategy of buy-it, add-value and then sell-it is taking its’ place. The MRO consolidators are adding value in the management of inventory. The traditionally focused wholesaler will have to add value in the same way and in different ways to prosper.

How the traditionally focused wholesaler responds to this latest challenge is going to be interesting.

Bibliography

(1) Hagemeyer website, www.hagemeyer.com
(2) Hagemeyer website, www.hagemeyer.com

About Bob Boyles and Smarter Distribution:

Bob Boyles started his strategic consulting business in 2001 and focuses on the change that technology is forcing in the supply chain and how independent distributors can not only respond to that change but also maximize their return on investment. Bob spent a significant amount of time as an Installation Consultant for several of the big name software companies in the distribution market. Working with hundreds of distributors across the country on installing, upgrading and utilizing their software. Bob also worked as Corporate Systems Manager for one of the largest electrical wholesalers in the country as that company moved from a completely manual operation to an on-line real-time system.

Bob graduated from Appalachian State University (BS - 1981) and the University of North Carolina at Greensboro Graduate School of Business (MBA - 1985).

© Copyright All rights reserved 2002 Robert S Boyles, Jr. This article cannot be reprinted or reproduced in whole or in part, without the express written permission of Robert S Boyles, Jr.