Viewpoint -- Achieving Growth In A Mature Market

Dec. 21, 2004
Communicating with end users will enable companies to move ahead of the competition.

Achieving growth in a mature market -- a market that is stagnant or declining -- is a problem many component manufacturers and OEMs face. Fortunately there are proactive approaches that provide growth in mature markets, thus strengthening companies and equipping them with new offerings when the economy regains momentum. One of the quickest and most productive approaches is to tap the end user for ways to add value to existing products. The conventional model of distribution has products moving from the manufacturer into the channel, but often it stops there -- except in cases where a manufacturer is delivering directly to a final user. For the most part, once products are shipped they simply disappear into the channel. The value to the end user is unknown. This becomes increasingly true in a mature market where product sales migrate toward the aftermarket. One distributor may have hundreds of customers. A manufacturer may share the same distributor with a half dozen competitors. But that producer often will have little or no knowledge about the end users of its product, and only anecdotal information regarding its competitors' positions at the distributor. This presents tremendous opportunities for a manufacturer to capture more of the distributor's attention and increase share in the market place. The idea is to bring value to both the end user and the distributor by achieving a better understanding of end-user applications and emerging needs. It isn't necessary to understand all of the needs and applications. Nor must the manufacturer solve everyone's problems. Like most cause-and-effect situations, the 80/20 rule applies. The distributor typically will be selling to contractors and equipment assemblers. Addressing a few of the key difficulties will clear up the majority of the concerns. Or put another way, with all manufacturers in a mature market being similar, a few carefully selected improvements will put one of them out in front. Finding which of these improvements to concentrate on is an opportunity for the producer and distributor to work together for the benefit of both. Survey The Market Step One: Manufacturers and distributors should identify and visit a dozen end users. End users should be representative of the customer base. It's important that at least a half hour be scheduled for this discussion. The best survey consists of a few topics handled in-depth rather than many superficially. "What are the three most important steps you need to grow? What are the three most important ways your suppliers and distributors can help? Who does it best?" will be enough. Answering only those questions will let you and your distributor know first-hand what your end users need, how your competitors are doing and how you can get out in front. Let the initial answers lead to the real issues. For example, asking "What is most important to you when you buy a part?" will normally be answered by "Price!" Following up on that by asking, "What else do you consider?" or "When do you not buy the lowest priced part?" will open up multiple problems and needed solutions addressing quality, aftermarket substitutions, delivery, cost of callbacks and warranty questions. Lowest priced parts will not make up for missed deliveries or return visits to replace failed components. Step Two: Analyze the results. Keep it simple and specific. List all of the answers, but look for the repetitive complaints that can be addressed. Many will be cited, some emotionally, but only a few will come up time and again. Those are the opportunities to focus on. Customers who themselves are manufacturers will typically be interested in expansion of offerings in assembly, design, manufacturing engineering, tooling, and material management that will reduce production costs. Contractors are normally more responsive to education and supplier assistance. Reducing Customer Costs Manufacturing in mature markets is a margins game. Customers that assemble products from purchased components are constantly looking for ways to cut costs by reducing their labor, parts count, and needed floor space to capitalize on a ready-made opportunity. Carrying a part number can be enormously expensive. The costs associated with documentation, purchasing, receiving, stocking and management on the production line for a single part number is $15,000 a year for some major manufacturers. The reduction of a four-part assembly to a single purchased subassembly can be an annual savings of $45,000. Labor in a union shop, oftentimes running $25/hour, is best reserved for the OEM's specialized final assembly and test operations. Subassemblies can be produced by a distributor under non-union conditions for $10/hour. Reducing the need for production-line labor reduces the need for production-line floor space as well. That is driving a general trend toward outsourcing subassemblies. Production of subassemblies is a value-added business that can be implemented by the component maker, or even the distributor, and benefits both. Finding and securing subassembly business is a task that is best accomplished by the supplier and distributor working together. Subassemblies don't have to be complicated. They can be as simple as a terminal crimped to a short wire cut to length. It only has to be a step in a production-line assembly operation for the user. Regardless of the sophistication of the subassembly, it will take knowledge of parts, tooling and end-user requirements. That opens the door for the supplier and distributor to become strategic partners with their end users. Partnering Just as the purchase of subassemblies can reduce costs for a customer, purchasing from fewer suppliers can make life simpler. The recent trend is for suppliers to provide subassemblies, subassembly design and tooling. This has led to contract partnerships between the customer and a select number of suppliers that take over a large portion of the management of the individual components. In some instances, suppliers have placed offices and even assembly areas inside customer plants to provide ultimate service. Such arrangements let the supplier take part in the client's inventory management and quality control as well as prepare for upcoming products. All of these lead to growth for the supplier while solidifying its position at the customer. Manufacturers have a relatively narrow range of products assembled on a scheduled basis. Contractors, on the other hand, live in a world of lowest bid, quick turnaround, and one-of-a-kind projects often using substitute parts. Anytime you can enable the contractor to increase his billable time or be more competitive in job bids, your product is of more value to him than a competing product and can justify a higher price. Education Most contractors welcome education. Especially important for repair and service is instruction on understanding the part nameplate data, and the use of test equipment for troubleshooting. Half- or one-day seminars directed at the selection and use of a supplier's parts and designed especially for contractors add value to both the distributor and the manufacturer. Aftermarket Parts Replacement Parts cross-referencing is a constant need, particularly in light of the mergers and buyouts of recent years involving component suppliers. Knowing how to choose a motor or compressor that will work in place of one no longer manufactured is a real problem for contractors. Parts cross-references supplied as a catalog or on disc, and a kit that contains needed brackets and accessories will put the manufacturer and distributor squarely on the side of the contractor. Design Services Providing backup to contractors so they can offer design capability is another way that manufacturers and distributors can add value. This is becoming increasingly important in Europe and helps solidify the relationships all through the channel from component supplier to end-user. Additionally, it keeps the manufacturer and distributor aware of emerging needs and trends. Quick Response Ask a contractor what they like about their favorite distributor and their answer likely will be, "When I call the 800 number a live person answers." Contractors tend to work 24/7. Especially those that have service as a major part of their business. Suppliers that accommodate that need are highly valued by contractors. A manned help line that gives quick assistance on delivery, pricing or technical matters is a value-added product that can't be beaten. The stagnant economy and flat market place are realities today. But they do not have to result in slow growth for suppliers. For those organizations willing to move beyond the tradition of selling to the channel this is an opportune time to surge ahead by opening communication among all the participants and developing the opportunities their needs reveal. Lionel Joyce is president of Market Strategies Inc., a Seattle-based business consulting firm that specializes in market research and business plans for manufacturers of industrial products. Rod Carlisle is the firm's senior program manager.

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