PCI recently asked key personnel at four distribution companies questions regarding the value that distributors bring to the industry, as well as the challenges they face in the modern global climate. Dan Gruber, President CASE, KODA Distribution Group; Joey Gullion, Vice President Marketing, Chemicals, Nexeo Solutions; Larry Krock, Director of Development, Paints, Coatings and Plastics, RE Carroll Inc.; and Earl Tveit, Executive Vice President/Owner, McCullough & Associates, participated in our Q&A.

PCI: What is the value of distributors?

Gruber: The greatest value distributors bring to suppliers is the ability and professionalism to service the second- and third-tier customers so that suppliers can focus their attention on the large accounts and ship in truckload quantities. Distributors work closely to the marketplace, and often provide accurate and timely industry intelligence to suppliers as well as discover the high-potential start-up opportunities. Distributors also often have complementary product lines, which allow them to offer bundling of multiple products that a customer needs.

Gullion: The distribution model has gone through (and continues to go through) a transition. Distributors are providing solutions and not just products. Both small and large distributors are now creating value by expanding the services they offer. The degree to which these services are offered depends very much on the distributor, but we have seen a significant increase in technical capabilities, a high degree of end-market focus, and continued efforts on more intimate collaboration with suppliers and customers. As a result of this commitment, distributors have been successful in not just trading market share, but also increasing the amount of business that goes through distribution.

Krock: Beyond the obvious of offering improvements in cash flow by improving logistics and supply chains, distributors offer a unique perspective. Distributors are trained to market and sell many different items and, therefore, have access to a wide variety of resources from their suppler base and their customer base. In drawing on this breadth of knowledge they can often provide new ideas and insight in solving problems.

I also dislike the term distributor. The model for most companies today is either marketing or logistics driven, and can often bridge both. In years past, especially for European suppliers entering the United States in the 60s and 70s, the model was manufacturer’s representative. The “reps”, as they were often called, provided access to and knowledge of the customer base. They were not logistics companies, but sales organizations primarily. They did not generally take title to material, but only collected a commission for what was shipped and billed by the manufacturer.

The transition to distribution began in the mid-80s through the 90s. Manufacturers wanted people who could buy truckloads and break them down into smaller shipments. Especially in the mid-90s, the buzzwords were “supply chain management” and “cash flow”. To keep up, the reps had to add logistics services to their base of customer knowledge. In the 2000s, the model has begun changing once more as companies have had to learn to become true marketing organizations and begin scouring the world looking for new suppliers. The focus now is not only on low cost but on innovation.

Tveit: Distributors are an integral part of a supplier’s business. They act as an extension of the supplier’s technical sales and marketing groups by providing sales and operational support in a specified territory. From a logistical standpoint, the distributor maintains local inventory to supply the customers’ requirements, which are often on a just-in-time basis. Distributors service customers of all sizes equally well, with support tailored to each account. This can include product coding and/or re-palletizing to customer specification, handling credit issues as well as providing both technical and logistical support. Distributors routinely provide their suppliers with sales trends and marketing opportunities, and tailor sales reports to meet supplier requirements.

PCI: How can a distributor’s lab help coatings manufacturers – do distributors have the proper knowledge and training to help customers?

Gruber: Many distributor sales forces are technically educated and/or trained in labs. The majority of staff at our five labs have Ph.D.s or multiple years of experience in a commercial lab. Areas of expertise typically are in QC and formulation functions – QA testing, benchmarking, formulation, application, replacement alternatives and greener technologies.

Gullion: Distributors today are involved in technical problem solving and are being treated as an extension of both the customer and the supplier technical teams. These technical support roles are highly trained, well-educated industry professionals. They play a significant role in the customer innovation process by leveraging the resources available to them. These resources include testing, benchmarking and formulation development. With a distributor’s breadth of product lines and large customer base, their technical team is likely to have seen the issue before, which provides a strong foundation for assisting the next customer.

Krock: I believe the real benefit of a lab being run by a small marketing organization is not in offering formulation advice. That should come from the company designing the material for the most part. However a small lab can be a very effective QC tool to use in certifying the quality and the consistency of the materials being sold. A small lab can also verify the suitability of a product in a formula by prescreening materials for customers using specific test protocols.

Tveit: The majority of customers prefer to test a formula change or new product in their own lab.  A distributor’s technical sales staff will assist the customer by making product recommendations, providing technical and/or safety data, and requesting samples and support from a supplier as needed. Most distributors do not need an in-house lab, as suppliers usually offer technical assistance to customers requesting support (through the distributor or on a direct basis). In addition, suppliers normally provide lab services to assist customers in formulation changes. Suppliers schedule training sessions as needed for their distributors, and support technical sales calls in each distributor’s geography on a regular basis.

PCI: What are some of the challenges that chemical distributors face?

