e-Business and the Distributor: A Powerhouse Pairing

If a time machine could retrieve some of the people who laid the groundwork for the Industrial Revolution and bring them to 2002, MRO is probably the only part of today's modern commerce they'd recognize. Bearings, power transmission parts and hoses have had the same basic shape for decades, but the way those parts are organized, ordered and distributed is entirely new. And that's where the Industrial Revolution meets the e-Revolution.

[From iSource Business, January 2002] Our world might seem complicated, but underlying it all are some pretty simple principles, particularly when you are talking about machinery. No matter how sophisticated a piece of machinery seems to be, it is basically just a variation of the lever, the pulley and the inclined plane - all of which are no more complicated than what the ancients invented and understood. Even the routers and switches that power the glamorous Internet have their roots in a factory somewhere, and that factory is pretty much a conglomeration of these tools, which should give you an idea of their inherent utility.

But that utility also has its drawbacks. If a part is a workhorse, then the loss of that workhorse is all the more costly. Spring a leak in your ink pen and you throw it away and reach for another. Break a race in a bearing that supports a crucial part of a company's manufacturing system and everything comes to a screeching, costly halt. That bearing (or power transmission part or hose) has to be replaced - and not with just any bearing. It has to have the same inside and outside diameter, be constructed of the same quality steel, and be able to withstand the same pressures the old bearing withstood.

Now multiply those requirements countless times over the face of North America, and you begin to realize why Motion Industries, a distribution company providing products for the maintenance, repair and operation (MRO) market, offers more than two million parts through over 500 facilities. Not only that, but it hosts all its own Web site and catalog content and allows its salespeople to directly access Motion Industries' own suppliers' enterprise resource planning (ERP) systems when the need arises.

As big as Motion Industries is, the MRO market is much larger. The size of the U.S. MRO industrial products market was $352 billion in 1999, according to estimates by Industrial Market Information (IMI), an industrial market data firm in Minneapolis.

The size of the U.S. original equipment manufacturer (OEM) market for industrial products was $243 billion in 1999, according to IMI.

iSource Business has decided to take a look inside the MRO distribution industry by studying how Motion Industries, headquartered in Birmingham, Ala., operates. The underlying theme? As distributors transform their operations from low-tech to high-tech, their service offerings to customers increase, while inefficiencies decrease.

Keeping Pace with the Internet Revolution

All those parts and their requirements is reason enough to take the high-tech road to what might seem like a low-tech market segment. Ellen Holladay, chief information officer at Motion Industries, explains that the company actually began an electronic initiative in 1986, with electronic data interchange (EDI). She explains, We were one of the first in our industry to implement a comprehensive EDI program where we could handle the whole business process, starting from requests for quotation [RFQ] all the way through billing for the product.

EDI does have its limitations, however, and with the advent of the Internet, the company began to put a major focus on full-blown e-commerce, starting at the senior management level. Behind the leadership of CEO Bill Stevens, the company formed the Electronic Commerce and Planning Group (ECPG) in October of 1999. The ECPG is comprised of vice presidents in the major functional areas at Motion Industries that e-business affects.

Although the ECPG's goals are what Stevens terms a moving target, there are five basic points to its strategy: the company's e-commerce site, motionmro.com; EDI; support of the customer base and e-procurement initiatives, particularly in supporting customer-hosted catalogs; participation in industry marketplaces; and the ability to tap into suppliers' ERP systems, which Motion Industries calls MiSupplierConnect.

e-Commerce holds tremendous potential for MRO. According to MRO.com's statistics, the average order value for MRO goods is in the range of $250, with an average of 2.5 lines per order. The administrative cost of processing the order ranges between $90 to $110, or around 40 percent of the value of the goods. When the costs wrapped up in logistics and the handling of a part by the distributor and manufacturer are added to that subtotal, it is obvious that the cost of administration is way more than the value of the goods in question. MRO.com's statistics show that by applying an e-procurement system, the level of savings on the part of the buying customer alone is realistically around 40 percent or more. While this level of savings requires a reorientation of resources, up-front savings of at least 20 percent are easily achievable.

