The Strategery of B2B E-Commerce

     In our 2014 research of mid-market firms and e-commerce, seven out of 10 executives selected online technology as "another means of transacting a sale..." versus "a strategic investment..."   We'll update the research in 2016 with a survey of manufacturers, their distributors, and end user customers.   It will be interesting to see if attitudes have changed.   Our bet is that most execs still view e-commerce as a transaction portal and not worthy of a strategy designation. We view them as strategery execs.  

     Hence, there is a begrudging impetus to invest millions in "best of class" software and personnel to drive online sales.  Maybe this is the reason that some tw0-thirds of distributors and half of manufacturers have what we term as "First Generation" capabilities in digital commerce.  That is, they have an e-commerce platform adapted from B2C software or a proprietary programmed site done before the Recession.   The user experience with this old tech is night and day different from a Second Generation e-commerce effort which has a made for B2B platform with user community, PIM, faceted search, and procurement punch-out.   Our research finds that Second Generation software bundles belong to the 20% of companies that sell 80% of online volume; their organic sales growth is 2x that of their competitors.   

     We've done two sizable research studies in the past two years and the results are the same.  Firms with an investment in modern e-commerce software and the people that run it are winning sales from their competitors.  Maybe the late bloomers in e-commerce will pay attention to a growing entity of competitors titled Transactional Distributors; potential disruptors to the chummy and mostly sclerotic channels that exist today. 

Low Cost Disruption         

     We penned an article on Transactional Distribution over a decade ago.  The observation was that a handful of small, entrepreneurial firms were disrupting manufacturer/distributor channels by taking cost out.    They used best in class e-commerce technology, limited brick and mortar footprints, and limited sales support to give customers a price break of 10% or so on their purchases.  Their service platform was lean and variety of inventory was low.   If you knew what you wanted and ordered online, you got a great price.   Ten years ago, these companies were in the 10 MM dollar or less in sales range--that was ten years ago. 

     Today, we find transactional models in most of the four-dozen vertical markets in the $2.5 Trillion dollar durable goods distribution space.   A notable example is Zorro Tool, a low price brand of Grainger.  The entity started in 2010 with $0 in sales.  Today, it is $300MM in sales and growing despite an Industrial sector recession.   

     Transactional entities typically reduce the brick and mortar footprint, target the "A" inventory items (20% of sku's that are 80% of sales) and give a price that is 5% to 20% less than the full-service competition.   Where does their cost advantage come from?   Our findings are:

• 7% to 12% cost advantage in lessened sales and solicitation cost
• 1.5% to 4% advantage in reduced brick and mortar cost and utilities
• 2% or so advantage in borrowing costs
• 2% advantage in administrative overhead
• 2% advantage in warranties, returns, and incomplete orders
• 5% or more advantage in cost of goods if they private brand or use offshore sources

Using the top level of cost advantage from the bullet-ed list, the transactional distributor can give a 15% price advantage over the competition and put 15% to the bottom line--in markets where a 3% return on sales is common!

The fundamental message is that low-cost distribution entities and non-traditional intermediaries are in play and have grown from niche players to national brands.   They will grow at an increasing rate as more users learn of good prices with a really good user experience.  (Note: You can see our White Paper on Trasactional Firms at: http://industrialsupplymagazine.com/file_open.php?id=45)

The Manufacturing Dilemma

     Manufacturers who market through traditional distributors are at risk in the online space if they haven't studied up on transactional entities and online activity in general.   We believe many are inundated with SPA's (special pricing arrangements) from full-service distributors who are battling low cost e-commerce models.  

     In a recent meeting with a panel of full-service distributors and vendors, we asked the manufacturers how they measured their distributors' online performance.  The answers were platitudes of "we know which distributors are winning online" to "we ask them."   There was no mention of end-user surveys or point of sale data including history on how the order was transacted.  In short, the answers were not very good and left us surmising that the channel managers had very little idea of what was really going on in the online space.  

     Channel management and channel policy has become very "chummy" in the last 20 years as distributors became dominant in their channels and extended their reach into the value chain with services and assemblies.   Their grip on the end-user appeared iron-clad.  We think channel management will be rediscovered as channel conflict arises in traditional distributor-controlled sectors.   The conflict will emerge as manufacturers realize their distributors aren't growing as they should, investigate why, and find online channels have taken root and prospered-- at their expense. 

Tech Strategery

    E-commerce technology allows the buyer to carve out a value proposition that is asynchronous, self-servicing, personalized, with increased order accuracy.   The overall experience to the customer is one of higher satisfaction, less cost, and greater value.   The rise of transactional distributors, where full-service distribution flourished, is a direct result of Second Generation technology and lean structures that take the cost out of of the existing supply chain.   

     Distributors and manufacturers that view e-commerce as an investment in just another way to take an order don't get it.   They've lost some battles but probably don't know it or rationalize it isn't that bad.  What they fail to realize is that successful transactional entities take a good five years to get off the ground. In five more years when the naysayers catch-up to today,  those who have invested in Second Generation technology, today, will be well-ahead and near impossible to stop.    The strategerists should take note.  

Scott Benfield is a consultant for B2B supply chains in the areas of  digital marketing and general management.  He is the author of six books on manufacturer-distributor supply chains.  He can be reached at Scott@benfieldconsulting.com or (630) 428-9311.