As a result, customers will become more confrontational, rely on increasingly sophisticated sourcing initiatives and use new technologies to counter the field-level sales tactics of distributors. Aggressive tools such as online reverse auctions, in which the lowest product price wins, are here to stay and will continue to grow.
Furthermore, Pembroke Consulting's research indicates that customers will push for better internal contract compliance from end-users within their organization. Expect the elimination of regional pricing for large customers, local price matching by small wholesaler-distributors and new constraints on the ability of local buyers to choose brand and supplier. Wholesaler-distributors larger than $1 billion should expect to get nearly half of their revenues from contracts by 2008.
Trend 3: Fee-Based Services and Pricing
Fee-based services and fee-for-service pricing will grow sharply, but significant barriers will remain. Pembroke Consulting's data show that over 80 percent of wholesaler-distributors plan to charge fees separate from product costs. Customers will accept fees, but slowly. Some will simply change distributors rather than pay for service.
Fee-based services promise improved profitability for those distributors that can deliver innovative services with genuine value to the customer. Customers will consider paying for new services offered by distributors that can lower their costs and drive profits. Pembroke cautions that attempting to charge new fees for currently free services will not work. Fee-based services will also require continuous reinvention over time to remain relevant.
Moving to fee-based services changes the relationship between customer and distributor. Distributors will be forced to deliver specific, measurable results, as well as maintain a high level of excellence in their core activities.
Manufacturers, under product pricing pressure from both imports and domestic competition, have also identified services as a business opportunity. In fact, most manufacturers in Pembroke's study plan to build on their design and research activities and offer fee-based services directly to end users, with or without their distributors.
Trend 4: Logistics and Fulfillment
Third-party logistics (3PL) companies are on a collision course with distributors for control of the supply chain. Going forward, competition for wholesale distribution's core logistics and fulfillment functions will greatly intensify. Eighty percent of the 200 largest logistics companies already offer pick-pack-ship services in direct competition to wholesale distribution. More than half of the Fortune 500 currently outsource supply chain functions to logistics companies.
Suppliers will treat logistics companies as viable alternatives to wholesale distribution. A majority of suppliers to distributors expect logistics companies to be competitive with wholesaler-distributors for customer order processing and fulfillment. However, wholesaler-distributors will retain a distinct advantage in post-sales service and support.
Alternative channels now provide additional options for material purchasing along with service levels that differ from traditional distributors. Customers turn to these channels for different buying situations, chipping away at wholesaler-distributors' longstanding share of channel sales.
The Road to Opportunity
New challenges bring new opportunities for savvy distributors. As products increasingly become commodities, customer service will become the true differentiator. Distributors have an opportunity to become suppliers of customized and differentiated relationships throughout the supply chain instead of merely reliably providing goods.
Wholesale distribution has survived by continuously reinventing itself over and over again. Facing the Forces of Change: The Road to Opportunity highlights many strategies and tactics for wholesale distribution executives:
* Get to know your customers all over again. Through years and years of day-to-day account servicing, distributors have developed an in-depth and unchallenged familiarity with customer needs and expectations. Test the understanding of yourself and your management team with external, objective data from customers. To understand the true service needs of your customers, sit down with both good and bad customers and walk through their buying processes.