As NAPM Index Plunges...

Manufacturers should focus on distributor relations to survive downturn, study says

Philadelphia  November 1, 2001  Even as a key report on manufacturing showed a sharp decline in activity at U.S. factories in October, a group representing the nation's wholesale distributors today issued a study calling on manufacturers to boost their profits by focusing more on their channel relationships in response to moves by customers to rationalize their supply bases and to use the Internet more extensively for product sourcing and purchasing decisions.

Today's report on manufacturing from the National Association of Purchasing Management showed a precipitous drop in the organization's index of factory activity in the wake of the September 11 terrorist attacks. The index fell to 39.8 in October, its lowest level since the 199091 recession, and a sharp decline from September's level of 47.0.

An index level below 50 indicates a contraction in manufacturing activity. October's reading marked the 15th straight month with an index below 50.

Meanwhile, the National Association of Wholesaler Distributors (NAW) said today in its report, entitled "Facing the Forces of Change: Future Scenarios for Wholesale Distribution," that manufacturers can improve profitability by focusing more on their channel relationships.

Based on responses from 1,600 manufacturers, distributors and customers across 50 industries, the study forecasts shifts in customer supply chain strategies that affect manufacturers and distributors, including increased supplier rationalization programs and expanding Internet use for product sourcing and purchasing decisions.

In the study, 83 percent of manufacturers and 86 percent of distributors surveyed expect customers to concentrate purchases with fewer suppliers by 2006. More than two-thirds of manufacturers and distributors also see customers aggressively enforcing national supply agreements over the next five years.

While Internet use will not be universally adopted throughout the economy, certain customers, such as institutional buyers, will increasingly use it to automate bidding while retail operations and contractors will use it less frequently, the distributors' report asserts.

"The current slowdown pushes customers to seek higher efficiencies in their supply relationships and buying processes," said the study's author, Adam Fein, Ph.D., president of Pembroke Consulting. "Manufacturers can gain long-term, strategic advantages by partnering with the distribution channel winners that will survive vendor rationalization programs."

The study found that 72 percent of B2B customers will value getting product information online and 76 percent of customers will use the web to identify new suppliers by 2006. As a result, Fein argues that manufacturers must be prepared with electronic content for either their own Web site or their distributors' sites.

"Manufacturers can use technology as a tool to become more effective channel partners by bringing lower prices and improved service to customers," concluded Fein.

Based on the research, the study urges manufacturers to carefully evaluate the business needs of their distribution partners before implementing any new technologies or programs, to respond proactively to growing technological capabilities of distributors, and to provide product and marketing information in electronic format for customers.

Manufacturers should also identify the likely winning distributors in a channel and create partnerships to retain customer access when customers are rationalizing suppliers, the report states.