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Relationships Based On Value

Services are becoming more popular amongst distributors as competition heats up, but are they value-added or standalone offerings?

This article first appeared in the October 2011 edition of Industrial Maintenance & Plant Operation.

Services are becoming more popular amongst distributors -- especially as competition increases -- but it's a matter of whether these services are a value-add or a stand alone offering, and whether distributors are trending towards more fee-based solutions.

Figure 1: Of the following services, for which do you charge a fee?

When we asked the readers of Industrial Distribution how many of them were providing services to their customers for a fee (unbundled services), 44 percent said they were. This leaves over half who aren't providing straight services outside of a contract. This aligns with a decades-long trend of distributors continuing to bundle more services for customers as part of a purchase contract. Overall, the percentage of those who are charging for services previously covered is declining.

Still, it's interesting to get a firm handle on which services still garner an additional fee from customers. Shipping, according to the ID readership, tops that list with 69 percent saying they charge a fee.

After shipping, it gets a little more difficult to establish a trend on par: Approximately 2 out of 3 distributors with design consulting services charge a fee for them. Other areas where readers said they charge are for set-up/installation, fabrication/kitting, and employee training. Some other areas we know are commonly offered -- such as 24-7 ordering capabilities and extended warranties -- came in on the lower end, suggesting these are not being charged for. Things like inventory management -- something half of respondents said they offer -- came in around 14 percent.

The "other" category yielded some write-ins related to after-hours emergencies, onsite repairs, and assembly and testing.

In terms of the actual amount of revenue generated from services themselves, most don't get much. The majority -- 54 percent of respondents -- said that they derive somewhere between 1 and 10 percent of their revenue from services (Figure 2). In fact, a mere 13 percent get more than 20 percent of their total revenue from the services category. This is a drop from 14 percent reflected in the 2009 results of this annual survey. 2009's numbers, in fact, were a slight increase from 2008, but our list this year indicates that we can't statistically support a growing trend towards distributors' ability to derive increased overall revenues from the services category. Still, numbers have changed in the sense that 34 percent said they derived zero revenue from services in 2009, compared with 13.5 percent who say the same today. For that reason, we can infer that as more distributors charge for certain services, the more will follow suit and assign a dollar amount to these once-free or -bundled offerings.

Figure 2: How much of your revenue do you derive from value added services?

Figure 3: Are you involved with vendor-managed inventory programs?

Industry-wide, it seems that the value-add strategy is becoming more viable and distributors gain more spend from individual customers who can attain the accompanied program they derive the most overall value from. The key to this strategy, we've ascertained, is in the ability of distributors to gain visibility and keep stringent metrics in order to assess whether certain services are actually profitable for them from a net standpoint. Perhaps easier said than done, the process of vetting these services on a case-by-case basis will continue to demand some man hours from businesses as they become more entrenched in this specific strategy.

One of the more popular services areas -- one 53 percent of survey respondents say they're involved in -- is vendor-managed inventory (Figure 3). This is consistent with a rate of 54 percent in 2009. As company size grows, involvement in these programs increases.

What To Expect

In the end, manufacturers would be wise to investigate the full service offerings of their suppliers to determine if there might be ways of utilizing some cost-saving and efficiency measures such as vendor-managed inventory, kitting, set-up, training, and more. With an increasing trend towards industrial suppliers developing partner-type relationships with their customers, it's a good time for manufacturers to jump onboard and essentially outsource some of the tasks they are currently addressing internally. That said, we anticipate the trend towards more fee-based options will grow. It's up to manufacturers to determine whether the justification is there to use an outside party. Luckily, for many, their suppliers are trusted partners that can come in with an informed history relative to the business. For these scenarios, we see the service offerings as strengthening these relationships over time.