No longer product pushers

June 1, 2003
Distributors discuss the delicacy of changing their indrustry's perception and practice.

Distributors discuss the delicacy of changing their indrustry's perception and practice.

Today's shops aren't looking to increase capacity so much as to improve manufacturing operations to work in a "lean" environment. Often, these shops don't have process or service departments to do their legwork, so they rely on their distributors to recommend ideas for better manufacturing, plus provide training and service. This shift in the needs of the manufacturer has completely changed the distribution industry.

To get a read on how distributors are changing with their field, AMERICANMACHINIST gathered with seven top distributors at the American Machine Tool Distributor's Association (AMTDA) annual meeting to discuss the changing needs of customers, the challenges involved with meeting those needs, and the effects of a redefined machine-tool-builder role.

New customer demands
Lean manufacturing is a necessary strategy for all plants in the U.S., and while most shops realize the importance of just-in-time operations, many no longer have in-house resources for research, development, and process planning. So, more manufacturers are asking their distributors for guidance on how to best use machines within their plants.

This makes sense to Ron Mager, senior vice president and CFO at Machinery Systems Inc., who attributes the demand for more value-added distributor services to a shift from "buying to fill capacity" to "buying to improve productivity."

"For us to sell equipment, we've got to improve customer productivity as opposed to meeting capacity need. This goes beyond looking at a discrete application and saying, 'This is the best solution to make this particular part.' It's understanding their entire manufacturing process so we can help U.S. manufacturing work smarter to survive globally and not lose work to plants overseas."

James Kreager, CEO at Kreager Machine Tool Corp., believes customers want the same things they always have, but adds that there is now a sense of urgency.

"Teaching customers, solving problems, and reducing their costs has always been a focus for us, but now it's much more intense. With the offshore competition and the market in a state of depression for the last few years, teaching the customer how to survive has become an opportunity."

In addition to global competition, shrinking tolerances and increased part complexity is forcing U.S. component manufacturers to work smarter. John Hackenberg, president of J&H Machine Tools Inc., sees the machine tool distributor playing a key role in helping customers produce statistically better parts faster and with greater efficiency.

"When a customer invests in new equipment, typically that customer is intent on improving the existing process," says Hackenberg. " Distributors must be able to analyze material and configurations, tolerances, lot sizes, yearly quantities, and the customer's interest in lean manufacturing. They must also be proficient in part fixturing, rotating workholding, cutting tools, coolants, plus part programming and optimization."

This emphasis on working smarter has, in turn, made the customer wiser, according to Allan Chartier, president at Midwest Industrial Tool Inc. (MIT) and Frank Kirbus, machine tool sales engineer and cofounder of Trident Machine Tools Inc., a Haas Factory Outlet (HFO).

Chartier says, "Distribution was a push-type industry where the builder built what it thought was best and then told us what to sell to the customer. Now the customer makes the decisions as to what will be built. And the builders are paying attention to what the customers want to buy. This changes our role because rather than telling the customer what is available, we have to tell the builder what the customer wants so it can build the system . . . We are no longer just sellers of product. We are solution providers."

Kirbus agrees, "The customer has more knowledge and more information available to him. But he still needs our help to execute the best solutions."

Changing an industry
Understanding customer needs is only the first small step to revamping an entire industry. Meeting those needs means changing the way distributors think about the marketplace and how they act within it.

Customers may be in need of more value-added services, but according to several distributors, those customers don't always know where to look for solutions. And helping customers change their perception of distributors is a challenge according to Ralph Nappi, AMTDA president, Hackenberg, Chartier, and Kreager.

"Distributors have to communicate that they have the capabilities and knowledge to help shops better manufacture products," says Nappi. "Customers do not always perceive the distributors as having the resources to fill their needs."

Hackenberg adds that even when customers do know, it can be hard to convince them to take the time to use the available resources.

"We have plenty of information and resources thanks to the tooling companies, fixturing builders, and accessory people we deal with weekly. Although we have open houses and machine demos, we sometimes have to drag in customers kicking and screaming to look at new technology."

Chartier knows that the perception problem isn't limited to the customer. It often extends throughout the distributor organization. "We've traditionally been sellers of product, and changing that mindset internally and externally is a challenge. I witnessed one of our most successful, senior salesman walk up to a customer and say, 'I hope you buy something here; business has been slow.' Afterwards I asked him, 'What's the matter with you? You're not here to sell, you're here to solve.'"

Kreager agrees that the problem of changing perception also lies on the shoulders of distributors. "We haven't done a full job of getting the word out. There were once 200 NTMA shops in our area we might have called on and now that number is around 70. In our case, the customers we've helped with valueadded service have all survived. So its imperative to let people know about these types of services."

One could argue that the best way to change customer perception is to make more services available. Distributors could build service and technical centers and invest in other value-added operations.

Rob Smith, president at Rudel Machine Tool Inc., says his company has done just that. "Back in 1995, we interviewed customers and learned that they wanted more service and support. So we opened a tech center, hired an application person, and hired service people. And while it wasn't a profit center at the time, it paid off after the first three or four years."

