A great downturn for distributors - Viewpoint

Electronic News, Feb 11, 2002 by Rob Spiegel

What a wonderful downturn it's been for electronic distributors. I think I can say for certain that no distribution executive alive would sing praises to the year 2001, yet a few market changes during last year were quite positive for the distribution industry. Before this downturn got started in late 2000, distributors had quite a few troubling challenges on their plate. Now that the last the ugly traces of the downturn are beginning to fade, the distributors' dish of troubles has turned into a potential feast of opportunity.

Let's look at the pre-downturn plight. In early 2000, the prospect of disintermediation was lighting up the trade news. The dot-coms were supposedly going to supplant distributors. After all, they could provide an instant market that would be more transparent and more efficient than distribution. This prospect may seem ridiculous in hindsight, and distribution executives knew the threat was nonsense, but it brought up questions on Wall Street about the value of distribution stock. This was happening while investors were stacking up their chips on the new B2B ventures that were down-talking traditional distributors as "dinosaurs."

Then there was the nasty question about contract manufacturing. Surely this hot trend would disintermediate the distributor. Again, distributors said EMSI was no threat, that contract manufacturers were friends, not enemies. Some distributors even set up divisions to serve this new industry trend. Now, EMSI continues to flourish, and so do distributors. The same story came with third-party logistics companies. Naysayers said they'd cut into the distribution business and the distributors said, "No way." No way won.

Then the downturn came with its wild and unpredictable winds. Most of the dot-coms blew away like the little pig's house of straw. The threat of EMSI and 3PL scattered like the wood of the second little pig's house. That left the house of brick, where the distributors lived. To mix metaphors, it's interesting how well the distribution dinosaurs were able to adapt to the swiftly changing market conditions. Through it all, the distributors kept insisting, "We're adding value to the supply chain!"

Another funny thing happened on the way through the downturn. Distributors were savvy enough to avoid the hot potato of inventory glut. While the new-economy companies watched their funding dry up, the old dinosaurs used their shiny new supply chain tools to manage down their stock. While they were at it, they quickly reduced their size as the market contracted, which allowed most distributors to deliver a few black-ink quarters while taking 25 percent to 45 percent hits on sales. And through it all, most distributors sliced away their debt.