Online portals make their bid to change the distribution industry.
Armed with pockets full of cash, upstart Web portals offering buyers a one-stop shop are frantically making their bids for a piece of the $187 billion industrial supplies market.
Certainly, the supply chain that runs from a manufacturer, through a distributor and ultimately to a customer is a highly fragmented and inefficient one. "You have tens of thousands of manufacturers interacting with about 150,000 distributors who are then trying to serve eight to 10 million customers," says Elizabeth Olig, president of TotalMRO.com, the latest W.W. Grainger, Lincolnshire, Ill., e-business venture. "As a result, there are all sorts of inefficiencies because of the one-to-one relationships and the varied processes and ways of interacting and communicating. E-commerce allows us to bring everyone together in a one-stop solution that allows for a much more streamlined and efficient process," she says.
Until the upstarts, a purchasing manager at a mid- to small-sized business charged with replenishing the company's supply of electrical tape, light bulbs and circuit breakers had to either dig through scores of catalogs or blindly trust his favorite supplier to give him a fair price. The dawn of the Internet and the recent rise of business-to-business (B2B) e-commerce promise to streamline the process and make the buyer a more- informed consumer.
With a few points and clicks of a mouse at catalog/auction sites like PurchasingCenter.com, Burlington, Ma.; EqualFooting.com, Sterling, Va.; or TotalMRO.com, buyers can quickly compare prices between distributors, place an order and pick up some useful industry info. The sites started opening their virtual doors last fall with the launch of Purchasing-Center.com in October, followed by EqualFooting.com in March and TotalMRO.com in April. Each site synthesized already successful Web business models, which include four basic genres: direct from the distributor, auctions, integrated supply and MRO.
Several larger distributors like WESCO (Wescodist.com), Fastenal (Fastenal.com) and W.W. Grainger (Grainger.com) have Web sites from which buyers may buy direct. Other portals, such as TradeOut.com, Ardsley, N.Y.; SurplusChannel.com, Chicago, Ill.; and ElectriciansWeb.com, Hartford, Conn., take advantage of distributor and manufacturers' excess inventory with sites that auction surplus goods in an effort to unload inventory at a reasonable price. A third genre is based on the integrated supply concept; companies like Supply-Force.com and SourceAlliance.com have collected distributors and buyers in a cohesive supply chain on their sites. Sites like BestRoute.com and FindMRO.com have also carved a niche in the market by helping buyers track down hard-to-find and slow-moving maintenance, repair and operations (MRO) items.
Like the auction sites used to sell excess inventory, the new portals also boast extensive catalogs of MRO supplies that resemble Grainger.com, Wescodist.com and Fastenal.com's distributor-based sites. The major difference is buyers can comparison shop without leaving the site because several distributors' products are displayed - many times, side-by-side. In addition to the cash savings from comparing prices, the portals say there are significant savings in time and the effort it takes to audit the paper trail of ordering from different suppliers.
Using the Internet to streamline procurement of industrial supplies and cut costs has been a viable solution for large companies for some time. Recently, Ford, General Motors and DaimlerChrysler announced a partnership using the Commerce One, Pleasanton, Calif., software platform. Commerce One has also developed the Global Trading Web (marketsite.net) to cater to many different industries. Another software giant, Ariba, Mountain View, Calif., (ariba.com), also made its mark in the B2B arena by developing software that creates a platform linking suppliers and buyers to one another.
The potential for the procurement market to move online has caught the attention of investors who have made the software companies Wall-Street darlings. But, because these solutions have been costly and impractical for small- and mid-range buyers and suppliers, they have not been adopted widely. Several recently launched online portals including Equal-Footing.com, PurchasingCenter.com and soon, Total MRO.com, attempt to offer smaller businesses the advantages of a procurement platform without the added cost.
By simply logging on to a Web site, buyers are instantly linked with several distributors and have access to thousands of products. "I think what we are going to be able to give the smaller customers - not just in price and other things - is a better package that larger companies have had available to them for quite sometime," says Bill Sullivan, vice president of industry marketing for Purchasing-Center.com, which targets mid-sized companies. "It's just not been available to these guys. Better delivery, better service, better information, more consistency in the supply chain. Those are things that the larger guys have benefited from that (mid-sized companies) now will be able to do through us."
