Compaq's Move: Will Desktop Rivals Ante Up?

In rolling out its new Distributor Alliance Program, Compaq is hoping history will repeat itself. Compaq said the industry followed its lead when the company first moved PCs through two-tier distribution in 1991 and later in 1994 launched open sourcing. "I hope we've caught our competitors flat-footed," said Mike Pocock, Compaq's vice president of U. S. channel sales.

The Houston-based vendor has set Aug. 1 as the target date for reducing the number of distributors and corporate resellers that buy product directly from the vendor to four from the current 39. In the process of drastically reducing its number of direct relationships, Compaq will reduce its channel stocking locations to less than 30 from about 100, a move it hopes will reduce channel inventories by 50 percent (CRN, May 10).

While channel executives said other vendors actively are looking to pare their distribution relationships, IBM Corp. and Hewlett-Packard Co. executives said Compaq may end up leading a parade of one in this instance.

Instead of being at the vanguard of market trends, both companies contend Compaq is taking drastic measures to solve internal problems. "There is no other reason for Compaq to do this other than to solve its own supply chain problems," said Jim McDonnell, senior vice president of HP's commercial channels organization.

HP, Palo Alto, Calif., has no plans to scale back the number of resellers that buy from it directly other than a move prompted by "the natural course of life," such as through consolidation in the channel, McDonnell said. "[The move by Compaq] will not drive us to change our strategies one iota," he said.

"I submit the whole reason Compaq is doing this is that they have failed at all of their supply chain issues. They are using a pickax surgery approach to try to get their supply chain costs under control," he said.

HP's channel inventory is the lowest in its history, and HP's inventory-driven costs have declined more than 20 percent for each of the past couple of quarters, said McDonnell.

Likewise, IBM, Armonk, N.Y., said it has no plans to trim the number of resellers that buy product directly from the vendor.

"If we would have seen a significant economic or customer benefit [from reducing the number of direct relationships], we would have been ahead of [Compaq] and had it done," said Bob Moffat, general manager of distribution, procurement and re-engineering for IBM's Personal Systems Group. "We did not see either one. There is consolidation in the industry, but we are not going to force it to happen," he said.

IBM does not need to "drive the number of people that we are dealing with to the four or five that Compaq did in order to achieve the [supply chain] efficiencies that we are already seeing in our Advanced Fulfillment Initiative [AFI]," he said.

Moffat said IBM recently won the Franz Edelman Award from the Institute for Operations Research and the Management Sciences because AFI helped the vendor eliminate more than $100 million in supply chain costs in 1998.

But channel executives said they see an unmistakable trend among all vendors toward fewer direct relationships.

"All [vendors] are looking at reducing the number of supply chain partners," said Jeffrey McKeever, chief executive and president of MicroAge Inc., Phoenix. "This is a pattern. Seagate [Technology Inc.], Apple [Computer Corp.] and now Compaq [have reduced the number of direct channel partners]. If you didn't see this coming and design a strategy to deal with this issue, I think you will not be part of the channel in the future."

While Compaq's Distributor Alliance Program currently applies only to its commercial Wintel products sold in North America and not to its enterprise systems and its six enterprise distributors, some vendors said channel consolidation will hit that segment, as well.

Unisys Corp., Blue Bell, Pa., for example, reduced the number of its direct North American reseller relationships to 43 from 700 one year ago, said Rick Carbone, vice president of business partner sales at the vendor. "As you move upstream into the enterprise, you must have focus. You can't afford to put that inventory out there among a variety of partners."

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