Valve and actuator end users are operating with tighter budgets and deadlines than ever before, which means increasing challenges in the distribution channels.
The last time a panel of distributors spoke before the Valve Manufacturers Association board (in 2005), the worldwide recession had not yet hit. However, the next few years were rough ones, and the need for tighter purse strings has since created a new set of challenges for distribution channels, according to a panel of experts from leading distributors who spoke at VMA’s annual meeting in October 2011.
The immediate effect of the economic recession was that “people pulled back—no one was stocking much,” explained Shelly White, division president of Baro Companies, a division of FCX Performance. When business picked back up, it was more difficult to fulfill orders. That situation will quickly right itself, but new pressures have arisen on the distribution channels that may stay around for awhile, panelists pointed out.
White, along with fellow panelists Andy Brown, president and owner of Mid States Supply, and his colleague, Ben Hurst, vice president for Mid States, as well as Gary Ittner, executive vice president for McJunkin Red Man Corporation (MRC), explained what their companies do today, how that has changed over the years, and the current challenges in the distribution field. (See sidebar at end of article)
DISTRIBUTOR AS BRIDGE
White said that one of the main trends she sees today in the distribution channel is that lead times “are really compressed.” The recession created a situation in which end-user customers have to do more with less resources, she pointed out.
These users remain under a lot more pressure, and as a result, they want distributors to do more of the work of finding the right product while taking on more of the risks inherent in that situation. At the same time, they have new sources of information such as what can be found on the Web.
Today, end-user customers “often pull out numbers for what they think a product should cost,” White said, which can be completely unrealistic or misunderstood.
End users also want a much wider range of products from a distributor than in the past.
“For example, a distributor may have just sold ball valves [in the past], but now the customer wants every possible thing that could go on that ball valve,” White says. More than ever before, end users also expect their distributors to be knowledgeable about the latest technology and to take responsibility for specifications and selecting the right equipment for applications while enabling those users to maintain a competitive edge.
Many users today require a distributor to manage the sub-vendors of the manufacturer such as foundries and companies that do the testing or provide machining, welding, assembly or packing.
Meanwhile, on the manufacturing side, a main trend is that the companies that make the products are increasingly asked for more severe service products, White said. This requires the distributors to keep up with what’s available.
FOR THE FUTURE
The calls for quicker delivery and reduced lead times are only going to increase going forward, according to White, and this situation will continue to be the main challenge for distribution channels.
Additional future challenges include:
- Competitive pressure from lower-end manufacturers will increase.
- Customers are getting more tech savvy, using e-sourcing and shopping online for products, which creates an uncertain situation for distributors of engineered, sourced products.
- Contract orders are getting larger and larger as big end users such as the giant oil companies want broader supply agreements.
- End users want to pass on more of the risk. “Whether it’s in the form of a letter of credit, performance guarantee or extended warranty through the startup period, the end user is applying more pressure on all sub vendors to perform until the plant starts up. There is more and more risk for suppliers with reduced reward. This has been happening for about five years, but it’s really coming to a head,” White said.
- There will be higher demands for response at all levels of the sales cycle, which is hampered by reductions in people and resources from within the manufacturing industry.
HOW MANUFACTURERS CAN HELP
Because distributors are the main buffer between end user and manufacturer, the more information the manufacturers can provide to that buffer, the better the situation. For example, because end users are demanding improved product quality, distributors need to know from manufacturers how they can show the customer a product is superior. That may mean increased research and development investment based on customer input and needs, White said.
It also means providing the best marketing tools the manufacturer can afford to create.
“The more information you put out there about your success stories and applications,” the better the distributor can convince an end user the product is right for the job, she pointed out.
THE RIGHT STUFF
Andy Brown of Mid-State Supply agreed with White that good information is key to the distribution industry today. He also pointed out that a main challenge in that industry at present is training—not training within the ranks of manufacturer or distributor, but educating end users.
“We all want sales … but ultimately, what I want to know is that the valves I sell are the right products going in the right service as well as properly installed and the best product for the job,” he said.
“We have to get our customers out there to understand what our products do,” he added. From the manufacturer’s standpoint, that means getting the distributors—the guys in the middle—the information they need to know how the products work so that when staff walks into a sales meeting, they can offer the best solutions possible, he added.
Brown and his co-worker, Ben Hurst, defined three main issues they see affecting distribution today: quality/integrity; sense of urgency/service; and pricing.
Quality/Integrity: A main concern today for end users is the balance between quality and cost savings, especially in cases where products coming from overseas are marketed as domestic products.
Because of this “in our opinion, one of the most important things we do is to test every valve,” Brown said. This issue will only get tougher to address going forward as “people in the future are going to hold products to standards probably 10 times what they are today,” he said. Training comes into play here, too, he said.
“I can’t tell you how many people go out and install a valve without any training. We must ensure that end users have the experience they need in field installation and maintenance,” Brown said.
Sense of Urgency: In distribution, deadlines are paramount to the business, and that doesn’t mean just deadlines with bidding out a job or fulfilling an order—it also means follow up. “Whatever issue the end user is having, we need to be able to react to their needs the minute they have any issues,” Brown said.
Pricing: Although pricing will remain a key in distribution, “quality is remembered long after price is forgotten,” Brown said. “Our request to manufacturers is this: Don’t get your product on the market by driving down the cost. Let’s focus more on how we can truly build a better mousetrap, then follow through and educate users how to put it in,” he said.
