Traditions die hard, but there has been a growing awareness for several years now that there is a convergence of factors that is growing to dramatically shift how products, especially new products move from idea to the end user. I have watched and anticipated this change for almost 10 years now and every once in a while, something happens for me to get a little bit more clarity about what is happening. The following is an attempt to give you a snap shot of some of the things that have brought me to this point in my thinking as well as some early pioneers in this shift and what they are doing that have the potential to revolutionize this business.
Distribution First we need to understand the “traditional channel of distribution.” This is how products have moved from manufacturer to end user since the industrial revolution. Generally, a manufacturer produces a product and sells it to a distributor. The role of the distributor is to stock product in relative close proximity to their retail customers. The distributor also sells the product to the retailer for the manufacturer. Historically this has also provided a layer of financial protection to the manufacturer as the distributor was the one who had to deal with collecting from the many retailers they served. This system worked extremely well when long distance business communication was by mail and transportation was by railcar and truck load.
Times have changed. Distributors have moved from being primarily service driven to being primarily financially driven and the inventory that once was considered an asset is now considered a liability. Turns and Cash Flow have become the driving forces in the Distribution world. Consequently the cost of carrying inventory has been shifted back to the manufacturer in the form of longer average days outstanding on receivables, smaller more frequent orders or both.
Distribution has, for the most part, reduced or eliminated the idea of selling the manufacturers products. What once were exclusive arrangements are now more aptly viewed as cherry picking the best sellers from all of the recognized vendors in the market. This creates an homogenized marketplace where every retailer is selling basically the same offering as every other retailer because the distributor has left them very little in the way of options to differentiate. The selling effort if it exists at all, is focused on selling programs and services that the distributor can provide to the retailer.
The financial insulation that distribution once provided to retailers has evaporated over the last thirty years as the number of Hardware Distributors has consolidated to a relative handful. The manufacturers have learned that as the consolidation continues, the risk of loss increases dramatically as the number of distributor’s decreases.
Finally, distribution has lost market share to the folks like Wal-mart and Home Depot who have found ways to reduce the costs associated with stocking, picking and reshipping inventory. This combined with their financial focus has forced them into a mind set that wants to limit the number of vendors and skus. For some time now, we have been faced with a situation where distributors are reluctant to add new vendors with limited product offerings even if it is a superior product. The time and cost of adding a vendor to the system combined with the cost of monitoring and issuing purchase orders for single items discourages if not eliminates the possibility of adding a better mouse trap if it is a stand alone product unless the manufacturer can prove that it will be a best seller. Recently I heard a comment that, “It costs Grainger $100,000 to set up a new vendor in their system.” This is not conducive to having new products in your offering.
Supply and Demand After World War II, the demand for hardware products far exceeded the supply. This created a situation where the suppliers or the manufacturers had the power in the channel of distribution and could pretty well set the rules of engagement including prices, terms, freight allowances, etc.. During the 70’s and 80’s, supply caught up with demand and the power in the channel shifted to the distributors. Manufacturers had to scramble and began offering programs like co-op advertising and smaller order sizes to make their product offering more attractive. Those that had strong brands, and were aggressive about business survived. There was a tremendous consolidation at the manufacturing level from the late 60’s into the early 80’s. By the late 80’s and all through the 90’s, the power had shifted once again, but this time it was to the Retailers. Home Depot, Lowes, Wal-mart and others set the terms because they were the ones with the power in the channel. Once again manufacturers were forced to adapt with rebate programs, even smaller shipments and lots of other programs. As we entered the 21 Century, the power shifted once more to the End Consumer. There are many factors that have contributed to the fact that the consumer is now the ultimate power in the channel. This is creating challenges and opportunities for manufacturers.
Technology Much has changed in the last 50 years and I believe we are on the forefront of incorporating these changes into a new paradigm in marketing Hardware Products. We have moved from truckload order quantities to LTL (less than truckload) to the world of UPS, Fedex, Airborne and others. We have moved from printed orders to faxed orders to EDI to online interactive ordering. We have moved from Cash in advance to Cash on Delivery to terms to credit card and electronic payments. We have also moved from printed advertising and catalogs to video to digital media. We have moved from Customer Service that is available 8 hours per day to Interactive Websites that are available 24 hours a day, seven days a week, 365 days a year.
The Future In the late 90’s, I thought that the future was in selling hardware products directly from the manufacturer to the end-user and certainly there is a place for that approach. Today, however, I am convinced that the consumer wants immediate access to hardware products, especially new products that meet a specific need that they don’t already own. Distribution doesn’t want to take the risk of adding vendors and products with unknown potential. There are other options that are slowly beginning to surface that will fill this void and help even one sku manufacturers make their products available to retailers who want exciting new products for their customers.
The impending Paradigm Shift is obvious to me. The best or most successful approach to this shift remains to be seen, but I believe it is in your best interest to at least explore the alternatives that are being developed. The shift will come quickly in comparison to past changes. You need to understand what is happening and what options exist for your business.
These are examples of just a few of the issues that we talk about at our new website
http://www.marketingnewproduct.com. We have even developed a collaborative consulting product call the Quickie Market Analysis to help inventors, and new product marketers avoid these pitfalls.
It doesn't really matter where you are in the process of introducing your product. The Quickie Market Analysis will pick you up where you stumbled and move you toward success. Visit the U.S. Hardware /Hardlines Resource Center to learn more.
Copyright Bob Cannon/The Cannon Advantage, 2005. All rights reserved.
Byline
Bob Cannon helps inventors, imagineers, importers and manufacturers successfully introduce new products to the Hardware / Hardlines Marketplace. Check out his blog at http:www.takingaim.blogspot.com. Bob can be reached at (216) 408-9495 or mailto: bob@marketingnewproduct.com
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