By Bridget McCrea
Facing numerous challenges in today’s market, industrial distributors can improve sales and form long-standing relationships by offering more value-added services in exchange for a fee.
When Lynn Daniel looks around at the current industrial distribution landscape, he sees a highly fragmented space comprised of companies that seem to “get it” and those that have fallen by the wayside when it comes to keeping up with customer preferences, supplier demands, and other competitive forces.
“The industrial distributor has been a marketing mainstay in many business-to-business market segments,” says Daniel, president of The Daniel Group in Charlotte, N.C. “But the changes in most distribution markets are forcing customers and manufacturers to look for the most effective ways to either buy or sell their products and services. Sometimes, the industrial distributor doesn’t fit anymore.”
A Threatened Species?
In 2014, the industrial distribution segment in the U.S. comprised 300,000 firms that represented approximately $2.3 trillion in sales, according to Daniel, citing a recent Industrial Distribution survey. According to the survey, the typical distributor has average annual sales of around $11 million, is family-owned, and has been in business for 38 years. According to Daniel, who authored The Industrial Distributor: A Threatened Species?, that distributor is facing far more challenges right now than it ever has in the past, including:
- Customer consolidation. Customers are getting bigger as a result of growth, mergers, and consolidation. These bigger customers are demanding, and getting, more services and better prices. These bigger customers are in some cases seeking to bypass the distributor altogether and buy direct from the manufacturer.
- More information. There is more product information available – information that in the past would have been available only from the distributor. Many manufacturers are offering “configurators” free of charge. With these, customers can develop their specifications rather than relying on the distributor representative.
- Manufacturer expectations. Many manufacturers have volume-purchasing requirements. These requirements force distributors to “stock up” so the best prices can be had and contracts can be satisfied. These requirements can sometimes force less desirable strategies for distributors.
- New technology and new techniques. Information technology makes customer transaction details available to manufacturers. Integrated supply chain management techniques and just-in-time inventory management processes have forced distributors to share this information with manufacturers.
“With these forces driving change in the industrial distribution market, it may seem that the industrial distributor is a threatened species,” says Daniel, who sees value-added services as one of several strategies that distributors can use to improve their competitive positions and profitability. He coined the term “value bucket” to describe the way in which distributors can position themselves for long-term success by not only making more money (via value-added services), but also by making themselves invaluable.
“I use the bucket analogy to describe how some distributors have very full buckets of value-added services while others really need to work on beefing up their offerings in this area,” says Daniel. In a world where many products are becoming commoditized, customers continue to shop on price, and the Amazons of the world are infiltrating on the ground once reserved for knowledgeable, experienced distributors, Daniel says now is the time to fill up those buckets.
“Distributors as a whole are under pressure from all sides,” says Daniel. “They need to be able to generate more sales, fulfill changing customer needs, and deal with new competition from the web. One of the best ways to address all three of these pain points is by developing a solid value-added offering across all product lines.”
In some cases, for example, a customer might reveal the need for your firm to hold stock on certain items – and not charging for them (using a vendor-managed inventory [VMI] strategy) until they are actually sold and used – that electrical contractors can tap at a moment’s notice. In other cases, the value-added services that the customer wants may include offerings like new product training, kitting products, and/or modifying equipment.
Electrical distributors looking to improve their value-added capabilities can start by getting into the field to see how their products and equipment are actually being used. Get out from behind the computer, hang up the phone, and/or step around to the other side of the counter to gain a better understanding of what’s going on in the field, says Daniel, and it won’t be long before you’re identifying gaps and figuring out ways to add more value to your customer relationships.
In his report, Daniel points to WW Grainger as a good example of a distributor that knows how to fill its value bucket. For example, he says Grainger offers its customers tool crib management services, safety programs, and electric motor maintenance and repair services, among others. “Grainger realized that customer problems with supplies had more to do with managing these supplies than actually buying them,” says Daniel, so it expanded its value bucket by solving problems customers had with managing their tool cribs and other plant supplies.”
Independent electrical distributors can take a similar approach to value-added, says Daniel. “Look for the areas where your company can do a better, faster, and more efficient job,” he notes, “and there’s your value-added opportunity.” Assembly, for example, is one area where distributors can step up to the plate and save time for their customers in exchange for a fee. “When you start looking around the job site, you’ll be surprised at how many places are just begging for your help,” says Daniel. “When you see an opportunity to help, propose it to your customer.”
Getting Your Fair Share
Knowing that many electrical distributors grapple with exactly how to charge more for the services that they offer, Daniel says the first step is to figure out exactly how much it’s going to cost your firm (in time, labor, and materials) to complete the value-added task. Then, factor in the volume of work that could come from adding this service to your menu of offerings (if one electrical contractor needs it, says Daniel, they probably all do). “Don’t look at just putting together two or three assemblies a week; multiply it out across your customer base,” says Daniel. “That will help build in some volume discounting and efficiencies into the equation.”
Next, look at how much time your customers spend handling the task on a daily, weekly, or quarterly basis. “The simple way to do this is by following an electrician around for a day or two on the job,” says Daniel. “For them, time is always money. When you can help out and prove your worth in this area, there shouldn’t be any question about the additional fees.”
To distributors that are reluctant to monetize their value-added services, Daniel says it’s time to break out of the “volume selling” mentality and seek out opportunities to become true partners for their electrical contractors and other customers.
“You’re making a big mistake if you’re out there doing these favors and not charging for them,” says Daniel. “With margins under continual pressure, and with the need for customer loyalty higher than ever, now is the time to sit down with your customers, find out what’s causing their headaches, and come up with ways to solve them in order to increase your own profit margins and create more loyal customers.”
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McCrea is a Florida-based writer who covers business, industrial, and educational topics for a variety of magazines and journals. You can reach her at bridgetmc@earthlink.net or visit her website at www.expertghostwriter.net.
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