Kirbus at Trident also invested in service and also saw it pay off in the long term. "I saw a need for expediency in the service end of our business. So I put together an intensive service program and made parts available immediately when we made service calls — what we call a 'van concept.' We went through inventory investment pains because we were carrying around a significant amount of spare-parts inventory. It took us some time to figure out what spares to carry, but it was worth it. Now our first-call repair rate is at 92%."

Investment is necessary for distributorsto offer value-added services, but it makes it difficult to stay profitable in a tight economy. Derek Treherne, managing partner at Haas Factory Outlet (HFO), sees how small distributors might have trouble competing in this value-added distributor market.

"If expense were no object, we could all do a wonderful job helping customers become more productive and efficient. But this requires a good deal of expense in terms of people and time. So it's easy to talk about being a consultative organization, but to actually practice it is probably beyond the capabilities of small distribution organizations."

Mager, however, doesn't see it as a one-sided investment. He feels there is a potential to offer postinstallation optimization as a fee-based service. "In times when the market has declined, we have been able to grow slightly and gain market share by optimizing operations for tooling customers. So there's a significant opportunity that we can provide value to our machine tool customers as well, while generating some fee-based services for ourselves."

Kirbus likes the idea of pulling profit out of shop-floor process optimization, but doesn't think his customers would buy it.

"I'm not sure I can get the smaller shops to buy those services. Distribution's problem with value-added service is that we're being price driven to compete in the marketplace. When you unbundle everything at the end of the day, what is left to offer? Clients want solutions to their process problems, but are they willing to pay $125/hour?"

For Hackenberg, part of the solution to the profitability issue was specialization. "We now focus solely on precision machining and CMM inspection. We discovered that we can't be all things to all customers. So, we figured out what we did best, and we simply do more of that. This approach has helped us serve customers better and be more profitable in the process. Our ability to understand how to inspect the part gives our customers a tremendous advantage. We are convinced that precision machining and inspection are part and parcel of each other."

For Treherne, remaining profitable boils down to building trust and educating customers about the value of working with his distributorship.

"The customer wants the distributor to solve his manufacturing problems, and he needs to believe that his needs have priority over the distributor's desire to consummate a sale. Conversely, the distributor wants his prospect to understand and respect that he has to manage a profitable business. What we've done with some major customers is instituted an open-book policy — sharing our costs, our overhead, and agreeing together what is a reasonable profit on the project. This ensures the distributor a reasonable profit and lets the customer know he got a good price."

Chartier is trying gainsharing to increase revenue while still offering customers solutions to their problems. "When you pursue gainsharing between the customer and distributor, there's an equal opportunity for risk and failure. If you are willing to put something up and split the risk and the success, then it is a win-win situation for everyone. That turns the 'seller' into a solution provider and helps you stay profitable."

The builder factor
For a time, some thought the Internet threatened to end distribution altogether. But when the bottom fell out of the on-line market, those fears subsided. The reality that emerged was that human interaction and accessibility was key to the sale, training, and support of machine tools. However, the Internet has changed the roles of manufacturers, distributors, and machine tool builders.

For the customer, the Internet provides previously unavailable information about technology and processes. End users are better educated and demand more of both the distributor and machine tool builder. "Not only do builders now have to build what customers want to buy and not just what they want to sell," says Chartier, "but our role has also changed. That's because we have become the builder's connection to the customer. Some builders have accepted this shift and some haven't, but the most successful ones are building what our clients want."

Chartier has also seen the Internet change the face of service via remote diagnostics. He sees a demand for it, but says that not enough builders and customers are setting plants up for this valuable service.

"Remote diagnostics would be a godsend if more people did it. We have customers that are 500 miles away, and we don't always have the parts in our vehicles to fix a machine. If you have to send a service technician to do the diagnostics and then wait 24 hr for the parts to fix the machine, you might have a service technician out for five days."

Smith agrees that on-line diagnostics would make the distributor's job a lot easier. "Only one of our five builders uses remote diagnostics consistently. And there's no reason for every builder not to have it."

Some might argue that this service cuts out the need for a distributor altogether, but Treherne disagrees. "If the goal of the distributor is to improve process efficiency and reduce costs, that is best achieved at a local level because it entails ongoing interaction with the customer."

Chartier agrees that the local connection is essential. "For the builder, the purpose of the distributor is to be closer to the customers. We're paid to be that first and local contact. The Internet, e-mails, and all of that just serves as an advantage to the customer, builder, and distributor."

All of the discussion participants felt that distribution, while being redefined, was still a lasting part of the machine tool-purchasing process.

Nappi sums up the distributor role, saying, "Machine tool buyers are not really buying machine tools; they are buying solutions and demonstrated outcomes. Distributors are now process and manufacturing engineers, not 'iron' salesman. Even the best machine tools are useless without the right application, tooling, and support. The bottom line is if customers are looking to buy iron anyone can sell it to them. If they are looking for process solutions and manufacturing partners, they should leverage the expertise of their local distributor."