Brown’s associate Ben Hurst said another issue in distribution today is accountability/traceability of what’s happening with products. “There is great demand for associated paperwork today,” he said. Whereas, “a long time ago, making valves seemed like the hard part, now the hard part is providing all the paperwork” that can back up a product’s claims, he said.
Like White, Brown and Hurst point to quick delivery as key to doing business today, and they added that speed is needed for proposals, as well as product delivery and follow up.
“It amazes me that on one morning today you can get a request for a million-dollar valve order the end user needs by the next day,” Hurst said.
But success in distribution is a combination of quick delivery, product quality, expertise and service after the sale, Hurst and Brown pointed out.
At the same time, manufacturers need to “make a stand. Realize you can’t be the ones chosen all the time. First and foremost, you should feel good about the products you’re selling,” Brown said.
THE EVOLUTION OF VALVE DISTRIBUTION
MRC’s Gary Ittner outlined the many changes that have occurred in the manufacturing/distribution systems for valves over the years. Back in the 1970s, for example, the industry was much more complex, more regional and local with many sales going straight from the multitude of manufacturers that existed to end users. Over the years—as international sourcing occurred; the number and types of products available grew; and manufacturers began outsourcing over borders—distribution began to consolidate regionally, and then expand nationally as companies grew. In the 2000s, rapid consolidation of both manufacturing and distribution occurred and many new brands entered the market before the economic crash. Later, after that crash, North America saw oversupply.
Today, manufacturers are looking to expand their integration chains, acquire additional lines of products and expand distribution channels. To grow their markets and capture larger projects, many manufacturers are “looking at higher-end products to help offset the commodity-type products,” Ittner said. Meanwhile, “the buy-direct model, which has been very prevalent in Europe, is starting to find its way into a broader North American project market.”
All of this affects distribution channels and means that “we all need to work together to ensure we are not duplicating what we do to one another,” Ittner said.
While the industry has seen many changes since the depth of our economic woes, many of the challenges remain the same, he pointed out. For example, a main challenge for manufacturers remains finding ways to: improve core competencies in manufacturing, services and solution selling; improve key processes such as raw materials, production and managing subcontractors; and measure value over a product’s lifecycle.
Meanwhile, distributors are also looking to improve their own core competencies, add value for their customers, deliver end-user cost savings and improve performance measures. And end users are seeking ways to consolidate what they spend through smaller bases of suppliers, balance technical needs and commercial pressures, and find leveraging opportunities.
What has changed the most over the years for end users is that they are migrating away from standard valves and toward customer specific solutions. What that means for manufacturers and distributors are new challenges in service requirements from both the commercial and technical ends. “There are many changes and additions being made to specific end-user valve specifications, thus requiring additional dedicated inventory to support these requirements,” Ittner said.
It also means new information requirements. For example, “As far as price updates, we’re getting beaten with a stick with constant requests for industry indices to support price changes,” Ittner said. Meanwhile, product quality issues are getting far more challenging, and distributors and manufacturers are asked to take on more financial risk, he added.
Going forward, ongoing challenges for distribution will include:
- Continued pressure to provide low-cost premium products. As quality differences narrow, low-cost sourcing will continue to gain influence, Ittner said.
- A reduction in the knowledgeable workforce at distribution, manufacturing and end-user levels.
- Increased demand for value-added products and services, which translates into more documentation and inspection requests, extended warranties, shipping advantages and other demands.
As far as how manufacturers can help meet these new demands, Ittner said they can look for better ways to ship on time and to communicate any changes in lead times. They also can challenge end users on unique inventory and standards requirements, be involved in developing price adjustment indices, and look at ways to deliver the quality customers expect to receive.
He also urged manufacturers to see their distributors as partners by looking at the value of distribution and future maintenance, repair and operation (MRO) requirements when developing positions on major projects and involving distributors in the sales channel.
The Speakers’ Companies
Baro, a division of FCX Performance, Inc., is a specialty flow control distributor for valves, actuators, accessories, process instrumentation, pumps and mixers that serves 30 states through 17 locations, including five distribution centers. The company is a total solutions provider for valve automation, pump repair, instrumentation and other technical services with about 75% of their business in MRO and a quarter in Original Equipment Manufacturer (OEM) and project business.
The company serves over 10,000 customers in diverse end markets including petrochemical; refinery; pulp/paper; aggregate, mining and minerals; power; semiconductor; and food and beverages. Baro has a 60,000-square foot assembly area for valve automation shop capabilities.www.barocompanies.com
McJunkin Red Man Corporation (MRC)
MRC is the largest global distributor of pipe, valves and fittings and related products and services to the energy industry. The company has over 400 service locations around the world, including key locations in active oil and natural gas regions of North America.
About 90% of the company’s revenue was generated from within the energy industry in 2010 with about 45% upstream, 23% midstream and 32% downstream. About 79% of the company’s business comes from the U.S., 12% from Canada and about 9% from Asia and Europe. The company had $3.96 billion in sales in 2010, more than 3,800 employees and over 400 global service locations, including more than 30 international branches.http://mrcpvf.com
Mid-States, which was established in 1947, has branches in 27 locations around the nation. The company serves a wide range of pipe, valve and fittings markets, including natural gas and oil; food and food products; refining; general mechanical contractors; OEM manufacturers; power plants; city utilities; and ethanol.
Among the services the company provides are material management programs; steam system analysis; valve automation and control audits; and more. www.midcoonline.com