The distribution industry, handling the countless number of $250 (or less) parts, discovered the value, early on, of enabling its world. However, the biggest challenge comes in the form of content management. How do you manage all those MRO parts on real-time catalogs?

Customizing Catalogs and e-Commerce Sites

Motion Industries' Holladay says that, for the majority of the company's two million-plus parts, item content includes manufacturer pricing, part descriptions, aliases and keywords. The parts are also cross-referenced to all the major classification schemes, like UN/SPSC. In addition, Motion Industries has its own parametric classification scheme that allows customers to data mine to such details as inside diameter, outside diameter, width, material or application. To repeat a familiar phrase, a user can't buy it if he can't find it. Motion Industries helps to ensure that he does find it.

Motion Industries not only developed its own catalog content, but it also hosts all of its own data in a single-image DB2 database. That approach is contrary to the hosted model some companies have embraced, but Holladay explains that there were good reasons for their decision not to outsource. Everything that we looked at on the market said, We're going to take your printed catalog and convert it to a digital format.' And that's not the world we live in. We needed a lot of flexibility, and we needed to be able to be in control of the tools. But a lot of those automated tools control you.

The need for strict control over data, and the ability to access that data in many ways, was also the rationale behind the company developing its own e-commerce site. Holladay explains that Motion Industries has a centralized architecture for its order fulfillment in which any branch in North America can see availability for any other branch. The ECPG at Motion Industries felt that if the company took that architecture to a hosted environment, where, for instance, somebody placed an order on a hosted site, the necessity of a routing and interface mechanism would add a layer of complexity. And complexity is what e-commerce is supposed to be driving out. Holladay says, We thought it would be better for a customer to be able to click on Order Submission' and have that order go directly to his local branch as part of our normal order fulfillment.

There were other more service-oriented reasons for this in-house approach. Pricing routines are the same, so there is no worry about keeping that current. Holladay says, We don't want somebody to be treated differently or have things not really operate the same on our e-commerce sites than if they call the branch. So, if we're using the exact same programs and the exact same codes, the product look-up work is exactly the same, pricing work is exactly the same and we can economically provide much more information to our customers.

Visibility in the supply chain was yet another factor. By using Motion Industries' system, customers are able to look at all their outstanding invoices, in real-time, to determine the exact parts that were ordered, how many were ordered, how they were shipped, when they were shipped, and what tracking numbers need to be used to see where they are currently located. Such a user-friendly system is much easier to provide if there is just one instance of data. Holladay says, You can't do that if you have a stand-alone, hosted environment, because just refreshing that information costs a lot of money, and it's hard to keep it accurate.

In the Role of Purchaser

Besides their involvement in e-commerce as a supplier, Motion Industries is also heavily involved as a purchaser, although it still uses the reliable and established EDI, particularly with the company's major suppliers. Holladay says, We use EDI to generate orders for the normal replenishment for our distribution centers. We order from these suppliers every week  we run through our forecast, we know what we want and then we send them an order for restocking our distribution centers. This tactic is straightforward enough, but customers will eventually want something that is not bought in sufficient enough quantities to merit keeping it in stock.

This is not a problem for Motion Industries' system, however. When a request for such a part is received, the MiSupplierConnect system allows Motion Industries' inside salespeople to tap their suppliers' ERP systems to determine if a particular supplier has that must have part in stock. As Holladay puts it, those situations are usually ones in which the customer's on the phone, he has a breakdown, or it was not a planned maintenance. Again, there is no Web browser to add another level of complexity. The sales force does not have to learn the intricacies of each supplier's Web site, which makes it able to answer a customer's question quickly in order to get the part to the factory that much faster. Such a level of integration is obviously not worth pursuing with every supplier however, says Holladay, MiSupplierConnect is keyed toward integration with Motion Industries' key suppliers.

