HP, Distributors Hone Supply Chain Strategy

At least two elements seem to be a given as HP executives examine the distributors' books to see what costs can be cut from the current relationship. One, distributors will take title to less HP product, and two, they will provide more services to solution providers targeting the SMB market, including deeper marketing and technical support.

"We are in some serious discussions with our distribution partners over their marketing machinery, which we think can be a major part of PartnerOne," said Kevin Gilroy, vice president and general manager of North America commercial channels at HP. The vendor is developing PartnerOne to replace the Hard Deck named-account program. "[Distributors have a lot of reach to our VARs in getting the HP message out to their sales organization," he said.

Mike Grainger, president and COO of Ingram Micro, said he's encouraged that HP recognizes the strengths the distributor has built through IM Logistics, a two-year-old division that provides vendor services.

"Being able to offer specific services to vendors and customers fits well with how we see the channel evolving," he said. "The relationship will be based on the same high-class value-add we've always offered our manufacturer partners."

Ingram Micro and Tech Data executives said the strategy sessions with HP are going well.

"I'm comfortable with the level of collaborative dealings we've had with HP," said Joe Serra, vice president of systems product marketing at Tech Data. "Do we agree 100 percent on everything? Absolutely not. But we do have a good relationship with them."

While HP executives pore through the distributors' books, distributors have gotten a chance to review a report by PricewaterhouseCoopers that examines the effectiveness of HP's direct and indirect sales strategies. One distribution executive who read the report said he was impressed with its thoroughness.

"It's not a finished product, but it does represent some great initial progress. We didn't find any missing components," the executive said. "We've had a couple of meetings to discuss the report, and now it's a matter of diving in deeper."

Gilroy has promised there is nothing that "distributors should be worried about" in the new strategy.

But some distribution executives say they are concerned that HP's plans to sell more systems directly to solution providers and end users could negatively affect top-line revenue, further undermining shareholder confidence in the battered technology sector. HP and Compaq products account for about 37 of Tech Data's overall sales and about 30 percent of Ingram Micro's.

It's still undecided how much product distributors will deal with once the plan is enacted. Publicly, the distributors said they have been selling fewer HP and Compaq desktop and notebook systems in the past year so they don't expect to take a huge hit on earnings, given the razor-thin margins involved.

"The balance sheet will look different, but our services are profitable," Grainger said. "There will be a lot of changes on how HP goes to market, but I don't think we'd do anything that isn't profitable for Ingram Micro."

Some solution providers said they welcome an agent model, in which HP bypasses the distributor and ships straight to the end user. But others, like Luis Alvarez, president of Alvarez Technology Group, Salinas, Calif., worry that manufacturers like HP will have trouble accurately shipping large orders and will overlook the customer service they've received from distributors.

"If HP goes direct, it will start treating solution providers like regular customers. If HP has to deal with thousands of different orders, they're not going to spend the time with me," he said. "Ingram Micro, Tech Data and Synnex [Information Technologies are used to dealing with the SMB. They realize and respect the fact that they have long-term relationships with us."