For decades, American industry has purchased much of its electrical, electronic and hydraulic products from independent distributors. Customers and manufacturers experience many advantages by using the industrial distributor business model. Local support, off-book cost, customer credit buffer and customer knowledge are just some of the traditional attractions. However, manufacturers have recently become dissatisfied, feeling that the value of distribution has decreased. This article is intended for those manufacturers whose industrial market share is low and who wish to grow at a faster rate. If your products are superior and you feel that improved sales efforts will help you grow, then read on.
Industrial manufacturers are dissatisfied with distribution. They are questioning the value and looking for alternatives.
Industrial manufacturers seeking a market-share increase must become proactive and help distributors to evolve by reinventing into marketing and sales organizations. They are highly focused on product selling, sales growth and adding new customers and less focused on inventory, delivery and transactions. Drastic reduction in distributor operating expenses and shifts in infrastructure are required. The lean distribution model offers realistic solutions to the growing challenges facing manufacturers today. The purpose of this post is to look at the current issues with the industrial automation sales channel while my next article provides ideas for growth.
Price pressure has turned into a war. To compete and increase profits, you must improve by changing the model.
Intense Competition Prevails
Despite slow sales, an avalanche of new industrial products is available from more manufacturers than ever before. The resulting competition, once characterized as price-pressured, is now described as war. Only high-quality sales and marketing organizations are winning, and they are creating sales barriers to the competition. The customers have benefited as the cost of many products has decreased substantially.
The increased competition is coming from European and Asian manufacturers who have large, established, competitive product lines. Their global presence combines well with many domestic customers who wish to expand offshore using a global supplier. Also, the American market is large, tempting the global suppliers to further expand their influence. If your business is not growing, you may be dying. You must improve to be competitive.
Core Distributor Weaknesses
Regardless of the distributor’s market position or size, the following are some of the significant areas adversely affecting distribution:
- Product inventory is a liability
- Distributor product sales skills have decreased
- Financial stress prevents reinvestment
- Distributors have diversified by adding products and services.
Historically, distributors have held many advantages for the manufacturer who has kept distribution a staple in their sales channel strategy. Now the role of the industrial distributor needs to be re-evaluated. The following are core distributor weaknesses that should be evaluated and eliminated.
Local inventory, coupled with customer services like transportation, kitting, and just-in-time delivery, are a few distributor offerings that customers love, and manufacturers love having. Many manufacturers are stocking their products, and most can ship the same day. Logistics and transportation systems have added to the delivery performance. Many distributors are “brokering” parts: ordering from the manufacturer when an order is received. Costs for inventory, warehouses, shipping, and handling are large compared to the benefit when alternate paths are available. Inventory losses from obsolete inventory and customer return negatively impact available cash. The large variety of product options makes stocking very difficult.
To compensate, the manufacturer frequently supports stocking programs with inventory exchange programs. The returns are frequently expensed and discarded, further increasing the inventory support cost. Inventory is a duplicate cost that can be eliminated.
Faded Sales Skills
Combined with knowledge of the existing customer base, outside and inside sales efforts at many industrial distributors have been valuable. These organizations have knowledge that gives them competitive information with these accounts.
Distributors have remained focused on major product lines, spending their time defending these customers against the competition.
Product technical complexity has increased, requiring training and study to remain competitive, and many are falling behind. Customers love product knowledge and are in the habit of depending on local technical support. They gravitate and buy from knowledgeable distributors.
Distributor Financial Stress
Sales price and gross profit have fallen dramatically. Industrial distribution has averaged gross profit margins of 23 to 27% for many years, and competition has caused these margins to fall. The profitability of a distributor is sensitive to small changes in gross profit margin, and a 1% drop is large.
Personal selling expenses have exploded for all organizations. Inflation in cars, fuel, insurance, and other employee benefits like health care has caused an average annual expense increase of more than 8% for the typical outside salesperson. The distributor needs 10% annual growth in gross profit to flourish, and net profit should exceed 4% every year.
These changes have created a dent in available cash, preventing investment to make improvements. Distributors need help.
My next article "Reinvent your Sales Model-Create Lean Distribution to prepare for the Industrial IoT Era" offers possible solutions that can mitigate these challenges. If you are dissatisfied with your sales channel and sales results then consider a re-tool of your sales channel and read my next post.
The article was written by our contributing author, Gary Simmerly, President at Automation Pilot. Gary is an engineer by education and sales engineer by choice. He founded one of the first high-tech industrial distributors servicing and supporting industrial controls for plant floor use. Great Lakes Controls (GLC) was a start-up venture to a regional distributor with six branches in 4 states. Sales grew to $20 million in 20 years.