Value-Chain Report

Much has been written recently of the pending disintermediation of industrial distributors in the value chain. However, writing off the distributor may be premature. Successful distributors are evolving from the traditional role of component/product supplier to true business partner, using in-depth knowledge of their customer's business to reduce the customer's overall operating costs. In a recent survey by Purchasing magazine, 84% of industrial firms responding indicated that they are increasing their sourcing of MRO purchases from distributors. The same survey indicated that 93% of purchasing managers rate distributor suppliers as excellent or good. A notable example of this is the Swagelok Co., based in Solon, Ohio. Swagelok is a leading manufacturer of high-quality valves, fittings, and related fluid-system components, which are recognized as the premier products of their kind by industrial users. More than 150 exclusive distributors deliver Swagelok products and services around the world. Swagelok maintains dedicated distribution centers in North America, Europe, and Asia to meet the needs of its global customer base. Swagelok distributors are unique. Although independent businesses, each distributor has a very close relationship with Swagelok, promoting only Swagelok products in an exclusive geographic area. Through proprietary information technology, distributors are directly linked to Swagelok factories and distribution centers. Distributors typically enjoy replenishment of stocked products in less than 24 hours, due to this tight linkage and Swagelok's inventory management policies. Swagelok's business strategy includes serving customers through its local distributors, which Swagelok regards as an integral part of its overall value chain. The distributors' role extends beyond simply stocking and selling Swagelok products to increasing the value of those products, providing product-related services, improving their customers' business processes, and providing valuable information to both customers and Swagelok. Responding to unique needs One of the most valuable services provided by distributors is the understanding of their customers' business needs, so as to be able to offer and supply products that are most effective in meeting the unique requirements of each specific application. Successful distributors continually try to stay ahead of the curve in being able to assist end users with products and services that offer the most cost-effective solution. Here's another example of this best practice from Swagelok: A large synthetic fibers plant in the Southeast U.S. actuates looms with pressurized air. The local Swagelok distributor worked with the customer to find a way to reduce a 32-item bill of material to as single item (a kit of components) to retrofit troublesome, leaking systems. Working with the customer, an effective combination of components was selected, and the distributor assigned a part number to the kit, simplifying the ordering process for the customer. In addition, Swagelok's products are functioning more reliably, improving uptime for the looms by 50%. Supplying product immediately Distributors typically provide their customers with a nearby source of supply. With local inventories of those products regularly needed by their customers, and with overnight access to Swagelok's global distribution network, Swagelok distributors provide their customers with exceptionally quick response and cost-effective ways to fulfill orders, minimizing costs throughout the entire supply chain. This high level of responsiveness provides many benefits to end users, including minimizing downtime for maintenance and/or repairs and preventing major capital expansion/new construction projects from falling behind schedule due to lack of valves, fittings, and related fluid-system components. Distributors also may provide vendor managed inventory (VMI) services, relieving the end user of the administrative burden associated with planning, ordering, receiving, and stocking of their valves, fittings, and related fluid-system components. VMI also reduces the customer's inventory investment, as VMI inventories are typically consigned stocks that are not considered "purchased" by the end user until actually used. Adding value beyond product Another valuable service that distributors provide to their customers is expertise in addressing their specific technical requirements. Distributors typically combine deep product knowledge with extensive industry experience to provide customers with strong technical support for their specific applications, often resulting in significant performance advantages and/or cost savings. Expertise and advice extend beyond just product applications to include identification of cost-reduction opportunities through Swagelok-developed methodologies, such as energy-management programs, maintenance-reduction opportunities, etc. Each of these adds value to the customer-distributor relationship. A manufacturing company was looking to upgrade its steam production and distribution system. Swagelok steam traps and ball valves were installed in the upgraded system, leading to a drop in steam demand of 16% and 29% over the first two years of operation. In addition to product and application expertise, Swagelok distributors provide their customers with some of the most comprehensive value-added services available in their industry. These services include local training programs for customer personnel and Swagelok-endorsed training certifications, increasing the knowledge and skills of end user engineering, applications, construction, and maintenance personnel. Swagelok distributors also provide logistics solutions designed to meet or exceed their customers' business requirements, including VMI, JIT delivery programs, and customer-specific packaging/shipping. New-product development and product customization also are integral parts of the distributor's value-added services. As a result of their close relationship with Swagelok, distributors work with customers to develop new configurations for valves, fittings, and related fluid-system components to meet ever-changing application requirements, reducing time demands on customer personnel. A Swagelok distributor in Canada performs "kit packaging" of gas-system components for one of its customers, a major bus company, and participates in its production meetings. The distributor's role is viewed as being one of providing leak-free, fully operational on-board gas systems for natural gas-powered vehicles, not just delivering components. While many industries and manufacturers are moving away from distribution, there are clearly circumstances where knowledgeable, service-oriented distributors will continue to add value in the overall supply chain. Smart buyers have learned to build closer relationships with distributor partners who are willing and able to help them reduce their total cost structure via needs identification, reduced ordering/purchasing costs, inventory-management services, installation savings, performance measurement, or other focused solutions. Kevin P. O'Brien is an Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.