Academic journal article Business Economics

Industry Corner: Industrial Distribution, Survival of the Smartest

Academic journal article Business Economics

Industry Corner: Industrial Distribution, Survival of the Smartest

Article excerpt

Industrial distribution, defined here as equivalent to durable-goods distribution, touches every sector of the U.S. economy, frequently multiple times. It is the industry that links the members of the supply chain (i. e., suppliers and manufacturers) through the activities of establishments and persons that sell to industrial, institutional, and commercial users but do not sell in significant amounts to retailers or ultimate consumers. In traditional terminology, this is the industrial distribution channel.

The industry generates value in the "service outputs" of time, space and acquisition utility, i.e., waiting time or temporal convenience, market decentralization or geographic convenience, product availability, and lot size. Consequently the industry accounts both for a substantial proportion of the value customers enjoy and for a significant portion of their cost.

Today the industrial distribution industry is experiencing great flux including transaction cost reduction, elimination of redundancies in the supply chain, development of economies of institutional scope (and sometimes scale), and deepening relationships among members of the supply chain. The result has been ongoing structural and operational change. For example, in its landmark 1992 study, Arthur Andersen and Company predicted by 2000 a reduction of 15 percent in the number of distributors and share of market for large firm approximating 50 percent. With such consolidation went naturally realignment of functions.

This article addresses the forces motivating such change and their likely effects on the industry. Then, we will discuss the approaches industrial distributors are taking to survive. Much of the motivation and the reactions are enabled by IT. Thus, survival and competitive advantage in industrial distribution literally will go to the smartest.


The industrial distribution industry comprised, as of the 1992 Census of Wholesale Trade, 245,000 firms operating 313,000 establishments and employing 3.3 million people. On average, distribution accounts for about 10 percent of the industries it serves. Durable-goods distribution volume was $1.6 trillion in 1992. Of that approximately 63 percent was through merchant wholesalers who take title to goods, carry inventory and provide a variety of marketing services to their suppliers and customers. These distributors accounted for 88 percent of all durable-goods distribution establishments. Manufacturers' sales branches, along with agents, brokers and commercial agents, accounted for the rest.

The industry is moderately concentrated. Just over 77 percent of dollar volume is concentrated in five segments:

Motor Vehicle, Parts and Supplies                     $394.1 billion

Professional and Commercial
Equipment and Supplies                                $263.0 billion

Machinery, Equipment and Supplies                     $230.0 billion

Electrical Goods                                      $227.8 billion

Metals and Minerals, except Petroleum                 $118.3 billion

Within lines, national market share concentration ratios traditionally have been low, while local market share concentration has been high. The emergence of numerous large national distributors is beginning to raise the national concentration level. Specialization by SIC is likely to trend down, with the growth of large, integrated national distributors.

Industrial distributors' functions generate value for both their suppliers and their customers. In this linking position, distributors' roles in both directions are feeling pressures. For suppliers, distributors offer market coverage, selling capability, market intelligence, order processing, customer relationship maintenance, inventory holding, transportation and some financing.

Clearly the market contact activities are subject to change by IT. Distributors offer their customers value through timely availability of product, a convenient assortment (range) of products, appropriate lot size, credit, pre- and postsale service, and technical information and support. …

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