Industrial distributors fight to fend off e-commerce 'disruption'
This story originally published on JOC.com.
E-commerce is transforming long-established business models of industrial distributors, the third-party companies that stock and deliver a wide range of nitty-gritty components, and supplies to businesses of all types, especially manufacturers and construction companies. Increasingly, online marketplaces, direct-from-manufacturer sourcing, mobile apps, and changing demographics are disrupting decades-old ways of distributing industrial goods.
The challenge to industrial distributors is similar to that confronting air and ocean freight forwarders and truck freight brokers competing with technology-based logistics startups that want to get between them and their shipper customers, cutting out a middleman. It is similar as well to the challenge Amazon's one-click shopping platform poses to traditional retailers. Industrial distributors need to rethink how they sell and how they ship goods to buyers.
"Distributors need to elevate their game," Simon Bhadra, marketing manager for UPS's Industrial Distributor customers, told JOC.com. That means not just selling online but enabling mobile purchasing and providing a consumer-like experience for the industrial buyer. "It's about speed, the speed of information and speed of logistics, they come together," Bhadra said. "The pressure is really on responding quickly and getting product into the hands of the end buyer."
For some industrial distributors, that will mean changing how they stock and ship products, and possibly involve changes in the transportation modes they choose to use. "This really ties back to what's going on in the retail sector," Bhadra said. "It's running in parallel. What we saw in retail a few years ago is what we're seeing now in industrial purchasing." That means more buyers of industrial parts and even janitorial supplies are purchasing via mobile phones.
In its third report on industrial buying dynamics since 2013, UPS found the traditional inventory-heavy model of industrial distributors is being upended more quickly than expected. The report, based on a survey of 1,500 buyers of industrial products, found 75 percent of those buyers surveyed had shopped at an e-marketplace, up from just 20 percent in 2013. Eighty-one percent of respondents had purchased direct from a manufacturer, up from 64 percent in 2015.
What is more, 80 percent of industrial buyers are likely to shift to suppliers or distributors with a more user-friendly websites, up from 72 percent two years ago, according to the study. Who is driving this trend toward the web and mobile sales? If you said "millennials," you are right. UPS claims the steady demographic shift toward younger, "digital native" industrial product buyers is helping "digital industrial distribution" concepts take root, just as in other industries.
"We got our first insight into the influence of millennial buyers in 2015," the year of the last study, Bhadra said. "Younger buyers, especially the millennials, have a higher preference toward buying from online marketplaces. When you think of these buyers, that tells you where the puck is going." Distributors, he said, "have to understand who their non-traditional competitors are. They're competing against e-marketplaces and manufacturers who sell direct to customers."
The good news for traditional distributors is their market share remains strong. Of the industrial buyers surveyed by UPS, 45 percent credited distributors with getting the largest share of their purchasing spend, followed by manufacturers at 31 percent and e-marketplaces at 24 percent. Industrial buyers also reported being restricted as to where they could shop, with company policies limiting them to specific suppliers or a certain range of products and prices.
But the ease and convenience of being able to buy an original equipment manufacturer (OEM) component or replacement part while on a factory floor or construction site using a mobile app is a natural draw for consumers used to ordering lunch using apps such as Grubhub or Yelp!, clothing and shoes from Zappos or Zulily, or calling a shared ride using Uber or Lyft. But the needs and expectations of industrial buyers don't exactly align with those of consumers shopping on Amazon, Bhadra said.
"In the business-to-business market, the 'criticality' of that shipment has to be taken into account," he said. "The product ordered may be a critical part needed for a revenue-generating machine." Many products stocked by industrial distributors also have a "post-sales" lifecycle different from consumer products. "You may have to think about training, disposal, the whole lifecycle of that product," Bhadra said. That is not the case with a coat or a pair of shoes.
That "criticality" will influence transportation choices. More opportunities for industrial buyers to purchase goods online may translate to more expedited packages or shipments - which would be good for companies such as UPS as well as specialized expedited carriers and less-than-truckload operators. For those buying critical components, rapid fulfillment rather than price is the more likely reason to turn to a marketplace such as Amazon Business.
"Based on the type of product, there's a different dynamic in terms of transportation, from order to delivery," Bhadra said. "When you're talking about OEM and MRO [maintenance, repair, and overhaul] parts, speed is a lot more critical. With 67 percent of OEM parts, buyers want delivery in one to two days. That percentage is a lot smaller in some other categories, such as janitorial and sanitation supplies. "That where you get into the cost of shipping versus speed," he said.
More industrial buyers are purchasing direct from manufacturers, as well, the UPS study shows. "That's more about getting access to high-quality products," Bhadra said. Digital technology and onlines sales platforms have made it possible for manufacturers to sell certain products directly to the end-user, again, perhaps components that are needed immediately or that have high value. "It may be spare parts that help maintain a system or product they sell," he said.
Are distributors doomed to be "disrupted" by digital upstarts? No more than third-party logistics providers are threatened by the next "Uber for trucking" application. For companies on top of their game, that means not much. Some of the largest distributors already are online and making heavy investments in e-commerce capability. W.W. Grainger, the largest US distributor, last month launched Gamut.com for customers to locate highly specific products more quickly.
"During the past few years, Grainger has made key investments to create unique value for different customers, while working to ensure an effortless customer experience," Grainger vice president in charge of e-commerce Elizabeth Ubell said in a statement. "Gamut.com is the latest of these initiatives." Last year, more than 60 percent of Grainger orders originated on digital channels, including Grainger.com and the company's inventory management systems.
Those distributors farther back on the learning curve need to focus on customer experience if they want to ride the e-commerce wave, Bhadra said. "They need to really focus on the experience of the end buyer. They've got to build an omnichannel experience that includes mobile sales and social media." Increasingly, social media is where customers learn about suppliers and their products, and industrial buyers will expect social media interaction.
"Customers want personalized service and a wide selection of products," Bhadra said. "Large distributors do a good job providing that wide selection. Small distributors do a good job with personalized service." Each will have to broaden its approach to successfully compete in the e-commerce era. Smaller distributors, he said, may need to rely more on the internet, their suppliers, and logistics and transportation providers to create "virtual" inventory online.
Distributors could turn the direct-from-manufacturer sales model on its head by selling a product online and ship it directly from the manufacturer to the end buyer. "You can drop ship directly to the end customer, that's where there's a lot of opportunity," Bhadra said. That type of arrangement requires a high level of multimodal visibility, provided by the distributor or a logistics partner, but that would be valuable to customers and suppliers.
Freight brokers claim they provide service to shippers and carriers that automation cannot entirely replicate, and distributors could make the same argument. "Distributors provide a lot of value to the manufacturer," Bhadra said. "They're a major part of the manufacturer's customer experience. The distributor frees them to focus on designing and building the best products possible. At the end of the day, these 'threats' are really all opportunities for distributors."
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