Survivor, distribution style: price is critical, but services keep the tribes happy - Distribution

Electronic News, Oct 7, 2002 by Rob Spiegel

In a downturn, prices sink and competitors battle for market share -- and in this, the worst downturn ever, distributors have fought long and hard.

In a flat market, growth will come through market-share gains. That translates into tight competition. In a heightened battle for market share, distributors have found it hard to raise margins.

Typically after periods of consolidation companies benefit from less competition. The flurry of acquisitions in the distribution sector in recent years did not leave a competitive breather in its wake.

But this downturn is not typical. The lull in demand hit just as the pace of acquisitions slowed, ushering in a new competitive season. Price is not the only factor in the race to gain and keep customers, distributors say. Services have taken an increased role as a competitive lever.

Customers want components to be in stock when they place an order. They want support from distributors around the globe. They want consigned inventory, and they demand instant quotes. Oh, and by the way, the price needs to be competitive and the terms generous.

Price is an enormous competitive factor, certainly at the top of the list. Yet distributors dismiss price as the sole factor in finding and keeping customers.

"You can't compete just on price, even if price is a key factor," said Bruce Goldberg, CEO and president of Miami-based All American Semiconductor Inc. "Price is one of the top competitive factors, but services are right up there with price." Goldberg also noted that financial terms have become an increasing lure in keeping customers. "Terms are absolutely important," Goldberg said. "They're killing us on terms these days."

Even among independent distributors, price is not the only element that determines who wins the customer. "We don't lead on price. If you compete on price, it's easy to lose a customer because the next guy reduces the price 2 percent," said Jim Magee, president of America II Electronics Inc. in St. Petersburg, Fla. Instead, Magee touts the quality of his company's process control. "If you visited our warehouse, you would see the same process and control as Avnet or Arrow."

At independent distributor Smith & Associates in Houston, services are also played up against price. "Our customers are looking for a good price, but the best price in the world doesn't matter if you don't deliver when you say you're going to deliver or if the quality isn't there," said Mark Bollinger, VP of business development at Smith & Harrison. "The competitive factors our customers are interested in are price, quality, delivery time, packaging." Bollinger also noted a recent emphasis on terms. "Terms have become more important lately," he said. "Being financially sound and having the wherewithal to offer terms is going to distinguish you before your customers."

An increased competitive environment is particularly pronounced in North America, where market growth seems to be part of a distant past. "This market is going through a resizing and reshaping due to a migration to Asia," said Harley Feldberg, president of Avnet Electronics Marketing, the Americas, a unit of Phoenix-based Avnet Inc. Feldberg recently returned from a multiyear stint in Asia. "It feels different here. It's not growing at the rate of Asia, or even how it used to be here."

In response to the changing North American market, Avnet is working to create a blend between specialization and full service. "Competition is heightened between the broadlines and the specialists," Feldberg said. "We're trying to find the right balance. How do we continue to drive the value of a specialist while at the same time offering the Wal-Mart solution?"

Feldberg agreed that price is no longer the leading competitive factor, no matter how important it may seem in the quoting process. "I don't believe price is a greater factor than previously," Feldberg said, adding that product availability is critical because customers have shortened their lead-times." Our customers are on a short window," he said.

Geography is an oft-repeated factor in keeping customers, especially as manufacturing migrates out of North America at an accelerating pace. "Geographic reach is a huge deal," said All American's Goldberg. "Customers want logistics support outside the United States as well as in multiple places in the United States."

"You do need to be global," agreed Magee of America II. In response to pressures to keep both sales and warehousing close to customers and suppliers, America II will open two new locations next month in Mexico and England.

Inventory management is an important factor both for franchised and independent distribution. For franchised distributors, it's the ability to consign inventory that matters. For independents, it's the ability to warehouse consigned excess that attracts business.

Old-fashioned customer service was also cited as a mechanism to keep customers from being distracted by the siren song of low pricing.

"The most competitive thing is customer service. There has to be a person there to quote anything, change anything, expedite anything," Goldberg said. "There has to be someone to send in if there's a problem. You get eliminated if you don't do those things well."