Distribution 25: Supply-Chain Advantages

"If it's a set configuration, [resellers] are [often] getting products from vendors directly," explains Charles Smulders, a distribution analyst with Gartner Group/Dataquest in San Jose, Calif. "But the more complex the product or offering, the more likely a distributor will be involved."

Tom Ducatelli, CompuCom's vice president of business development and supply-chain management, says distributors serve the purpose of being holding areas for inventory. "They give me visibility electronically to about $5.1 billion of inventory," he explains. "Without having the distributor stocking those finished goods, everything we buy from OEMs would either be forecasted orders or just-in-time, and that would substantially lengthen delivery time."

Ducatelli and other solution providers say distributors can often fulfill orders in less than half the time it takes OEMs to deliver the products. And distributors also make it much easier to deal with multiple manufacturers, rather than handling a variety of direct-vendor relationships individually.

"The distributor is important to augment our direct purchasing and to manage a broad spectrum of product lines, which would not be efficient or cost-effective for Jade to partner with independently," agrees Debbi Milner, co-CEO and president of Jade Systems VB270, an IT solution provider based in Long Island City, N.Y.

Despite the fact that Ingram Micro led a wave of distributor price increases last year, Jade Systems remains a loyal partner to the distribution giant. "The pricing increases did not have us looking toward other distributors," Milner says. "Ingram went through a very substantial change in management, which has resulted in an extremely cohesive group that is clearly moving Ingram ahead rapidly."

Gartner's Smulders also gives a thumbs-up to Ingram's current management: "I certainly think Ingram suffered from executive losses in the past two years, but I see much greater stability in their management team now."

Ingram's decision to raise prices last spring was a risk, but it was the only way the distribution industry could survive the suicidal, cutthroat margin squeezes that were bleeding it dry.

"We really led the way in restoring financial health to distribution," says Kevin Murai, U.S. president of the distribution giant. "It was a tough decision. When we led the industry in raising prices, we knew we were providing our competitors with an opportunity not to follow us and take market share from us. We saw that happen in the second quarter. But we also viewed that as a temporary market-share shift. We knew if we continued to invest in enhancing our value proposition in terms of specific services, we would gain that share back. That's exactly what we saw happen through the second half of last year."

Alexander agrees, noting that 2000 saw a return to rational pricing pioneered by Ingram Micro that was quickly followed by Tech Data. The exit of Pinacor and Merisel helped the two giants implement their price increases without losing too many customers, and both Ingram and Tech Data have done an effective job of "identifying the value-add they provide their customers," Alexander explains. "For example, Tech Data talked about going through customer by customer and drilling down to figure out exactly what the [cost-saving] possibilities were [for each]. If the levels were unacceptable, Tech Data would go to the customer and explain that they could stop doing business or accept higher prices. They refer to that as Activity Based Costing (ABC), and they're now taking that effort to Europe, where we expect margins to improve as well."

The "return to rationality," as Alexander calls it, has meant improved margins quarter by quarter for both distribution giants over the past year and buy recommendations from Raymond James. Tech Data's gross margins improved from 5.24 percent in the first quarter of 2000 to 5.31, 5.41 and then 5.5 percent during the next three quarters. Ingram's gross margins also saw steady increases, growing from 4.7 percent in the first quarter to 4.96, 5.13 and 5.46 percent during the next three quarters.

"The [distribution] industry in itself is in much better shape than it has been for a while," says Steve Raymund, CEO of Tech Data. "A couple of years ago, [the industry was] overtaken by vicious price wars that hammered everyone's margins and profits, but that was unsustainable and played itself out with the demise of some of the weaker players."

Resellers seem to accept the trade-off of improved service for higher prices. The price increases "didn't really concern me that much because we're trying to focus on selling professional services and are providing hardware as part of our solutions," says John Stewart, COO of Universal Access Consulting, a Parsippany, N.J.-based solution provider that specializes in the SMB and education marketplaces. "We just added a little more margin to our resale to compensate for the increases."

Even though they source some products directly from vendors, solution providers are learning--or relearning--that it makes sense to let distributors do what they do best: handle the logistics and sourcing issues that would otherwise tie up fiscal and human resources with activities that don't support sales.

"We're doing more and more for our resellers," explains Tech Data's Raymund. "Resellers are transitioning in one form or another to an agent model, where an increasing share of their business is garnered through services and less through product margins. One way to restructure their businesses to let them prosper is to allow us to do activities like procurement and fulfillment [on their behalf]."

