Sept. 11, 2000

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Beyond Just Moving Goods

Distributors use IT to meet customers' demands for service and partnerships

By Tony Seideman

More on distribution:

Industry Charts: Distribution (PDF File) sidebar: Applied Divides IT, Conquers E-Business Online Grocer Takes Different Approach (4/3/00) Electronic Buyers News Special Report: Distribution -- Surviving the online jungle (7/10/00) VARBusiness Fight Of Their Lives (5/29/00) Electronic Buyers News Distribution rises to record level on stock index (5/1/00)

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ew industries are changing as dramatically as distribution, in which companies that once warehoused and moved goods between buyers and sellers are redefining themselves as broad customer-service organizations. The Internet, fast databases, supply chains, and customer-relationship management software give everyone access to information that until recently even insiders in a specific industry once had a hard time obtaining.

Along with these changes come many challenges for distributors, too. "We're the circus conductor in the middle of the supply chain," says Guy Abramo, senior VP worldwide and CIO of Ingram Micro Inc., a wholesale provider of technology parts and services.

Distributors are a key part of the supply chain in practically every industry, from poultry to machinery to sophisticated electronics. They are expected to do everything from prepackaging shipments to providing factory services. Because of the rising role of IT, "we've moved from being a product company to a supply-chain management company," Abramo says.

The shift also is altering the way the Santa Ana, Calif., distributor makes money. In 1998, none of Ingram Micro's $22 billion revenue was derived from services such as logistics support, which includes shipping products directly to consumers and providing real-time statistics on supply-chain activity. By 1999, 10% of its revenue was service-based--and it's on the rise.

Service and partnership are what customers demand from their distributors. Just a few years ago, distributors were expected to move goods and do little else, says Michael Roche, manager of warehousing operations for Georgia-Pacific Corp., an $18 billion manufacturer of building, paper, and chemical products in Atlanta.

Now, Georgia-Pacific and other customers want distributors to play a strategic role in their businesses. "We place a lot more management [responsibility] on them to main-tain the integrity of our business," Roche says. Major retailers are notoriously un-forgiving when it comes to distribution, and the face they see when the trucks arrive is the distributor's, not Georgia-Pacific's, Roche says.

Effective use of IT is the only way to cope, he says. Systems must be integrated, policies must match, and communications must prove effortless. "They have to be sophisticated," he says of the distributors his companies use.

Distributors have no choice but to respond, says Tom Taylor, president of ServiceCraft Corp. in Buena Park, Calif. ServiceCraft, the primary unit of May Logistics, is one of Georgia-Pacific's two largest distributors. "We're moving forward very vigorously as far as technology is concerned," Taylor says. "Our relationship with Georgia-Pacific is a true partnership. We're absolutely in a steady flow of communication." Some of that communication takes place through Georgia-Pacific's SAP-based supply-chain management system. Data also moves via electronic data interchange and value-added networks, he says. "We're focused not only on being able to supply data, but also on moving information through the system very quickly," Taylor says.

Clients want to know the status of all of their products at any given moment, and distributors need to make it easy for manufacturers to get that improved visibility, says Greg Runyan, a senior analyst at the Yankee Group. "You have to open yourself up to the manufacturer and give them the ability to see the demand you're satisfying," he says.

Distributors understand that adopting technology such as sophisticated logistics software is a matter of survival, not convenience. "It's difficult to move a company this size from a products mind-set to a service mind-set, but that's what we're doing," says Ingram's Abramo.

Distributors use IT to generate revenue for the company as well. Ingram isn't charging its long-time customers for services they're used to getting for free. But newcomers, especially those in the dot-com sector, are putting up the bucks for logistics services. "What comes along with that change is a whole different set of responsibilities, and most of those tend to be information-related," Abramo says.

Drop shipping is one example of an information-driven service. In drop shipping, a distributor stores a manufacturer's product such as computer chips. When a customer, say a PC maker, orders that chip from the manufacturer, the chip maker's order-entry system notifies the distributor's IT system. The distributor then "drops" the chip at the PC maker's doorstep as if it came directly from the chip manufacturer. IT systems let distributors pinpoint shipments of goods as well as running the E-commerce engines that account for the business itself.

"As little as two years ago, less than a third of the product sold through Ingram Micro got drop shipped to the user. Today, more than 70% of orders go to end users," Abramo says.

The Internet has advanced IT's position of reaching out to customers rather than operating only within a company's boundaries. "Information technology is more and more externally focused," says Charles Bonomo, VP of technology at Arrow Electronics Inc. in Melville, N.Y.

Increasingly, distributors view their vast databases as mining companies view deposits of ore--repositories of potential wealth, not just machines doing a job. Companies large and small are establishing initiatives to harvest this potential, partially because its a new revenue source, and partially because customers are demanding it.

"What was leading edge and competitive last year is a commodity this year," says Steven Bandrowczak, VP and CIO at Avnet Inc., a $9 billion supplier of electronic components in Phoenix.

