Industrial Margins Declining?

\"\"Feedback from manufacturers and distributors indicate a rather significant drop in sales but recent conversations indicate that margins could be even more significantly impacted.  While industrial margins typically are higher than contractor / construction business, this quickly could become a memory.
We\’ve heard of:

  • Contracts / blankets going for \”low teens\” (i.e. 13%)
  • Longterm contracts lost due to the tricks of market basket pricing only for the \’winner\” to then have the contract pulled, sometimes only a few months later, for service reasons. But the servicing distributor (original agreement holder) now has the privilege of retaining the business at a reduced margin.
  • MRO buyers are advising distributors that they require extended payment terms … from 90-120 days!
  • And some are asking for rebates and prebates (signing bonuses)
  • All of this before in addition to requiring the distributor to add services (i.e. storeroom management), meet TCO (total cost of ownership) goals which are essentially sharing cost-saving ideas, and absorbing excess / obsolete inventory that the industrial account may have.

So much for the opportunity for margin improvement. Once margins decline, you know the odds of them ever increasing!

Why do distributors accept this?
  • Part of the reason is fear of losing cash flow
  • Part of the reason is an inability to measure their service with an account
  • Part is a concern of validating their value

And we\’re starting to see the same occur with contractors. Larger contractors are seeking productivity benefits and services. In many instances distributors\’ first response is to offer the service … for free, thereby increasing their costs and frequently not getting much in return. While frequently this is a defensive move to retain business, it could be an offensive move to expand the business relationship.
So why do buyers feel they can negotiate to decrease product costs, and distributor margin, in an industry that is essentially a pennies (okay, for some, a nickel), net profit business?  Perhaps because …

  • They \”can\” (knowing some distributors will readily reduce their pricing (margins) and others will seek to \”share\” in the pain with their manufacturers)
  • They view many distributor services as commodities.

Rarely can distributors quantify their services or their service benefits, hence purchasing feels that many distributors are equal until production / operations are impacted (and the true \”customer\” starts to scream!)
So, what to do:

  • Value yourself
  • Track service. Develop a customer service scorecard
  • Broaden relationships within the account
  • Communicate your value (to yourself and to the customer)
  • If you feel your appropriately priced and add value, consider standing your ground
  • Teach sales how to sell services and sell value

And if sales don\’t participate in the concession, perhaps they should (and not only based upon reduced GM$ but maybe a lower commission percentage as they may have \”devolved\” into an account management / contract entitlement mentality and are not effectively selling the company\’s value.
Accounts that are not profitable may not be worth having.
What are you seeing re MRO margins, contractor productivity requests, the ability to \”monetize\” service?
Shameless pitch alert!!  If you want to know how your company performs in the eyes of your customer, ask us about our Customer Satisfaction Assessment process where we can calculate a Customer Satisfaction Index for you and solicit insights from customers … and even customer specific.  We can also help you through the Customer Service Scorecard development process.

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3 thoughts on “Industrial Margins Declining?”

  1. David, You are spot on.
    The procurement departments of these big industrial companies are “playing their distributor sales teams like second hand fiddles.” Distributor salespeople are poor negotiators (whether from lack of will or lack of training). Most fail to understand their value or even know how to calculate it. And, distributors give away services like drunken sailors. But, the procurement folks are hedging their bets with their maintenance and engineering departments, who used to stand up for their distributor.
    I just learned through the “grapevine” that Maintenance Managers at companies owned by a gentleman called the Wizard of Omaha, are being told “get used to the service from big companies like Grainger, because it cost’s too much to do business with your local distributor.” One area pointed to was the “new industry standard for terms of payment is between 105 and 120 days, and the little companies can’t afford to keep up.”
    Time for our industry to make some changes.

    1. Frank – thanks for the feedback and the info. Perhaps distributor salespeople shouldn’t be involved in negotiations? Do these discussions need to be elevated to strategic sales decisions or people more experienced (maybe trained) to deal with professional procurement decision makers?
      Also, if dating gets extended, as a practice, what does this do to publicly held distributors when they report to shareholders? And does it also mean that only very strong, financially, distributors will be able to play. Lending banks won’t be happy if DSOs are well extended.

  2. I am a big believer in selling benefits. Another great way to drive awareness and increase sales is to provide as much up front value as possible. Give, Give, Give and then ask! Great article.

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