The agent model can ease the credit strain of maintaining inventory, says Gartner's Smulders: "Clearly, if you're a reseller, one of the biggest strains is credit. [Solution providers] should be thinking of moving toward agent models, which would relieve the credit strain."

Anything distributors can do to ease the credit squeeze is especially important in a time when the economy is softening and solution providers have seen a major market (dot-com companies) completely implode, says Michael Minard, executive vice president of Boulder, Colo.-based GE Access. "The [solution- provider] community lost one of its major marketplaces, and in many cases their accounts receivables are banged up because of that and because of the resulting gray market in used equipment. A year ago, [solution providers] were more focused on the competition. Right now, they're more focused on getting through the month."

Eric Bakker, president of Computer Design and Integration (CDI) VB431, a solution provider based in Teterboro, N.J., says the financial support from Phoenix-based Avnet/Hall-Mark has been key to his company's success.

"They go beyond product fulfillment," Bakker says. "They have loaned us the money to help us grow, and they've been very flexible with regard to terms...they work with us without penalties. That's key, because if they charge me a point, I'm giving up all my margin."

Distributors also give smaller solution providers more clout with vendors than they would have on their own. Ingram's Venture Tech Network, an alliance of hundreds of solution providers that specialize in the SMB market space, for example, has some enthusiastic proponents.

"With Venture Tech, we've got a voice inside a big company like Ingram, so we don't get lost," says Ted Warner, president of Greeley, Colo.-based Connecting Point and head of the Venture Tech Network. "Through Venture Tech, we also have a lot of clout with manufacturers. Whether it's Compaq, HP, Cisco or Microsoft, they can look at us and say, 'Here's a quality group of VARs,' and they can design offerings we couldn't get if we were out there on our own."

Warner says the leverage of the Venture Tech program has generated training and market development programs worth millions from Compaq, Cisco and Microsoft.

In addition to aggregating financial clout, distributors create solution-provider loyalty by simplifying their businesses.

Tony Orlando, vice president of professional services for Glastonbury, Conn.-based integrator The Allied Group VB266, which specializes in enterprise-level services, says he sources products almost exclusively through two distributors--the Comstor division of the Westcon Group, Tarrytown, N.Y., and GE Access.

"We sell multiple sets of products to our customers, but we get a single invoice and cut just two checks monthly, one to GE and one to Westcon," Orlando says. "That makes it easier on the accounts payable side of the house."

Like other solution providers that specialize in high-end solutions, Orlando continues to rely on smaller technical distributors because of the high-touch relationships and support he receives, even though all-purpose distribution giants like Ingram and Tech Data could supply the same products.

"With our advanced array of products, we didn't determine we would get the same level of quality and service from other distributors," explains Orlando when asked why he doesn't switch to Tech Data or Ingram. "We use [GE Access and Comstor] primarily for the strong relationships built over time. That personal touch takes us to the next level, and they both provide us with inside sales support."

Similarly, Bakker says, Avnet/Hall-Mark's technical expertise is a crucial asset to CDI: "They provide quality inside sales support around their suite of products. They understand from a technical-support perspective how they all work together, especially the mission-critical component."

Not everyone agrees, however. Universal Access Consulting's Stewart says his company didn't find dealing with a specialty distributor like Comstor any different than doing business with Ingram. "The services were not that different at Comstor than what was available from Ingram, and Ingram has pretty much every product we need in their repertoire of SKUs," he says. "Plus, we don't want to manage too many relationships and credit lines."

Citing the economies of scale of the two giants, Gartner's Smulders says it's more important than ever for smaller distributors to differentiate themselves in order to survive. "It's pretty clear they need to be focused on niche areas and specialized in product categories that will continue to have margin," he says. "The smaller regional distributors are going to continue to find it very tough."

D&H Distributing of Harrisburg, Pa., however, seems to be having a run of good luck in spite of market conditions. Gary Brothers, president, insists the distributor,whose revenue is approximately $700 million,is "financially rock-solid and coming off the best year in the history of the company." Brothers attributes that rock-solid performance to the fact that D&H is not trying to be all things to all people. "We don't carry every line, and we're not trying to be the biggest player in every channel segment. We have our core competencies, so we approach the market more with rifles than shotguns," he says.

Whatever their weapons, distributors have, for the moment, called a cease-fire to their shoot-out. They'll need to be quick to stay alive, but of the top companies still standing, most are on solid ground.

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