Measuring the Growth Gap

Total revenues of wholesale distributors grew by 9.9% to $3.9 trillion in 2006, marking another year of strong performance. Will growth keep going? In my opinion, the fundamentals for most wholesale distribution sectors still look good for 2007.

But as I point out in Chapter Five of Facing the Forces of Change®: Lead the Way in the Supply Chain, unusually high commodity price inflation has made revenue growth much easier for wholesaler-distributors.

Here are some fresh data from the all-new 2007 Wholesale Distribution Economic Reports. I used a sector-specific price index to adjust wholesaler-distributors’ revenue for the effect of inflationary/deflationary price changes. (HINT: Click the picture to open it in a new window.)

Some sectors showed minimal or negative growth in 2006 after revenues are adjusted for the effects of price changes. In other words, total unit shipments for wholesale distributors in these sectors was flat or down once inflationary trends are stripped out.

For example, revenues for plastics and chemicals distributors were up 7.4% in 2006, but actually declined by more than 2% once revenues are adjusted for price changes. The price of steel and copper created a similar effect for metal service centers, whose revenue growth was a paltry 0.8% once the data are adjusted (vs. unadjusted growth of 13.2%).

If commodity price growth returns to historic norms, then wholesaler-distributors are going to have to work harder for real growth. Does your company face a growth gap? How much would your top-line revenue growth slow down if product prices remained flat over the next 24 months?

Be Found Online

The Internet now accounts for approximately 5% of total U.S. advertising spending, making it a crucial tool for new customer acquisition. (See page 76 of Facing the Forces of Change®: Lead the Way in the Supply Chain for more details and survey results from wholesaler-distributors.)

And the boom keeps going. According to the Interactive Advertising Bureau, total Internet advertising revenues were $16.8 billion in 2006, a 34 percent increase over 2005. See Internet Advertising Revenues Estimated at $16.8 Billion for Full Year 2006.

(Note that I was only able to cite data from the third quarter of 2006 in Chapter Four when the report went to press. Hooray for blogs!)

In Chapter Four's Action Ideas section (page 85 of Lead the Way), I state: "Customers will increasingly use the Internet as a primary way to gather information and find new suppliers even if the actual purchase is not made online. Therefore, your company’s Web site must function as an effective sales lead generation tool, not just as an online e-commerce platform."

What about your company?

• Can a prospective customer find you through a search engine? Would they find a competitor instead?
• If a prospect does find you online, how easily can they figure out what to do next? Can they send an email to a real person?

If you don't know the answers to these questions (or don't care enough yet), make all of your top managers try Question for Management Discussion #3 on page 90 from their homes one weekend. I bet your Monday morning discussion will be very enlightening!

Capturing New Profits from Services

William Gibson, the great sci-fi writer, once quipped: “The future is here, it's just not evenly distributed.”

Keep that quote in mind when you read Buyers look for value from electronics distributors from the 2/15/07 Purchasing magazine. I like to study distributors in the electronics industry because they provide early insight into the evolution of other distribution industries, even though the dynamics and products can be quite different.

Here are two representative quotes from the article:

• “Distributors who have survived have gotten away from competing on price and try to sell services … Those distributors that tried to compete just on price aren't around anymore.” – Robin Gray, executive vice president of the National Electronic Distributors Association
• “We have crossed the point where more than 50% of the business we do today is substantially more than just parts.” – Dave Bowers, president of distributor Nu Horizons Electronics

As I point out on page 63 of Lead the Way in the Supply Chain, management’s internal assumptions and beliefs are often the biggest barrier to capturing new profits from fee-based services. When asked about fee-based services, one executive from a hydraulic and pneumatic products wholesaler-distributor told me: “Culturally we always gave this away. It’s amazing what we can charge with no questions asked!" (There are four more eye-opening quotes on page 63.)

Do yourself and your company a favor by reviewing this article with your management team, and then discuss questions 5 & 6 on page 68 of Lead the Way. Ideally, this exercise will challenge any outdated preconceptions and open your eyes up to new profit models.

