Distributors Play a Critical Role in the Supply Chain
April 1, 2009
In the ever-changing chemicals industry, distributors play an important role in the supply chain. From just-in-time procurement strategies to risk management, distributors can bring real value to customers. In today’s economy, distributors are relied on heavily, as customers are more likely to order smaller volumes of product more frequently. Established partnerships with distributors provide for continuity and trust of supply. The following discussion highlights some of the challenges that distributors face, as well as benefits that they can offer to both customers and suppliers.
ChallengesChemical distributors face a variety of challenges. First, like most of their customers and manufacturing partners, chemical distributors are experiencing unprecedented price fluctuations for materials, energy, and transportation. Unfortunately, these distributors have little control over their number-one cost: raw materials. This is driven by suppliers and their exposure to macroeconomic factors (e.g., the price of oil falling from $140/barrel to less than $40/barrel in a matter of months). Distributors can remove selling and administrative costs from the system and implement controls on freight expenses by establishing strong relationships with local carriers, innovative consolidation, and the use of third-party logistics providers, but they also need to find new ways to bring real value to customers. As manufacturers alter their pricing strategies, distributors are potentially exposed to reduced profitability or loss of business.
Fortunately for distributors, most of them do not have the cost structures that manufacturers have. This is largely due to the size and scope of their operations - they are quick to act and more willing to take entrepreneurial risks that manufacturers cannot.
Industry consolidation on both the customer and supplier side greatly affects the long-term viability of distribution companies. As the North American adhesives and sealants industry has consolidated over the past decade, there are far fewer manufacturers for distributors to supply from. From a distributor’s perspective, this problem is compounded by the fact that the top-tier adhesive manufacturers are often handled as “house” accounts for the distributor's manufacturers. This consolidation is expected to continue, as small- and mid-sized manufacturers need to realize economies of scale to compete.
Nearly every distributor in every industry touts its ability to offer outstanding customer service and promotes its fantastic sales relationships. If everyone offers this, then it cannot be a competitive advantage. Distributors need to offer a complementary range of products that meet customers’ needs at the right price, with the right quality, in the right package, at an acceptable lead time. The ability of a distributor to differentiate is value driven. What can a supplier do to increase the value that can be offered to a customer? It’s critical to understand a customer’s process, product mix, cost structures and competitive landscape before solutions can be offered. Developing a consultative sales force that sells multiple layers in an organization allows distributors to identify value and provide tailored solutions.
What is the Value of Distributors?A Customer's Perspective
Customers may sometimes wonder, Why buy from a middle man when I can just go direct at a lower cost? There are several answers, the most straightforward being that either the buyer or seller in a direct relationship will have to perform the function of the distributor. This adds cost to the equation, which can be seen in several key areas.
In addition, distributors can typically offer a greater level of flexibility than manufacturers, including quicker turnaround times on orders - often as little as two hours. Most manufacturers today supply orders based on 7–30-day lead-times, excluding transit time to import products to the United States. With just-in-time manufacturing principals in place at many customers’ facilities, not to mention ever-changing production schedules, customers do not have the luxury of waiting four to eight weeks for materials to arrive. With customers focused on increasing inventory turns and improving working capital and revenue through operational efficiencies, the distribution channel is critical to maintain inventory strategically located near the customer base.
Distributors must also be flexible in financial considerations, such as extended payment terms and consignment programs. Publicly traded, multi-billion-dollar chemical manufacturers are often unwilling to extend payment terms and rarely consider consignment programs. International suppliers often demand payment prior to shipment delivery. Agile, privately held distributors have more flexibility to implement programs that bring greater value to customers.
From a sourcing standpoint, distributors greatly reduce risk for customers. As our industry continues to expand globally, small- and mid-sized customers have to take advantage of global sourcing to realize cost benefits and technology advancements. However, customers of this size oftentimes do not have the resources available to visit facilities that are located thousands of miles away to qualify materials, audit plants, manage international logistics and establish the supply relationship. Furthermore, it is cost-prohibitive for customers to buy full-container quantities of products when they only need a few thousand pounds per month. Good distributors can fill this role by bridging the “international gap” through a systematic approach of identifying new sources for products, conducting regular plant audits, having local representatives active in developing countries, and importing full-container quantities of products but selling pallet or bag quantities.
Distributors can offer product bundling, allowing customers to purchase several items from one supplier. This greatly reduces administrative and freight costs. Most successful distributors offer a complementary portfolio of products that can be combined in quantities smaller than truckload sizes. If a customer requires resin, additives, pigment and containers, they can combine them into one order from one supplier and pick them up on the day they are needed.
Finally, due to their geographic proximity, distributors can maintain close relationships with customers to gain an in-depth understanding of their processes, formulations and competitive advantages. Most distributors visit customers more often than manufacturers can. This is prevalent in today’s economy, where the cost of business travel has skyrocketed. Customers don’t have to wait weeks to see someone in case of emergency; distributors can be in a plant by the end of a shift. In addition, this relationship allows distributors to provide innovative end products that can generate new revenue and profitability; because of their range of market knowledge, distributors can often help customers better tailor their research dollars.
A Supplier's Perspective
Distributors can offer unique advantages to suppliers. Effective sales channel management will lead to greater profitability, increased market share and higher customer satisfaction. Distributors may be viewed as an extension of a supplier’s sales force in markets where it is not economically viable to establish a permanent facility or direct staff. This outsourcing of the sales function results in lower costs and allows the manufacturer to concentrate on R&D and manufacturing. With rising health-care costs, travel expenses and language barriers, some manufacturers simply would not be able to access the North American market without local distribution partners.
Furthermore, due to their established market presence, distributors can typically develop business in a much shorter timeframe than suppliers new to a market. The ability to gather market intelligence is more likely to be achieved by a distributor than a new face. Continuity of long-standing geographic coverage creates business relationships that are built on trust and mutual dependency. Where a direct sales force is employed, distributors can still offer an advantage because of these relationships.
The Internet allows manufacturers throughout the world to be easily identified; establishing a logistics flow is more complex. Navigating a sea of federal, state and local regulations can affect the transport of certain products and introduces hurdles that cannot be readily overcome. In addition, most distributors offer the ability to provide samples, custom labels or contract packaging. With facilities equipped to handle hazardous goods, distributors certified in the National Association of Chemical Distributors’ Responsible Distribution ProcessSM are qualified to deal with damages, spills or other unexpected occurrences safely and efficiently.
Distributors are often the first call chemists make when they are developing new formulations, as they can provide a breadth of knowledge based on experience supplying multiple components for formulations. Distributors are able to cross-fertilize from one product group to another and one industry to the next.
There are significant financial advantages to working with a distributor. Manufacturers are able to optimize production capacity, rather than trying to sell a couple of bags or single pallets to 100 different customers who speak different languages, who want custom labeling and who need immediate delivery. Furthermore, when it’s time to get paid, contacting one distributor is more cost effective than trying to collect from multiple customers.
ConclusionAlthough distributors face significant challenges, today’s economy offers ample opportunity for growth. Distributors can provide several advantages to both customers and suppliers, and they play a critical role in the supply chain.
For more information, contact Michael F. McKenna, Business Development Manager, at (877) Maroon-1, e-mail email@example.com or visit www.marooninc.com.
National Association of Chemical Distributors, Responsible Distribution ProcessSM, www.nacd.com.
This article originally appeared in Paint & Coatings Industry magazine, www.pcimag.com.