It's been four years since the last time Supply House Times probed the PVF distribution community about its business practices and performance. Our 1999 survey took place in a perky PVF marketplace that was at the end of its rope, although nobody knew it at the time. Since then, a deep slump in industrial production and capital spending has sent the PVF sector reeling.
How pie-eyed now seems the optimism expressed by the 69% of PVF wholesalers who went on record as predicting a better sales year in 2000 than 1999. (Our PVF survey traditionally has been conducted every two years, but was skipped in 2001, the year this magazine changed ownership.)
Fast forward to the present. The industrial market has been in the doldrums for the last three years. Signs of an upturn have appeared in recent months, but they are faint and iffy signals. A more pressing question on peoples' minds is whether U.S. manufacturing is in a slump or at the beginning of a permanent decline caused by low-cost global competition.
The 2003 Supply House Times' PVF Purchasing Habits Survey was mailed to 2,000 wholesalers of PVF, some 43% of whom said that more than 50% of their sales come from that product sector. The response rate of 13% was respectable for a complex questionnaire of this nature.
The most basic question was a straightforward one asking whether sales increased, stayed the same or decreased in the first half of 2003 vs. the same period of 2002. Results were fairly evenly split, with 35.2% saying they increased, 36.9% answering “stayed the same” and 27.9% admitting to a sales decline.
It's interesting to note, however, that larger PVF firms reported better results. Among wholesalers reporting more than $50 million in annual volume, 52.2% said their sales increased in the first six months, while 28.3% said they stayed the same, and 19.6% reported a decrease. It could be that the larger firms benefit from a larger and more diverse customer base not so dependent upon industrial markets.
These results seem to be more encouraging than anecdotal evidence from talking to PVF people throughout the industry, most of whom play an unrelenting blues riff. One explanation is that business may have improved for many compared with last year, but sales are still climbing out of a trough carved over the last three years. However, let's also acknowledge an artifact that plagues all market researchers. Persons are more inclined to respond to surveys when things are going well than when they're not. It's human nature to avoid unpleasant subjects.
Be that as it may, there is plenty of good information to be gleaned from the 2003 Supply House Times PVF Survey.
Why Is Business Good?One of the more interesting queries asked those reporting a sales increase during the first half to attribute the reasons why. In fact, we asked respondents to list the two most important factors, so total responses will surpass 100%.
Overall the most prevalent responses were “increase in orders and/or contracts,” 52.4%, followed by “additional business due to 'quality partnering,'” 39.3%. Among $50 million and larger wholesalers, though, the “quality partnering” aspect was even more important. Half of those responding named it as the most important factor. Next was “increase in orders and/or contracts,” at 37.5%.
This emphasis on good business relationships is a silver lining in the PVF recession's cloud. Many wholesalers have found that much of the business that went away wasn't very profitable, and in the long run they may be better off without it.
2004 OutlookWhen asked to predict next year's sales, two-thirds of the respondents expected a sales increase, while only 2.9% predicted a decline. Of those who said sales would be up, 28.5% anticipated a 0-5% increase, while 39.2% expected to see sales rise between 6-10% and 28.5% predicted healthy increases in the 11% to 25% range. Another 3.8% went out on a limb to say sales would go up by 25% or more.
Among $50 million+ PVF wholesalers, a whopping 81.3% said sales would increase next year, with only 4.2% predicting a decline.
These opinions may have little to do with objective business conditions. At a recent meeting of ASA's Industrial Piping Division (IPD), several members got into a discussion about next year's prospects. One of them pointed out that his company is predicting an increase, but nobody can say why. “It's just that everyone feels the market has been down so long it's got to turn up some time,” he said. Other members talked of similar forecasting dynamics in their companies.
If that's the prevailing mood in the industry, it's not necessarily a bad thing. Guarded optimism is better for the business psyche than the depressive mentality that's held the industry in its grip for the last three years.
Greener PasturesAnother query asked PVF wholesalers to identify the two most significant areas of sales growth for their firms over the next few years. The most prevalent responses went, in order (adding up to more than 100% by nature of the question):
-- Diversification into new market segments and product lines 52.8%
-- Existing product lines 43.3%
-- Improved operational efficiency and personnel productivity 35.1%
-- Quality partnering with customers 20.3%
-- Branch openings and acquisitions 15.6%
The diversification response traditionally has topped the list in this survey. In 1999, 63.9% of respondents cited it as the main source of sales growth.
Who Do Wholesalers Buy From?Another question was, “What percentage of your annual purchases comes from each of the following categories?” There were four categories listed, as follows:
-- Domestic manufacturers 47.6%
-- Foreign manufacturers 22.0%
-- Conventional PVF distributors 20.7%
-- Master distributors 9.7%
These responses follow the general pattern found in previous Supply House Times PVF surveys.
This year's survey added one question not asked on previous ones. It was suggested by a member of ASA's IPD Council, asking: “What percent of your customers would prefer that you ship them a product marked 'Made in USA' versus receiving a product that was marked with a foreign country of origin?” Responses:
-- Made in USA: 54.2%
-- No preference: 38.4%
-- Foreign country: 7.4%
Then we asked, “Of the customers that prefer 'Made in USA,' what percent above the current price would they pay for a product marked, 'Made in USA?'” Responses:
-- 0-5%: 50.5%
-- 6% to 10%: 26.2%
-- 11% to 25%: 17.0%
-- More than 25%: 6.3%
Market ActivitiesWe asked PVF wholesalers to identify markets and activities in which they were involved, listing a variety of prompted responses. This question is most interesting when comparing responses to those of previous surveys, shown in the chart on page 48.
