Below is an excerpt from “Facing the Forces of Change: The Road to Opportunity” by Adam J. Fein, Ph.D., president of Pembroke Consulting. The book is available from the National Association of Wholesaler-Distributors (NAW). Order online at www.nawpubs.org or call Vicky Walsh at NAW: 202-872-0885.

KEY MESSAGES

  • Logistics companies are on a collision course with large distributors for control of the supply chain. Third-party logistics providers already perform traditional wholesale distribution functions such as warehouse management, order processing and parts delivery.

  • Suppliers will treat logistics companies as viable alternatives to wholesale distribution.

  • Wholesaler-distributors will retain an advantage in post-sales service and support

    DATA POINTS

  • More than half of the Fortune 500 companies currently outsource supply chain functions to logistics companies.

  • About 160 of the largest 200 logistics companies already offer pick-pack-ship warehousing services.

  • More than half of suppliers to distributors expect logistics companies to be competitive with wholesaler-distributors for customer order processing.

    Logistics companies will continue competing directly with wholesaler-distributors

    Wholesaler-distributors will increasingly compete with logistics companies in performing specific, defined activities in the supply chain for manufacturers or customers.

    For many distributors, the presence of logistics companies in the supply chain is not new. Logistics companies have for some time been providers of basic transportation and warehousing - “trucks and sheds” - to both wholesaler-distributors and their suppliers. “Facing the Forces of Change: Future Scenarios for Wholesale Distribution” highlighted the push by logistics companies into fulfillment and warehousing activities as a strategic uncertainty for wholesale distribution.

    Today, revenues of logistics companies have reached $65 billion, representing an average annual growth rate of over 20% during the past 10 years. 8% of the Fortune 500 currently outsource supply chain functions to logistics companies - twice the percentage of 10 years ago.

    Approximately $17 billion, or 24%, of logistics company revenues come from value-added warehousing and distribution services. Third-party logistics providers already perform product-handling activities such as warehouse management, order processing and parts delivery. (See Exhibit 4-1.) For example, 80% of the 200 largest logistics companies already offer pick-pack-ship warehousing services - an activity usually associated with distributors.

    Despite these growth trends, most wholesale distribution executives remain skeptical about the direct competitive threat posed by logistics companies. (See Exhibit 4-2.) One-third of all distribution executives see direct competition as unlikely, while an equal number are still not sure about the potential competitive threat.

    However, there are important differences in the perceptions of wholesale distribution executives based on company size and type of customer served.

  • More than 40% of industrial distribution executives expect competition from logistics companies compared to only 22% of wholesaler-distributors serving retail markets.

  • The perceived threat varies by wholesaler-distributor company size. Larger distributors expect to face significant competitive threats from logistics companies for warehousing services and order fulfillment to customers.

  • Smaller wholesaler-distributors will face less of a threat because they rely more on personal relationships and sales skills for success. In contrast, larger distributors in the food, health care and technology industries perceive a more immediate threat due to their emphasis on logistical efficiencies.

    Wholesaler-distributors serving contractors, retail stores and industrial buyers all expect to be challenged by logistics companies in activities such as warehousing, order management and order fulfillment. On the other hand, distributors do not expect their post-sales service and support role to be replaced by logistics companies.

    Outsourced logistics will have the greatest impact on industrial distributors. In the industrial market, integrated supply agreements have opened the door for logistics companies. Integrated supply has taught customers that they can get much lower prices without having to worry about value add. Industrial buyers will increasingly be tempted to negotiate directly with manufacturers, keep the price savings and hand off fulfillment to a logistics company.

    Suppliers will treat logistics companies as viable alternatives

    Logistics companies are being used most frequently by suppliers when the distribution channel has few opportunities to add value in sales and marketing. The use of logistics companies instead of wholesale distribution has been greatest for retail industries, such as computers and consumer goods. These channels are controlled by large power-retail customers who have taken over wholesale distribution activities.

