What are your core competencies and those of your trading partners?

There is an eager sense of anticipation as we move deeper into what many believe is a second industrial revolution.

The explosion in e-commerce technology promises to forever change the way we do business - the very way we live. But there is fear and uncertainty, too. How do we realize the potential the new technology offers without sacrificing personalized service and the efficient product distribution that has distinctively characterized the markets of North America? Can the resources of the thousands of entrepreneurial distribution companies in the United States and Canada, and in fact the world, be brought to bear to fill in the gaps of developing Internet technology?

In spring 2000, I joined in Calgary, Alberta, with my fellow officers of the Northamerican Heating, Refrigeration and Air Conditioning Wholesalers Association to address these questions. The group, a leading voice for its industry, has long been a proponent of the traditional two-step distribution process - manufacturer to wholesaler to retailer - as the most efficient way to move products to the ultimate consumer. Realizing that these consumers are seeking new avenues to fulfill their needs, and that the "middleman's" role may be overlapping with others in the supply chain, my compatriots and I searched for ways to marry the new technology concepts to the strengths local and regional distributors have always brought to the marketplace.

The result of these discussions was a concept we call Market Center Distribution.

It embraces the idea that only regionally established business centers staffed by those familiar with local markets and customers can effectively maximize a product's market share - and that the more complex a product is, and the more it relies on a professional corps of contractors or retailers to deliver to the local consumer, the more these professionals will need the service of local distribution.

What are those key services? Convenient warehousing of parts and supplies, warranty support and administration, rapid delivery, the extension of trade credit, access to product information and one-stop shopping for related accessories. While some of these can conceivably be provided on a national scale, there is still a cost associated with them. These functions must be performed in some manner and the established network of independent distributors located in each market center provides the most cost-effective way to do so.

Redundancies in the chain

But what makes Market Center Distribution different from the old two-step concept is a realization that there are redundancies in costs among the different participants in the product supply chain. It calls upon manufacturer, distributor and retailer/contractor to each define their core competencies - those functions they perform better than anyone else - and to seek the support of other channel partners in providing their own respective core competencies. Rather than thinking of the distribution process as a series of sequential steps, it looks at the whole thing as a unified system with each participant taking responsibility for the functions he or she does best.

This means that the different players in the supply chain will have to open communication to a far greater degree than has previously been the case. Strategic alliances will have to be developed based on mutual trust. To remove redundant costs manufacturers, distributors and retailers/contractors must be willing to face up to their strengths and weaknesses in assessing what are their respective core competencies. They must be willing to divest themselves of some of their functions if a channel partner can perform it more efficiently. They must be willing to step up to the plate and take primary responsibility for their logical role in the chain.

Negotiations between partners in these new alliances must center on defining and communicating the roles to be played by each. The party who negotiates with an eye to avoiding his responsibilities will soon find that he has lost his value to the alliance and will no longer be a player.

High-tech linkage

Technology will be at the forefront of the new Market Center Distribution, as all participants will have to be on board with state-of-the-art electronic communication, ordering and order fulfillment, inventory control and whatever the future may bring. Industry associations and leaders must promote standardization so partners can come together in integrated product delivery teams. Online ordering, order status, and communicating customers' special requirements will flow instantly from the customer to the proper parties throughout the chain. Marketing that utilizes integrated customer and product databases will become a cooperative effort.

These unique characteristics of Market Center Distribution reflect some of the key trends in distribution identified in a recent study commissioned by the National Association of Wholesaler-Distributors examining changes in the industry and economy.

Over recent decades manufacturing has spurred the economic development of many emerging countries. Low-cost, yet high-quality goods have made some of these countries players on the world stage. And yet, no one outshines North America in getting the product where it needs to be on time. People coming to this continent marvel at the diverse products available in our stores and local markets. Such things as fruit being available in the cold of winter would be unheard of in some countries.

Our distribution system developed to a large extent when the first industrial revolution dovetailed with the taming of the American frontier. Businesses and transportation systems evolved to meet needs in a cost-efficient way.

Now we embrace both a technological revolution and a globalization of markets that promise to provide incredible opportunities. Market Center Distribution, utilizing the strengths of the past, the innovation of the future, and the best talents of all supply channel partners, promises a road map for industry.

SIDEBAR: Trends in distribution

Driving the need for a new focus in distribution are a number of trends we identified. These are:

  • Customer relationships are increasingly critical.

  • Gaining access to customer information yields marketplace power.

  • Value-added services are expanding to meet customer needs.

  • Channels of distribution are evolving and changing form.

  • Distributors are forming alliances with suppliers to reduce costs and increase power.

  • Business is becoming North Americanized and trade borders between the United States, Mexico, and Canada are dissolving.

  • Products are being introduced from Europe and Asia that influence North America in terms of application and design.

  • Multibranding is commonplace.

  • Consolidation continues.

  • Deregulation is opening markets.

  • There are serious workplace shortages.

  • There is more "professional ownership" of distribution and fewer family-owned supply houses.

  • E-commerce is enabling 24-hour/7-day-a-week business.

  • The consumer is now more educated based on availability of information via the Internet.

  • There is great interest rate volatility.

  • Great intergenerational wealth transfers are occurring or about to occur.

Given these trends, wholesalers must develop strategic plans to capitalize on the changes which will be brought about by these trends. Each of these trends presents problems as well as opportunities. Strategic planning identifies the problems and determines how they will be overcome and also identifies opportunities and determines how the wholesaler will take advantage of them. For example, if customer relationships are becoming increasingly critical, then specific customer-by-customer plans will need to be made to protect our most valuable accounts and similar plans developed to target those accounts we wish to capture. If value-added services are expanding to meet customer needs then we must identify what services we can presently provide and plan to develop new needed services to meet the customer's needs.

As our markets mature and we find a surplus of product and suppliers fighting for a shrinking or stable demand, we may find it harder to increase our value offerings to customers because of shrinking margins which limit our ability to invest, a fragmented customer base that gives us too many market segments to aim our plan at, and a shortage of management and sales talent.

Power shifts in a maturing market from the manufacturer towards the consumer. The wholesale-distributor who wishes to enhance his power in the channel of delivery will, however, find ways to add value for the ultimate customer, and in so doing will increase his value to the manufacturer.

Because the wholesaler cannot economically provide every service and value, the only option is to focus on differentiated service levels to attract customers. The wholesaler might decide, for example, to focus on providing superior product availability, creative credit arrangements, customized dealer programs, training for customers, or promotions. The main thing is to do certain things that have value to the customer better and more economically than the competition.