Standing Firm

Participating in the high-tech arena is good, but what about Motion Industries' role as a distributor? Wasn't disintermediation, the weeding out of the middleman, supposed to be one of the benefits of the Internet? In a word, no. Yes, there are some ways in which the middleman has been taken out of the economic picture, but there are still places for him in the economy, and there will continue to be places for him. Just as Amazon.com changed the way we buy books but did not do away with all physical bookstores, the Internet can serve as a tremendous tool without doing away with the middleman.

Bob Summerlin, Motion Industries' group vice president, explains, Distribution as an industry, particularly industrial distribution, has a natural role of being the aggregator in this process of both products and information for the customer. Because Motion Industries is able to spread its costs across those multiple product lines and channels, it has become what Summerlin calls a touchpoint for customers to come for information and products, such as product availability and transaction management.

Like a dictionary or comprehensive Web site you might go to for information, rather than chasing down all the informational threads yourself, Motion Industries' market position has evolved into that of an information broker. Summerlin explains, The customers come to us and say, What we really need is for someone to become the focal point of these activities.' In a development that should thrill the lazy among us, it is actually more cost-effective for somebody else to do it. Because someone else has done the research, the integration, the application and the general leg work necessary to assemble all these data packets together, any cost-savings in product price a company might realize as they do things themselves are offset by the labor and other costs.

The Last Mile

When asked if Motion Industries felt threatened by the specter of disintermediation, Summerlin's answer was a solid no. He went on to distill Motion Industries' belief in the continued marketplace viability of a distributor into one phrase: the last mile, which consists of getting the right products off the computer screen or the warehouse shelf and into the hands of the end user. As he puts it, The last mile is definitely not going away. Someone has to take this logistical responsibility that says, We're going to position this inventory in the supply chain so that the burden of carrying the inventory cost of the supply chain is not carried by one particular customer or party.' We are expected to provide the product and to facilitate the logical aspect of this business.

According to Summerlin, the last mile is usually not thoroughly addressed, particularly in the case of online marketplaces. Motion Industries does not feel threatened by the concept of disintermediation, because of its accumulated knowledge both in databases and users; and because, in Summerlin's words, the entry costs to the product- and information-side of the business are tremendous. Motion Industries staked its claim in that last mile, and staked it well, relying on its logistical position and product knowledge to hold that claim.

The Essence of an e-Marketplace

Summerlin points out that an electronic marketplace or market site is, at its essence, a facilitator; it is almost conceptual or virtual in its application. As Summerlin puts it, marketplaces have not consistently addressed the issues of having products available, understanding the market dynamics of price, and actually fulfilling that need to the customer's expectations.

Motion Industries breaks down its approach to marketplaces into three categories: brand, content and fulfillment. First, a brand has to be created to garner market share. But the most well-developed brand is worthless if the content is not what the users want. Finally, the most synergistic, blindingly-brilliant combination of brand and content is nothing but so much conceptual airiness if the customers aren't getting their orders into their hands. According to Summerlin, most marketplaces have not necessarily addressed all three of those concerns. They can create a brand in a marketplace, such as many have done. They can actually have a distribution or supplier base and put the content in the catalog. But they still have to deal with integrating the fulfillment issue, for example. Each category has to work in concert for this process to be advantageous to the customer.

Evolving into Efficiency

Summerlin believes marketplaces have a function, but that function does not control the entire supply chain. What we see evolving is this concept of competitive supply chains. A large user, an industrial user, can use the supply chain as a competitive advantage, and the ability to properly leverage that supply chain is one advantage that no customer wants to give up.

Supply chain integration is one area in which Summerlin does see the potential for growth. In his opinion, the typical customer looks at the supply chain in terms of a series of redundant costs and redundant activities. Redundancies are never good, whether it's in a business model or the endless marketplace offerings.

According to Summerlin, these redundancies can be reduced if an open environment is created for information. He explains, The issue is to identify value-added activities - we need to improve the cycle time, we need to reduce the number of gatekeepers that are in the supply chain - those types of things. As information becomes available, some of these activities will disappear, because they are non-valued. I think that whole model will evolve over a period of time, as the supply chain becomes more integrated, and we'll see it become more efficient. MotionMRO.com is our effort to accommodate customer needs in this area.