What's interesting here is the large drop-off in various categories. The fall-off in e-commerce could be explained as yesterday's trend gone cold. But how to explain the diminishing interest in export sales, instrumentation, pipe fabrication, valve actuation and maintaining customer inventories? It seems counterintuitive that in a sluggish market PVF wholesalers would seek to do away with value-added services, but that's one possible interpretation.
A staple of this survey, and perhaps the most important question of all, asks PVF wholesalers to rate the importance of various factors in their purchasing decisions. The responses are weighted on a 5 (extremely important) to 1 (not at all important) scale. Average responses are noted in the table, "Importance of Factors," on this page. "Product quality," followed by "product availability," has topped the list in importance in surveys conducted since 1993.
"Lead times" and "price" have flip-flopped each other in importance over the years. In surveys conducted from 1995 to the present, "lead times" were ranked higher in importance than "price," but usually the percentage difference was very small. For example, in the 1999 survey, a mean of 4.47 respondents cited "lead times" as most important, while a mean of 4.44 respondents said that about "price."
"Relationship with vendor" maintained its ranking but may have lost some support when compared with its mean score of 4.19 in 1999.
In 2003 "technical support" surpassed "brand recognition/
acceptance" in importance, which had been ranked higher in every survey since 1997. In the 1999 survey, "brand recognition/acceptance" was ranked as very important by a mean of 4.21 respondents, vs. a mean of 4.05 respondents who ranked "technical support" as very important.
Similarly, "quality partnering program," which had received the lowest importance ranking in every survey done since 1993, gained support and surpassed "domestic vs. imported." In the 1999 survey, a mean of 3.90 respondents ranked "domestic vs. imported" as very important, compared with 3.23 in 2003. Support for "quality partnering program" rose from a mean of 2.88 in the 1999 survey to a mean of 3.32 in 2003. While no eye-popping trends stand out, the relative rise in the “quality partnering” response is probably significant.
We traditionally have aimed to track a variety of other issues pertinent to PVF wholesalers. “Does your company have an active program of vendor consolidation?” is a question asked on previous surveys as well as this year's. The 39.6% “yes” response is generally in line with the responses to previous surveys (34.2% in 1999).
Also, we asked: “Is your company involved in vendor-managed inventory with any customers?” 23.1% responded affirmatively, compared with 30.2% in 1999. Notably, more than 96% of respondents indicated a level of satisfaction (“very” or “somewhat”) with their VMI programs, also in line with previous findings.
Almost double the number of wholesalers reported being registered to ISO-9000 standards, 19.6% this year compared with 10.7% in 1999. We added a question this year asking if customers request that their vendors be ISO-certified, and 14.5% said yes. Also, we asked if a first-class Quality Manual would be acceptable to customers in lieu of ISO certification, and 70.8% responded affirmatively.
Sole SourcingThis year's survey revealed a slight rise, 30.3% compared with 25.3% in the 1999 survey, in PVF wholesalers reporting coveted sole-source contracts with any customers. Looking at it from the flip side, we added a query asking if the wholesalers perceive any advantages in sole sourcing from a vendor, and more than half, 52.7%, said yes.
Those involved with integrated supply agreements (providing non-PVF products to industrial customers) remained virtually unchanged from the 1999 survey, rising a bit to 26.6% from 25.6%.
AutomationAnother standard question on the PVF survey dealt with electronic automation. This year's survey uncovered some encouraging signs of progress among PVF wholesalers. It shows that 36% of them are currently using bar coding, compared with only 17.6% in the last survey, and that only 49% have no foreseeable plans to use bar coding, compared with 64.4% in our last survey.
Nowadays, 57% of PVF wholesalers say they communicate electronically with vendors, compared with only 47.6% four years ago, while another 26.8% say they plan to implement it within the next year.
Similarly, 56% of PVF wholesalers currently report e-commerce contacts with customers, compared with 41.1% in 1999. Another 25.4% say they plan to do so by next year.
All in all, we found some encouraging signs of progress and better business ahead for the industry. Now let's keep those fingers crossed. <<
SideBar:If your sales increased in comparison to 2002, what were the two most important factors behind your firm's increasing sales during the first half of 2003? (Multiple response allowed)
-- Increase in orders and/or contracts: 52%
-- Additional business due to your firm's “quality partnering” efforts with customers: 39%
-- Diversification by your company into more specialized markets: 27%
-- Increase in new construction or major renovation in your trading area: 23%
-- Less competition due to consolidations or closings: 8%
-- Addition of vendor-managed inventory program for customers: 7%
-- Higher prices: 5%
Total Respondents 84
If your sales decreased in comparison to 2002, what were the two most important factors behind your firm's decreasing sales during the first half of 2003? (Multiple response allowed)
-- Decrease in new construction or major renovation in your trading area:56%
-- Lower prices: 27%
-- New competition entering the market: 24%
-- Decrease in MRO orders and/or contracts: 23%
-- Competition offering of vendor-managed inventory: 11%
-- Lost business due to vendor-reduction programs: 6%
-- Integrated supply contracts awarded to competitors: 5%
-- Other: 18%
Total Respondents: 66
Which of the following will be the two most significant areas of sales growth for your firm over the next few years? (Multiple response allowed)
-- Diversification into new market segments and product lines: 53%
-- Existing product lines: 43%
-- Improved operational efficiency and personnel productivity: 35%
-- Quality partnering with customers: 20%
-- Branch openings and acquisitions: 16%
-- Development of business through the Internet: 6%
-- Improved service via more sophisticated electronic technologies: 5%
-- Other: 4%
Total Respondents: 231