Ingram Micro hired a data-mining lab at Northern Arizona University, which spent three years going over hundreds of millions of pieces of data in Ingram's database, Abramo says. One of the first results: a radical increase in the ability to let value-added resellers "see" across orders. The upshot: Smaller inventories, faster response times, and fewer errors.

Moreover, distributors take on tasks that were once the province of specialty service providers. "We're doing a lot of services for our customers," says Ergin Uskup, VP of management information systems and CIO of United Stationers Inc., a $3.4 billion distributor of office products in Des Plaines, Ill. "We pick the items, put them in a plastic bag or a box, and address it to the recipient. We put the customer's label on it so the package that's going to the end consumer looks like it's going from Joe's Office Supplies when it's actually coming directly from our warehouse," Uskup says.

Working this way requires an awareness of IT as a strategic force. "We need to lose the name "information technology,'" Bandrowczak says. In this hothouse environment, new products and services evolve at a rapid pace.

"It's not the technology itself that's creating the new opportunities. It's all the things you have to wrap around the technology," he says. "The ability to recognize technology isn't what differentiates your company. It's the business-process training, change-management technology, and project management that does."

The new IT environment has made distributors more powerful and at the same time, more vulnerable. They can accomplish more than ever, but the new openness makes it impossible to conceal flaws that once would have passed unnoticed. "The Internet is your storefront. If an internal application goes down, you have room for maneuver. It's behind closed doors. If you have problems with the Internet, you're on the air and there's no hiding," Arrow Electronic's Bonomo says.

Distribution IT executives face a complex and challenging situation. SAP's supply-chain systems, which are almost a de facto industry standard, are notoriously difficult to integrate. EDI, one of the most common ways of moving information, is considered clumsy, awkward, and outdated. The Extensible Markup Language is becoming increasingly common for online systems, but broad implementation only has just begun. The reality is that a great many companies still rely on faxes and sneakernets.

Getting all these pieces together involves politics and marketing as much as it does technology. Because of this, a different type of CIO is emerging in the distribution business. Abramo's background, for example, is in marketing. "I started with Ingram as the company's chief marketing officer. We felt the challenges in managing IT today had more to do with strategic vision, project management, and marketing, and less to do with the knowledge of technology," he says. He's been on the IT side for just over a year.

Of course, technology remains a driving force. Distributors pour millions of dollars into systems that will help them move data effectively. Avnet has two on-line initiatives under way, Bandrowczak says. Avnet Connection is designed to make all the company's information accessible on the Web, he says. This involves taking data stored in databases or paper catalogs and putting it in Internet-compatible formats.

Avnet's other initiative is ChinaECnet, an online marketplace that will be the sole gateway into China for hightech components. China's Ministry of Information is a prime investor in the venture.

Creating digital connections is one of the most important tasks facing distributors, United Stationer's Uskup says. Matching up varying ways of doing business is as important as getting different networks to talk to one another, he says. In distribution the situation is more intense than in almost any other field because it's such an information-intensive business.

All of these demands make it difficult to set budgets and do planning, Bonomo says. "When you're dealing with applications within a corporation, you have a much better chance at estimating the use of the organization. When you point your applications externally, you really can't predict size or usage," he says.

Boosting user friendliness has become a priority at Arrow, says Bonomo, whose background includes working on Wall Street. Financial companies spend a great deal of time and money making sure that information presented to users is comprehensible and clear. "That's an art that has not been focused on strongly enough in the IT industry," he says.

Arrow wants to remedy that by improving computer and human interaction and interface design. There's no room for error in the distribution world, nor for clumsily designed software. Customers simply have too many choices and too little tolerance, Bonomo says. Avnet had a similar concern and hired an outside specialist to design interfaces that were easier to use.

But most IT projects are handled internally, and Bonomo sees retaining an IT staff as a significant challenge. "We've put together a very attractive retention plan, and I still have to deal with resignations," Bonomo says. Overall, his group has 45 people, about 20 of whom are directly involved in technology work.

Two tools work best to keep people on board, Bandrowczak says: technology and training. "Everybody wants to have a marketable resumeacute," he says. They won't get one if they're working with outdated technology or their skills aren't constantly polished. "We focus on training, technology, and career development. Those have been the keys to our retention" and for recruitment as well, he says.

Whatever means distributors use to get and keep staff, their ability to command and creatively use information technology will prove a crucial competitive advantage. "We see a big part of our value proposition over the next six to 18 months as being information providers for the whole supply chain, whether it's a value-added reseller trying to provide a solution or a manufacturer trying to cross-promote its own products," Ingram Micro's Abramo says.

For distributors, "the pressure is to figure out how to leverage the infrastructure to their advantage," says Aberdeen Group analyst David Altschuler. "Distributors have to understand what their value add is," he says, and they should view technology as "a challenge, not a death sentence"--at least for the time being.

illustration by Jeffrey Fisher
Photograph of Abramo by Nick Souza
Photograph of Uskup by Jeff Sciortino

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