CHANGING TIMES The rapid proliferation of online MRO purchasing and auction sites could drastically alter the day-to-day operations of the distributor. "I think it's definitely the wave of the future," says Marci Baer, vice president of marketing and strategic planning for The Unilink Group, Atlanta, which will launch ElectricalOnline.com late this summer. "I think that for contractors and distributors to survive, they have to embrace the Internet as their platform for technology," she says. In the next five years, according to Baer, almost 80% of the electrical distribution market will move online. "The technology is here. It's just getting it out there," she says. "I think it will dramatically change the distribution business in how we do things," agrees Wil Oberton, chief operating officer and vice president of Fastenal Co., Winoa, Minn., one of the large distributors to sign on with EqualFooting.com.
However, the ways business will change and the extent of the changes are still open for debate. Early guesses range from a near total dependence on Web sites for the purchase of supplies to the Internet becoming simply a replacement for the fax machine and telephone as a medium for placing orders.
One immediate change, say the upstart Web portals, is that the reach of the distributor will go far beyond regular customers. In the online auction business model, a specifically targeted group of buyers has become the commodity.
"I think that WESCO and Ferguson (the first two PurchasingCenter.com distributor partners) are the types that are going to be very happy because we are actually helping them penetrate a market that they don't really even look into," says Sullivan. "This is all incremental business to them. It's not substituting from the phone to the computer," he says. "By targeting this market, we are actually bringing incremental revenue to their company that they normally wouldn't have. That's very satisfying to them."
Although PurchasingCenter.com targets mid-range buyers, Equal-Footing.com is pinpointing the small-business market. "The problem that we are trying to solve is that it's incredibly costly to sell to a lot of these small-business owners," says Aaron Martin, chief financial and business development officer of EqualFoot-ing.com. "So what we're trying to do is create a more efficient channel for the suppliers. The corresponding trade-off for the buyers in terms of their value proposition is we are giving them a one-stop shop to buy construction and industrial supplies, equipment, as well as shipping all in one place," he says.
In order to tap into new customer markets and maintain their presence in traditional ones, e-business-savvy distributors develop their e-business strategy on several different levels. WESCO Distribution Inc., Pittsburgh, thrust its name into the online marketplace in an attempt to align itself with the winners in several different markets. The distribution giant inked deals with EqualFooting.com, Purchasing-Center.com and other sites to complement its own online catalog. "We think it's a great opportunity to grow our customer base," says Russ Lambert, director of e-commerce for WESCO. "In most cases our brand is visible, so it allows us broader access. We've invested in the internal technology to be able to accept the orders over the Internet, so why not take more orders?" he says.
In addition to developing its own online catalog to be launched in June, Cameron & Barkley Co., Charleston, S.C., signed on as a distributor on Total MRO.com and plans to align with other sites in the near future. "Like almost everyone else in this business right now, we are evaluating a number of different options," says Joel Bateman, chief operating officer of Cameron & Barkley. "TotalMRO.com is an area that we are looking at, and we'll see how many of our customers want to deal through that. There are other places our customers will want to deal through, too," he says. "At this point, we don't see customers all being tied down to one specific thing. There's too many different ways they can do business."
ONLINE IMPACT The uncertainty of the impact of the online portals on the distribution business has companies scrambling to develop an e-commerce strategy that will leave them standing when the weak begin to fade. "If we don't go on an EqualFooting.com someone else will," says Fastenal's Oberton. He believes the online portals will pick up business, but he also believes that not all of them will survive. "Like in any new business venture, you have your winners and your losers. We believe that some are going to fall apart. If we can be with the winners when that happens, then we'll continue to drive business."
Oberton sums up the most valuable aspect of the online portal for the distributor in one word: "exposure." According to him, Fastenal's main objective in e-commerce is to drive business to its own site, Fastenal.com. Any business it can glean from the online portals is a bonus. He believes that while online portals will initially draw a lot of business, most buyers will shift back directly to buying from their favorite five to 10 sites. "All of us still like dealing directly with the person we're buying from," says Oberton. "That's human nature."
