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The Future of Equipment Distribution

Respond to Industry Change with PFW's Solutions

PFW Password - Fall 2004 First identifying and then promptly responding to trends is something that is critical to any successful business entity. In the equipment distribution industry, growth-a positive change-is indeed happening, as illustrated by these 2004 industry headlines:

• "Caterpillar Announces Record Profitability"
• "Ingersoll-Rand Earnings Up 72%"
• "Terex Second-Quarter Net Sales Up 27%"
• "CNH Doubles Net Income in Second Quarter"
• "Cummins Announces 485% Increase in Revenues"
• "Gehl Reports 75% Increase in Earnings in Second Quarter"
• "Toromont Reports Record Results"

Source: www.aednet.org

These developments back up the annual Association of Equipment Manufacturers "outlook" survey-which includes machinery manufacturers-which forecasted that the construction equipment business in the United States will grow by 5.5% in 2004, while in Canada construction equipment shipments are predicted to increase by 3.7%.

Trends
Industry analysts note that today, technology, consolidation, diversification, and changes in distribution methods all alter the relationship between the manufacturer, the distributor, and the customer. Customers, more and more, use technology to locate, order, and arrange the delivery of products, and also look for more than just the product. They seek a convenient, "one-stop shopping" experience, where an uncomplicated solution is offered that includes effective aftermarket service and support. In addition, experts forecast that dealerships could become less involved in the supply chain if manufacturers turn to logistics companies for the delivery process. According to research conducted by Pembroke Consulting, ("Lead from the Middle" - Adam J. Fein, www.progessivedistributor.com), 67 percent of polled manufacturers "believe that distributors will stock less inventory and rely on other supply chain companies to drop-ship to customers on their behalf by 2006." These trends counter the traditional model of supply and demand, where dealerships do the following:

1. Hold inventory for delivery to customers, based on demand trends.
2. Provide trained inside or outside salespeople in order to give customers technical and business assistance in product selection and use.
3. Market products and services, where it is not practical or economical for the manufacturer.
4. Transition the product from manufacturer to customer and provide order processing, warehouse management, pick/pack/ship, and just-in-time parts delivery.

As part of the new model, the following industry patterns need to be considered and responded to by dealerships.

Further Applications of Technology
With surveys showing that customer self-service is on the rise, dealerships that respond to this trend can reap the benefits by offering electronic services without a perceived loss of "regular" service quality. Technology is changing the way equipment is distributed.

Through technology, dealerships can attain a better depth and quality of information-data that may facilitate business relationships. As an example, manufacturers tend to seek partners with a proven market presence and a quality that sets them apart-such as a progressive approach to the use of distribution information. Dealers who want to forge strong manufacturer relationships assist that effort through technological awareness.

Internet exposure allows for product presentation and distribution alternatives, where manufacturers can post their products on a "bulletin board", allowing worldwide customers to source through Internet search engines, and can bypass dealers by providing direct access to customers.

Consolidation
Industry consolidations may replace independent dealers with enterprise, professionally managed, publicly traded corporations. According to John R. Walker ("Impact of consolidation: Big not always better" - Outdoor Power Equipment, February, 2002), consolidation occurs for the following reasons:

1. To increase profits for the shareholders and corporate executives
2. To increase a company's market share
3. To reduce expenses by a reduction in workforce and overhead

Dealerships that increase in size as a result of a consolidation with other entities will usually increase revenues-assuming the parties are already lucrative-which makes the business as a whole that much more successful on paper. Also, consolidation will increase a company's market because, in essence, when buying another company, it is buying their market-as well as losses. One of the most important reasons for consolidation is to reduce expenses by eliminating distribution points, replacing them with one dealership with several locations that can share costs.

Diversification of Offerings
Industry analyst Adam Fein ("Facing the forces of change: The road to opportunity" - www.pembrokeconsulting.com) believes that today's dealerships need to sell more than just products. To get an edge on their competition, they need to change the methods they rely on to make money, and that they must sell services in a fee-based structure to provide future growth.

Fein writes, "The standard wholesale distribution business model sells products and adds value. Historically, dealers have been paid for the value they add in the form of gross profit dollars-the margin added to the cost of the product to cover operating expenses and profit. Support and other services are included in product price, making them seemingly free from the customer's perspective."

He continues, "Moving to fee-based services changes the relationship between customer and distributor. Dealers will be forced to deliver specific, measurable results as well as maintain a high level of excellence in their core activities. Customers will accept fees, but slowly. Some will simply change dealers rather than pay for service."

"Fee-based services promise improved profitability for those dealers who can deliver innovative services with genuine value to the customer. Customers will consider paying for new services offered by dealers that can lower their costs and drive profits. We caution that attempting to charge new fees for currently free services will not work."

Distribution Changes
Statistics indicate that manufacturers are increasingly using logistics companies to provide delivery services. U.S. census data documents a 30 percent 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 percent during the same period.

Diligence regarding the distribution chain is gaining importance as logistics companies increasingly compete for core delivery responsibilities with dealers. This trend is gradually eliminating the need for the "middle man". It is expected that customer order processing will become the basis that logistics companies and dealers will compete on, so other factors such as customer relationship management become increasingly important in the fight to win customers.

As illustrated here, as the rate of change increases with regard to equipment distribution methods, those who keep pace will be the beneficiaries. By paying attention to changes in the patterns regarding the way products and services are offered and distributed to the market-and reacting accordingly-dealerships can take advantage of the potential for growth that is available.