    Suppliers increasingly see logistics companies as being viable alternatives to wholesaler-distributors for many core fulfillment functions. (See Exhibit 4-3.) The only exception is the relatively low figure for post-sales service.

    Wholesaler-distributors find themselves on a collision course with logistics companies for control in the supply chain. Consider UPS, one of the world's largest package delivery companies. Through its Supply Chain Solutions business unit, UPS now serves as Fujitsu Technology's one source provider of post-sales services in North America, supplanting multiple vendors. UPS handles central parts distribution, returns management and parts planning services for a wide range of Fujitsu products. UPS call centers receive emergency orders directly from Fujitsu field technicians. UPS Supply Chain Solutions consultants use proprietary planning software to optimize inventory levels and increase order fill rates.

    Other logistics companies offer similar services that were once the sole purview of distributors. Ryder Systems was a conventional truck rental and leasing company until 10 years ago. Now the company bills itself as a “supply chain and transportation management company,” reflecting its current focus on performing a wide range of supply chain activities for its customers. Sales growth at Ryder's Supply Chain Solutions division exceeds growth in its traditional business.

    Wholesale distribution executives should carefully consider these data. Exhibit 4-3 indicates the progress that logistics companies have made in repositioning themselves. Manufacturers have an ever-expanding set of alternative intermediaries who can perform equivalent tasks in moving products and information to customers. The customer self-service trend provides manufacturer-suppliers with affordable ways to take greater control over the information flow to the customer, magnifying the threat for wholesaler-distributors.

    Outsourced logistics Can support wholesale distribution

    Manufacturers will increasingly turn to logistics companies to provide master wholesaling services. These provide value in channels comprising many small distributors and a large installed base of equipment and facilities requiring maintenance or regular deliveries.

    Manufacturers are increasingly turning to logistics companies to service their distribution channel. U.S. Census data document a 30% decline in the number of manufacturer-owned sales offices and distribution centers over the past 15 years, even as total shipments grew by almost 50% during the same period.

  • Most manufacturer-suppliers find it expensive to deal with large numbers of smaller distributors. Most manufacturers establish policies to discourage small orders, such as minimum order quantities or minimum quantities to waive freight charges. These policies can make it costly for small distributors to purchase in small quantities. However, local distributors still represent the best way to reach smaller customers in most geographic markets.

  • Outsourced logistics providers often have higher service levels to the channel than a self-distributing manufacturer. A major industry study found that suppliers using a third-party logistics company reduced logistics costs by 7%, lowered overall finished-goods inventories by 9% and shortened its cash-to-cash cycle by four days.* In some cases, manufacturers can reduce or eliminate stocking requirements for their authorized channel partners.

    Master wholesalers already exist in some lines of trade. Most are relatively small private companies. Exceptions include a few large public companies operating master wholesaling divisions. Examples include the Lagasse division of United Stationers, The Home Depot's Your Other Warehouse and Bunzl's disposable paper and sanitary maintenance products master wholesale operations. Production Tool Supply, a master wholesaler of industrial MRO products with over $200 million in annual revenues, is one of the largest private companies.

    While logistics companies see the manufacturer as the customer, master wholesalers typically view smaller wholesaler-distributors as their target customers and offer a broad range of support services such as private-imprint catalogs, Web sites with online ordering and customized promotional flyers. Most will drop-ship directly to the customer, eliminating double handling of a distributor's non-stock items. Successful master wholesalers use the distributor's purchase order, packaging, shipping label and billing to avoid disrupting the local distributor-customer relationship.

    Logistics companies play a different role than traditional master wholesalers. A supplier could use a logistics company for fulfillment and hand-off the customer-facing work to the traditional wholesale distribution channel. Wholesaler-distributors will also lose the ability to subsidize a weaker component of their business with a stronger one, such as an inefficient warehouse matched with above-average post-sales service.