Demand-Driven Excavators

The Wall Street Journal recently published an interview with Jim Owens, Chairman and CEO of Caterpillar Inc. (See Global Trade Galvanizes Caterpillar - you may need a subscription.)

The following exchange caught my eye:

WSJ: You've also said you want to get away from the automotive model of stuffing dealers' inventories with products.

Mr. Owens: We want to keep some dealer inventory out there so they can see it and buy it and try it, but we want to get away from having them carry significant amounts of inventory. If you look back ... dealer-inventory swings have in every case aggravated the business cycle for Caterpillar. We work overtime to build inventory in the up cycles, and then [in down cycles] help them get it moved by price discounting or other bad practices. We've got to convince them that they don't need to hold the inventory. This is a huge cultural change.

This is a nice summary of the idea behind Demand-Driven Channels (Chapter 2). As I note on page 31 of Lead the Way in the Supply Chain:

"The term demand-driven refers to the idea that products are pulled down the supply chain to the market based on actual customer demand data. It also represents a contrast from the more traditional notion of products in a marketing channel being pushed by manufacturers toward the customer. Both manufacturers and distributors will be able to manage their respective inventories better when demand-based information is shared."

Clearly, CAT is building on its strong dealer relationships to bring this innovation to the construction equipment industry. In a classic Harvard Business Review article from 10 years ago, the then-CEO of CAT famously stated: "We'd sooner cut off our right arm than sell directly to customers and bypass our dealers."

My challenge questions to you:

1. How and where could you get the benefits of having a more demand-driven relationship with key suppliers?
2. Which of your suppliers are trustworthy enough to share data with?

These questions could be great team discussion starters, especially if you combine them with the Questions for Management Discussion on page 47.

Can private labels strengthen channel links?

On the very first page of Facing the Forces of Change®: Lead the Way in the Supply Chain, I write about executives who “…position their companies to lead the supply chain by combining an understanding of their customers’ purchasing priorities with a realistic perspective on their best suppliers’ business requirements.”

Industrial Distribution’s February issue has a super example in Kimball Midwest, a company that is putting this philosophy into practice. (See Going public about private labeling.) Curt Campagna, Kimball Midwest's director of marketing, says:

“We want to differentiate ourselves, so we try to work with manufacturers, using our expertise and their expertise, to come up with not just a generic product, but one that is better than the standard. By doing so, we help solve specific customer problems and reduce their overall costs."

Well said!

Read the whole article and you’ll also see how private labels can be a way to strengthen relationships with suppliers, an intriguing counterpoint to my discussion of strained relationships in Chapter One (p. 26).

Kimball is consciously collaborating with its manufacturer-suppliers “... to try to come up with a more effective product than the manufacturers would be able to make on their own and market to a broader customer base.” Andrew Berlin of Berlin Packaging also highlighted the potential collaboration opportunity in his fascinating talk at NAW's Executive Summit in January.

I'm very intrigued by this "man bites dog" angle on private label products. Anyone out there have a similar story in which a private label strategy led to greater collaboration between a manufacturer and a distributor?

About this blog

Welcome to my new blog! That's right, it's "a user-generated website where entries are made in journal style and displayed in a reverse chronological order." (See Wikipedia's definition of a blog.)

I am writing this blog to help you get the most out of my new report Facing the Forces of Change: Lead the Way in the Supply Chain, published by the NAW Institute for Distribution Excellence. On this blog, I'll highlight case studies, news stories, data reports, and anything else that relates to the report or industry trends. You can expect to see posts that:

• Illustrate the ways an individual wholesaler-distributor is responding to a specific trend
• Indicate the speed at which a trend is happening (or not occurring)
• Highlight a wholesale distribution line of trade that is being affected by a specific trend
• Identify emerging trends not covered in the reportThis blog is also way for us to communicate.

Drop me a line and let me know if you have any questions, comments, critiques, or feedback on the report. Send me your ideas and examples for blog posts. Better yet, make my day by telling me that you learned something new from the report!

You can comment publicly using the links at the bottom of each message. I'd love to get some thoughtful conversations going.

I'll try to post at least weekly, so stay tuned!