The online portals are not worried about losing business to distributor-based sites. "It's probably pretty rare that that will happen," says Equal-Footing.com's Martin. He believes the wide variety of goods and services EqualFooting provides will keep buyers coming back rather than going directly to a distributor's site. To shift back to buying directly from the distributor sites, it would likely become necessary to search in several different places to find supplies at the lowest cost, so the time savings would be lost. "It's easier than searching through five different Web sites," says Martin. "(Being on EqualFooting.com) benefits Fastenal because, if it's the business model that small businesses really like, then they are there collecting the business."
Fastenal also recognizes the valuable exposure of placing items on EqualFooting.com. "Our name is on all of the boxes," Oberton says. "So if the (online portal) does go out of business - I'm not saying EqualFooting, we think they are pretty solid - but if we are dealing with one that disappears tomorrow, the customer can look at the box and say, 'Oh, it came from these guys.' So we're out to 10,000 or 50,000 more customers," he says.
By doing business with a "clicks-and-mortar" business rather than a traditional "bricks-and-mortar" business, supplies will speed through the chain at much higher rates, leaving social interaction between buyer and seller at a minimum. "What happens when the customer places the order electronically is our front-office work almost disappears," Oberton says. "When they call up with an order, we pick up the phone, talk about the game or whatever happened last night, we write it down on a piece of paper and say, 'I'll call you back.' When they do it over the Internet, it comes right in, the computer checks stock, it goes to the back room of our branch and an order ticket prints out. It's a much more streamlined process, so we can afford to invest a tremendous amount of our resources in making this thing work really well," he says.
The increase in faceless transactions will increase the pressure on distributors to perform, according to PurchasingCenter.com's Sullivan. "I think it will make the distributors focus on the value-added that they provide," he says. "If you are not in that (e-commerce) chain or it's not very good, you'd have to be concerned about that. It's just a different way to compete."
He does not dismiss the importance of the supplier-buyer relationship, however. "I want that relationship," he says. "But I want to be able to look at a relationship and figure out what is of value in a relationship and what is not. Value is not bringing doughnuts by on Fridays," he says. "What it really gets down to is measuring your distributors and figuring out who's doing the right thing."
WAVE OF THE FUTURE For all of the bravado coming out of the B2B online realm and all of the venture capital flowing in, it has yet to take hold with the average MRO buyer. A recent AMR Research Inc., Boston, Ma., survey showed that less than 5% of all distribution industry business transactions are carried out on the Web. "It's insignificant," says Fastenal's Oberton before quickly adding, "It's growing like crazy." According to him, Fastenal will have online sales in the neighborhood of $1 million, which is less than 1% of its $180 million to $190 million in total sales. Because of the ease of the transactions, he believes e-business will grow rapidly as more buyers hone their computer skills. "I think as a way of transmitting order information, someday it will exceed 25% because it works really well. For a customer to click on his screen and send you a request without picking up a phone ... I think it's going to catch on just like e-mail has," he says.
Making use of the Internet in some form will soon be a necessity, according to ElectricalOnline.com's Baer. "In order for a company to remain effective, regardless of industry, they are going to have to figure out how their supply chain works and how to make it streamlined," she says. "Because the end result is cost and getting the product to market in the most efficient and least expensive way possible. And the Internet can provide that."
However, Oberton stops short of saying online purchasing will take over the market completely. "It's different from what everyone's saying," he says. "What we're hearing is that our average invoice is $150 with about five lines on it. And so when you have an average per item of less than $40, you can't shop too hard for that. Saving 10% and spending 10 minutes is a losing deal."
It will take time for the winners and losers to shake themselves loose from the pack that has clustered on the entry level of the online procurement marketplace. But there will definitely be winners. "I think (e-business) will take a huge segment of the industrial market before it's all over with," says Cameron & Barkley's Bateman.
Online orders have yet to take over a significant part of WESCO's business, according to Lambert. "(The sites) start slow, but then they really start building quickly," he says. "We're not ready to report that revenue yet, but it's growing."
Fastenal's Oberton believes the current strength of a company is the key indicator of how it will do in the virtual world. Adjusting to the change will make the strong even stronger, while life will only get tougher for those who are lagging behind.
"No one knows who the winners and the losers are going to be," says Russ Lambert, director of e-commerce for WESCO Distribution Inc., Pittsburgh, "They predict there is a 35:1 failure ratio of the different sites." With odds like that, picking a portal - or group of portals - to get involved with takes a great deal of study and prognostication on the part of a distributor.