Summerlin sees informational development as an integral part of industrial distribution. In his opinion, industrial distribution has three functions: to provide technical product support, logistical efficiency, and information. I think if we can take care of supplying accurate information first, the other two functions will have the ability to advance within the process. But without that information being available, both for the distributor and the customer, it's very difficult for the other activities to progress to a higher level of efficiency.

Distribution is Here to Stay

Listening to Holladay and Summerlin, you get the idea that Motion Industries' CEO Bill Stevens is a hands-on type of boss, and in a good way. Stevens, who characterizes his company's business as a very low-key business that has some pretty high-tech features, was responsible for the creation of the company's ECPG, and he remains at the forefront of the company's e-commerce efforts. He has a 30,000-foot view of those countless parts and how they get where they need to be. As a result, he's able to give insight into subjects as varied as catalog content and eXtensible Markup Language (XML) qualifications.

Stevens believes the company's experience was one of the factors that allowed it to move smoothly and efficiently into e-commerce. Our system has been in place for a long time, and we've operated on one platform that said we have one inventory for sale. So if a customer anywhere in our system needs something, we're able to find it. We've taken that philosophy and moved it into our e-business efforts. There was no need to reinvent an already successful wheel.

As with Summerlin, Stevens believes the role of the distributor, at least in some industries, is one with a sound future. Given his company's established presence, it was crucial to assess what the future economic landscape would look like. So, when Motion Industries made the call that the landscape would include distributors, it was vindicated. I think there was a period where there was the concept that companies didn't need physical distribution anymore, because people can just buy direct and buy on this system or that. But then people realized that most of what we sell would be in the category of products that have to have some application advice. Just as Web surfers find that sometimes software isn't quite the plug-and-play jackpot it claims to be, or that Version 3.0 was ordered, when what was really needed was 3.1, the bearings, power transmission parts and hose products that Motion Industries stocks often require technical support in order to be installed or substituted correctly.

While Stevens' company did commit to move to the e-commerce model, with its tempting promises of such things as fewer warehouse locations, they resisted the urge to radically rework their business model. Stevens explains, We are still committed to our locations. At the same time, [we're] embracing the Internet as a tool that will enable us to be more efficient. So, yes, we think there are efficiencies to be gained, and the biggest one, obviously, is trying to grow our business without adding incremental costs.

MRO Around the Clock

According to Stevens, one aspect of Motion Industries' business that was truly enhanced by the switch to e-commerce was the 24-hour ability to replace parts, since big plants run around the clock and the parts that are in them often break at the most inopportune times.

In order to augment the regular activity of Motion Industries' distribution centers, which are open primarily from 8 a.m. to 5 p.m., Motion Industries' call-duty people can have system access from a remote location to do anything they can do from a branch. The single-image database that Holladay mentioned can then show immediate benefits, allowing system users to receive a call at any hour, check the stock level of the necessary part, and then have it delivered, no matter where it might be located. Stevens points out how much of a radical change that is from previous ways of doing business: Under previous systems, that would have taken much longer. Historically, you had to get in a vehicle, drive to the facility, get other people on the phone, etc. That method is not only ineffective, but it is also costly.

As useful as the 24-hour availability is for the existing Motion Industries customers who might have parts that breakdown in the middle of the night, Stevens says his company has also seen sales growth as a result of the availability. We have very good historical usage data, but we've just started to segregate customers we're now doing business with on the Internet that we've never had a relationship with before. It's starting to be significant, and when you look at the products we have and where they're used, it's quite broad.

Stevens believes the potential is there for even more growth, due to Internet initiatives. Remote markets have visibility that was formerly reserved for companies located in the immediate vicinity of a distribution center. Stevens says, We're pretty remote, when you look at some of our branches, because what's usually brought us there was some sort of manufacturing site - a paper mill, or a steel mill - and a lot of those are in very small cities. But, certainly, there are also industrial users and other customers in cities where we could never economically justify a location.

