Traditions die hard, but there has been a growing
awareness for several years now that there is a convergence
of factors that is growing to dramatically shift how
products, especially new products move from idea to
the end user. I have watched and anticipated this
change for almost 10 years now and every once in a
while, something happens for me to get a little bit
more clarity about what is happening. The following
is an attempt to give you a snap shot of some of the
things that have brought me to this point in my thinking
as well as some early pioneers in this shift and what
they are doing that have the potential to revolutionize
this business.
Distribution - First
we need to understand the “traditional channel
of distribution.” This is how products have
moved from manufacturer to end user since the industrial
revolution. Generally, a manufacturer produces a product
and sells it to a distributor. The role of the distributor
is to stock product in relative close proximity to
their retail customers. The distributor also sells
the product to the retailer for the manufacturer.
Historically this has also provided a layer of financial
protection to the manufacturer as the distributor
was the one who had to deal with collecting from the
many retailers they served. This system worked extremely
well when long distance business communication was
by mail and transportation was by railcar and truck
load.
Times have changed. Distributors have
moved from being primarily service driven to being
primarily financially driven and the inventory that
once was considered an asset is now considered a liability.
Turns and Cash Flow have become the driving forces
in the Distribution world. Consequently the cost of
carrying inventory has been shifted back to the manufacturer
in the form of longer average days outstanding on
receivables, smaller more frequent orders or both.
Distribution has, for the most part,
reduced or eliminated the idea of selling the manufacturers
products. What once were exclusive arrangements are
now more aptly viewed as cherry picking the best sellers
from all of the recognized vendors in the market.
This creates an homogenized marketplace where every
retailer is selling basically the same offering as
every other retailer because the distributor has left
them very little in the way of options to differentiate.
The selling effort if it exists at all, is focused
on selling programs and services that the distributor
can provide to the retailer.
The financial insulation that distribution
once provided to retailers has evaporated over the
last thirty years as the number of Hardware Distributors
has consolidated to a relative handful. The manufacturers
have learned that as the consolidation continues,
the risk of loss increases dramatically as the number
of distributor’s decreases.
Finally, distribution has lost market
share to the folks like Wal-Mart and Home Depot who
have found ways to reduce the costs associated with
stocking, picking and reshipping inventory. This combined
with their financial focus has forced them into a
mind set that wants to limit the number of vendors
and skus. For some time now, we have been faced with
a situation where distributors are reluctant to add
new vendors with limited product offerings even if
it is a superior product. The time and cost of adding
a vendor to the system combined with the cost of monitoring
and issuing purchase orders for single items discourages
if not eliminates the possibility of adding a better
mouse trap if it is a stand alone product unless the
manufacturer can prove that it will be a best seller.
Recently I heard a comment that, “It costs Grainger
$100,000 to set up a new vendor in their system.”
This is not conducive to having new products in your
offering.
Supply and Demand -
After World War II, the demand for hardware products
far exceeded the supply. This created a situation
where the suppliers or the manufacturers had the power
in the channel of distribution and could pretty well
set the rules of engagement including prices, terms,
freight allowances, etc.. During the 70’s and
80’s, supply caught up with demand and the power
in the channel shifted to the distributors. Manufacturers
had to scramble and began offering programs like co-op
advertising and smaller order sizes to make their
product offering more attractive. Those that had strong
brands, and were aggressive about business survived.
There was a tremendous consolidation at the manufacturing
level from the late 60’s into the early 80’s.
By the late 80’s and all through the 90’s,
the power had shifted once again, but this time it
was to the Retailers. Home Depot, Lowes, Wal-Mart
and others set the terms because they were the ones
with the power in the channel. Once again manufacturers
were forced to adapt with rebate programs, even smaller
shipments and lots of other programs. As we entered
the 21 Century, the power shifted once more to the
End Consumer. There are many factors that have contributed
to the fact that the consumer is now the ultimate
power in the channel. This is creating challenges
and opportunities for manufacturers.
Technology - Much
has changed in the last 50 years and I believe we
are on the forefront of incorporating these changes
into a new paradigm in marketing Hardware Products.
We have moved from truckload order quantities to LTL
(less than truckload) to the world of UPS, Fedex,
Airborne and others. We have moved from printed orders
to faxed orders to EDI to online interactive ordering.
We have moved from Cash in advance to Cash on Delivery
to terms to credit card and electronic payments. We
have also moved from printed advertising and catalogs
to video to digital media. We have moved from Customer
Service that is available 8 hours per day to Interactive
Websites that are available 24 hours a day, seven
days a week, 365 days a year.
The Future - In the
late 90’s, I thought that the future was in
selling hardware products directly from the manufacturer
to the end-user and certainly there is a place for
that approach. Today, however, I am convinced that
the consumer wants immediate access to hardware products,
especially new products that meet a specific need
that they don’t already own. Distribution doesn’t
want to take the risk of adding vendors and products
with unknown potential. There are other options that
are slowly beginning to surface that will fill this
void and help even one sku manufacturers make their
products available to retailers who want exciting
new products for their customers.
The impending Paradigm Shift is obvious
to me. There are a number of options available today
for direct selling in addition to Amazon and E-Bay.
The best or most successful approach to this shift
will vary by company and product. It is in your best
interest to at least explore the alternatives that
are being developed. The shift will come quickly in
comparison to past changes. You need to understand
what is happening and what options exist for your
business.
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Robert E. Cannon
Management Consultant
175 Sorrelwood Lane,
Chagrin Falls,
OH 44022 USA
866.598.8450 phone/v-mail
440.338.7159 facsimile
aim@cannonadvantage.com
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"The greater danger for
most of us is not that our aim is too high and we
miss it, but that it is too low and we reach it."
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Thomas Edison
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Ben Stein
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