In order to make well-informed decisions, the early e-commerce players looked at three main areas before signing on to online portals.
* What market does the site focus on? "It needs to be somebody that at least is likely to be able to get to our type of customer," says Joel Bateman, chief operating officer of Cameron & Barkley Co., Charleston, S.C. With the number of portals rising every day, it is becoming easier for a distributor to sign on with a site that is either tightly focused on a niche or covers an expansive market.
"What will probably happen is there are going to be auctions based on industries," says Wil Oberton, chief operating officer and president of Fastenal Co., Winona, Minn. "And then there are going to be distributors that are good in those industries that clamp onto those auctions. It's just like we all have our own niches today, the electrical guys will all follow the electrical business and the fastener guys will follow the fastener business."
* Can the portal deliver on its promises? "Most of them over-promise what they can deliver and when," says WESCO's Lambert. "The main product they have to sell is 'promise-ware,' and the main component of promise-ware is PowerPoint," he jokes. "From the date you sign a deal with somebody and do all the preparatory work and they finally get launched and start taking orders there's a gap and a time that most people don't appreciate," he says.
Before Fastenal signs on with a site, it runs several tests to see if the technology works correctly, according to Oberton. "We want to make sure that if we're putting our name on something, we're putting it on a system that works," he says.
* What sort of financial backing and marketing strategy does the site have? "We don't believe they are going to drive product through the site unless they do marketing," says Oberton. "So, unless we believe there is enough resources behind it to drive sales, we shy away from it."
Financial backing and marketing experience were major factors in the decision of Cameron & Barkley to sign on with TotalMRO.com, the latest online venture from W.W. Grainger Inc., Lincolnshire, Ill. "We believe the publicity and the Grainger background, the type of customers they aim toward, is a pretty good indication that they will at least be working in the areas that we want to work in," says Bateman.
PurchasingCenter.com Started by former executives from W.W. Grainger and Open Markets Inc., PurchasingCenter.com went live in October with a catalog of 12,000 MRO items, which has since increased to more than 100,000 stock-keeping units (SKUs). The portal serves mid-sized businesses that employ 100 to 1,000 people or a company that spends $3 million to $4 million on MRO supplies annually. A recent agreement with CareerPath.com allows users to search current job listings.
EqualFooting.com Created by former McKinsey & Co. e-commerce engagement managers Jim Fox, Angie Kim and Aaron Martin, Equal Footing.com sprang to life March 14. The portal is targeted at small construction and manufacturing businesses that employ less than 100 people or have less than $50 million in revenue. The portal currently offers a catalog, auctions, has plans to launch a financing segment in May and wants to further expand the site later this summer.
Bestroute.com For customers looking for hard-to-find MRO items, bestroute.com was developed with financial backing from Hughes Supply Inc., Orlando, Fla. The portal unveiled its industry news component March 29 and plans to have the commerce component running soon. Led by industry veteran Mike Gambino, formerly of Pass & Seymour, Syracuse, N.Y.; and Thomas & Betts, Memphis, Tenn., the portal will maintain its own inventory in order to speed the delivery process.
TotalMRO.com TotalMRO.com launched April 10 to serve large MRO customers. Backed by W.W. Grainger Inc., the site is its fourth venture into the online marketplace. Although Grainger created TotalMRO.com, several other distributors will also have items available on the site. Currently, only companies using the Ariba e-procurement software can use the site, but TotalMRO.com plans to open the site to any Internet user later this year.
SourceAlliance.com SourceAlliance.com is an online integrated supply portal created by Rockwell Automation to serve large customers with nationwide operations. The company, which has since spun off from Rockwell, serves its customers through Allen-Bradley distributors. An agreement with e-procurement service provider MRO.com promises to extend SourceAlliance.com's reach even further. The Web site will offer more than just Rockwell Automation products.
SupplyFORCE.com Affiliated Distributors, King of Prussia, Pa., unveiled SupplyFORCE.com, its online integrated supply portal November 1999. It is headed by Bill Weisberg, A-D chairman and chief executive officer. In addition to offering a catalog of commercial, industrial and construction supplies, the site also acts as an e-business center for regional and local distributors servicing national accounts and participating in Web commerce at the individual market account level.