The Advantage of Extensive Content

Stevens' 30,000-foot view also allows him to see the benefits of the extensive catalog content Motion Industries retains. He offers a vivid explanation of why Motion Industries' content needs to be so thorough.

In automobile usage, they have a great database, because every automobile and truck is registered. They know what model is registered in what county. So you can know what to stock if you're in the auto parts business, in a town, to serve that market. For instance, if your county has become Saab central, then the auto parts suppliers will need to have a way to contact the auto parts distributors in Sweden to order parts like reverse shifter rings.

But the same predictive ability does not reside in the heavy-duty industrial world. Some of the machinery for which Motion Industries carries parts is quite old. Not only that, but there's the documentation issue with which to contend. Stevens says, Maintenance people don't always document everything they do. So we do a lot of work and build databases for plants based on what they've used and what they need for certain equipment. But there's always equipment out there that has been modified and doesn't fit the original way, so that has to be dealt with. An example of this would be if a hopper in Holly Springs, Miss. broke down at midnight and the machinist in charge pieced together a replacement that now requires a different-sized part. Motion Industries has the ability to gather that machinist's knowledge of the replacement part, stock it and make life a lot easier for whoever might replace the machinist in the future. What we've found is that to build a catalog, it almost has to be site-specific. And we're able to do that better this way than trying to build a market catalog and then make a customer fit the catalog.

Above and Beyond

While Stevens is like Summerlin and Holladay, who take pride in their in-house e-commerce efforts, he also acknowledges the necessity of Motion Industries participating in marketplaces. Such efforts are too thorough to group them under the heading hedging your bets, but there is a bit of a hedging air to Motion Industries' efforts. The company's customers had invested in marketplace infrastructure, sometimes to very significant levels, and obviously wanted Motion Industries to make their products available through these marketplaces.

Stevens explains, [Motion Industries' customers] bought these products, or they invested in some of them, and they wanted us to work with them, so we said yes. And that's everything from Covisint to some that were launched by industries, and some that were launched by industry segments.

In his company's quest to continue a good working relationship with its customers, Stevens admits that it was necessary to invest a substantial effort to ensure that the data Motion Industries collected was stringently maintained at the same level of accuracy as when it was originally culled from the marketplace. We took the position that we would work with market-places because we wanted to be a valued supplier. We're trying to not create issues about customer relationships. And, for some of them, we have spent more money than I would have liked to get the data in the right format, but it's still a result of responding to the user.

In order to meet those users' needs, Motion Industries has to migrate their requirements for interchange data to market sites. And, while manufacturers may sometimes stop at what Stevens calls dimensional interchange - Pump A is the same size as Pump B - Motion Industries goes beyond that specificity level into functional interchange: Pump B meets the same pressure requirements, is made of the correct quality of metal and has the easily replaceable drive pulley.  You may be able to replace a pump with a part that bolts in place easily enough, but if it does not meet the specific design and requirements that are necessary, it will probably dissolve into scrap metal before the new smell wears off.

Our interchange is both dimensional and functional. If the part is a bearing, it has to be the same load and it has to be the same bearing manufacturer specifications. That [data level] is one of the proprietary aspects of our system we weren't willing to give up.

Strategic Timing

Stevens has seen the rise of the ECPG group, and, in his vision, it will continue to play an important part in the company's business model, even though he originally thought the group would serve its purpose and then be disbanded. When we started e-business, I was like a lot of people in thinking that we'd form this group, decide our direction, empower some people and let them move on. But, as we got into it, I saw that we really needed to keep this group in place.

Motion Industries gives us a detailed view of what's taking place in the distribution industry. Key to its success is top-down support by its CEO and the on-going team effort from the critical e-business players. The Motion Industries story is not unlike other distributors that want to be in the forefront of e-commerce. The question for the leaders in this space was not when to e-enable, but how.