Gruber: Keeping up with all the changes in regulations, software and chemical technologies. Distributors manage this with ongoing training and educational programs. One of the challenges our company pays particular attention to is managing sales rep time so that our top suppliers are getting the attention needed to grow their business.

Gullion: One challenge is changing customer and supplier perceptions of distribution companies – trying to get them to see the value that the new and changing distribution model can bring further up the value chain. Another is evolving the organizational mindset. As the distribution model develops, it is important for the organization mindset to evolve at a similar pace, or companies can be left behind. Managing supplier relationships during a high-growth/expansion phase is also challenging. For a distributor to be competitive, it must mirror the growth pattern of its key suppliers and customers. And, in an environment of high price transparency, the importance of validating and quantifying the value-added benefits that a distributor brings to the customer can also be a challenge.

Krock: Long supply chains, cash flow, excess inventory, obsolete material, EHS issues. These are the major concerns, as they affect the financial health and stability of the company. They can be addressed by careful choice of companies to do business with (both customers and suppliers), but only to a point. Supply chain and inventory management require careful planning and execution by a company’s entire team. Often large companies use logistics/marketing companies as their channel to market to avoid having to deal with these issues themselves due to the risks involved.

Tveit: One challenge consistent in the chemical industry is change! Distributors are faced with continual internal supplier changes, customers altering or deleting formulas, government regulation changes, logistic changes and personnel changes, just to name a few. In order to move forward with these changes and challenges, the distributor must have an experienced operations group adept in communicating and handling change. In addition, a specialized operating system is key to successfully implementing change. Partnering with a chemically oriented warehouse and carefully vetted LTL carriers also allows us to meet fast-changing situations.

Members of NACD (National Association of Chemical Distributors) continually receive updates regarding pertinent industry regulations and changes. NACD’s RD (Responsible Distribution) program provides a guideline of standards for distributors, and NACD conducts audits every third year to ensure compliance to their guidelines.

Keeping our sales team educated on new products can be challenging, but is a priority, and it is supported by our suppliers in an ongoing basis through webinars, on-site training in their labs, and by making technical sales calls with our sales team.

PCI: Has industry consolidation on both the manufacturer and supplier side affected the viability of distribution companies?

Gruber: Consolidation is a natural evolution in business, especially in the chemical industry. You must be prepared for it and capitalize on consolidation. In fact, in the April 2014 Boston Consulting Group Report – Specialty Chemical Distribution Market Update– one of the trends they point out is consolidation and the key role the “Super Regional” will play in servicing this consolidated landscape.

Gullion: We are seeing some resurgence in consolidation. Considering the highly fragmented nature of the distribution industry, consolidation is inevitable. As suppliers and customers continue to scale back commercial and technical resources, ‘evolved’ distributors are very capable of filling the void. Suppliers that see value in the expanded services offered by distributors are providing more product and customer access. Another trend is selectivity. Since not all partners think alike, suppliers, distributors and customers are being more selective regarding whom they want to work with. Exclusivity, or at least the formation of contractual relationships between distributor and supplier, is also something we are seeing more of.

Krock: Initially consolidation took a big toll on distribution organizations. Purchasing agents were trained to negotiate the lowest possible purchase price. This often meant classifying distribution organizations strictly as middlemen who provided no value to the supply chain. Companies representing multiple companies were forced to look for smaller companies to represent who did not have sales capabilities of their own, or look offshore for low-cost suppliers who often offered poor or inconsistent quality. This is now beginning to change.

Companies now are looking not only at invoice cost but at the full use cost of buying raw materials. This means specialty logistics services often can be of great significance. Offshore suppliers can offer low-cost goods. However it takes time and money to find those capable of offering consistent quality material compliant with domestic EHS guidelines. Innovation is also not limited to the United States. Many small private companies, especially in Europe, offering new technology are too small to do business in the United States on their own. All of these companies (large and small) seeking entry into the U.S. market offer opportunities for customers to both save money and have access to new technology. The new breed of marketing organizations you call distributors is their prime channel to market. Also, many large companies have found it advantageous to offer new product lines or lines with small dosage in formulations through marketing organizations, as our cost of doing business is often less than their internal marketing cost alone.

 Tveit: Distributors provide increasing value to their suppliers, as they are a major conduit to drive sales growth and provide valuable market data. Distributors are needed to provide customers with local inventory (shorter lead times), handle specific requirements and offer technical support. Unfortunately, distributors have always been susceptible to the changes enacted by mergers, buy outs or business consolidations from both their principals and customers. In some instances, change can bring more business to the distributor; however, often product lines or major customers can be lost due to any of the above scenarios. To be successful in today’s constantly fluctuating business environment, a distributor must be industry diversified, have a full list of complimentary principals for each industry, and provide exceptional service to both the supplier and the customer.