There is no shortage of anecdotal advice regarding e-commerce in the distribution industry. The durable goods distribution sector of the North American economy represents some $3 trillion in sales and thousands of distribution firms. Benfield Consulting surveyed 170 durable goods distributors in the Industrial/MRO/Institutional sector on their e-commerce practices. (MRO refers to products used in the maintenance, repair and operation of facilities and equipment.)
Industrial/MRO/Institutional accounts for the largest share of durable goods distribution, representing some $700 billion in distribution sales. Also, the sector is far along the path of online purchasing. In 2015, we conducted research on 250 Industrial/MRO/Institutional buyers and found that the weighted average of online purchases for their firms were 24% of total purchases. Our forecasts indicate that, by 2020, the overall online volume in the sector will be 35% or more and, if your distribution firm is not well along the technology path, you will likely lose sales to competitors who are. Hence, there is a sizable, growing, and expectant market in distributor e-commerce.
Investment is Key
The weighted average of online sales, as a percent of total sales, in the Industrial/MRO/Institutional sector is slightly less than 10% of total annual sales. Those firms whose online sales were greater than 10% were classified as winners. Firms whose online sales were less than 10% of annual volume have some catching up to do. Our comparisons of these groups finds that winners’ budgets were some 50% greater than those of low performers. Fifteen percent of the winners had annual e-commerce budgets from $500,000 to over $1 million.
The need for sufficient funding of the e-commerce effort cannot be understated. The software bundle for a satisfactory customer experience includes a transaction platform for B2B commerce, product information management, or PIM, faceted search and punch-out from procurement software to e-commerce sites. We estimate that a start-up effort requires upwards of $2 million in the first several years. For many smaller distributors, this type of capital is difficult to secure. Hence we are not surprised to find that some six out of 10 distribution firms sell less than 5% of their volume online.
Getting the Right Tech
The software bundle of transaction platform, PIM, faceted search, and punch-out is found in three-quarters of distributors whose online sales are over 25% of annual volume. For the firms that sold 10% to 25% online as a percent of all sales, there was a two to three times greater chance of having the full software bundle over firms who sell 5% or less online. Additionally, the use of a mobile app was 2x more among wholesalers with high online sales.
The software to offer a satisfactory online experience began to appear after the 2008 recession. Reports of transaction software specifically for B2B e-commerce and PIM systems appeared in trade journals and industry venues, and were quickly tried by distributors with over $1 Billion in sales with good results. Today, half of all distributors have proprietary transaction software. This is a legacy of the early days of e-commerce when there were no specific B2B platforms available. Proprietary technology platforms, and B2C platforms adapted to B2B applications, were all that was available to answer the need.
Today, the trend is away from self-generated transaction software and to both independent platforms and those sponsored by a distributor’s vendor of enterprise resource planning, or ERP, software. Fifteen percent of distributors purchase transactional software from the many independent vendors, and 35% use their ERP vendor’s platform. Additionally, ERP vendors are trending toward outside partnerships with e-commerce software vendors and away from proprietary software. Companies use ERP systems to manage such operations as inventory, customer activity and financial records.
ERP Influence on Distributor Online Success
Distributors moved from manual inventory and accounting systems to ERP systems and computerization of their business in the 1970s and 1980s. Hence the ERP systems have developed significant functional expertise and their organizations are sizable, often tracking at a billion dollars in sales or more. These software organizations serve many industry groups, but distribution is often among their top three sales markets.
There has, however, been scant research on the effect of ERP vendors’ technology on distributors’ success in e-commerce. Our research reviewed nine ERP vendors and their influence on distributor e-commerce sales. In two instances, the vendors had over 30% of their distributors classified as winners that sold over 10% of their volume online. The remaining seven ERP software vendors had less than 10% of their distributors classified as winners. When we examined the two vendors whose success rate was significantly higher than their competitors, we found:
- There was a well-defined e-commerce community open to the ERP vendor’s customers—including research data, industry experts, meetings and educational venues designed to help distributors drive online growth—and the ERP vendor paid for these effort with its own funds.
- The ERP vendor had established preferred partnerships with outside e-commerce software vendors, including providers of transaction platforms and PIM systems;
- The ERP vendor actively promoted and funded research in e-commerce and digitalization of the distribution industry;
- The ERP vendor’s integration partners were experienced with multiple e-commerce transaction platforms and connecting them to the ERP system;
- The ERP vendor had in-house experts in e-commerce and relied on them to keep abreast of the latest technology and advise on strategy.
In short, a significant amount of e-commerce success is dependent on the ERP vendor and their support of e-commerce. Interestingly, we found that there was no correlation between ERP proprietary e-commerce transaction platforms and online success with customers.
Developing Winners in E-Commerce
Distributors who succeed in e-commerce have noticeable behaviors that move them toward winning online. These behaviors include superior investment in e-commerce in both technology and people with a willingness to invest this amount well into the future. The willingness to fund the full e-commerce bundle of transaction platform, PIM, faceted search and punch-out, plus a mobile app, was found in winning companies.
ERP software vendors also developed distributor winners by funding a community for education and research of e-commerce. Additionally, ERP vendors that developed strong integration partnerships with other technology providers, developed in-house expertise on digital strategy, and established partnerships with outside transaction and PIM platforms, had significantly more distributors who sold over 10% of their volume online.
Scott Benfield is a consultant for B2B manufacturers and distributors, and president of Chicago-based Benfield Consulting. He can be reached at [email protected] or 630-428-9311.