Supplier Sourcing – Inside And Out 

Distributors may finally be realizing the power of preferred vendor relationships. In 2000, the median number of suppliers distributors sourced from was only 50 (of the thousands available). On the other hand, it could be, as Moisant notes, that distributors tend to stick with certain suppliers for cashflow reasons. “They’ve already got established credit, so it’s easier,” she points out.

Still, for more than half of distributors (52%), the number of suppliers they used increased from 1999. Moisant is one of those distributors who likes to venture outside her regular pool of vendors. “We’re known for our creativity, and we go out of bounds to provide it. We won’t sacrifice it just to deal with a supplier with whom we’re established.”

Distributors are doing most of their business with industry suppliers. And while 30% of distributors imported products from other countries in 2000, that number was down from 36% in 1999. Fifty-four percent reported using an import broker. The top three products imported were: Emblematic jewelry (26%); hats (21%); and games/toys/playing cards/inflatables (18%). Top countries imported from include:

• Mainland China (58%)
• Taiwan (41%)
• Canada (14.5%), and
• Japan (8%). 
  

Suppliers Compete From Within

It seems suppliers aren’t all that concerned with distributors sourcing from manufacturers/dealers outside the industry. That form of competition only garnered the attention of 5% of respondents. Importers were only mentioned by 9%.

Like their distributor counterparts, suppliers cited peers – “industry suppliers in my own product category” – as their number one competitive threat in 2000. This is a constant for most suppliers, having held down first place for the last four years (although there was a drop from 40% in 1999 to 35% in 2000 among those citing the concern).

Why the drop? Could it be that other competitive fears edge upwards in their significance? It doesn’t appear so. For example, “Industry suppliers in my own product category” garnered nearly three times as many responses as the number two source of competition, “Distributors sourcing products overseas” – which also dropped, going from 20% in 1999 to 12% in 2000 (perhaps due to fewer distributors saying they source from other countries).

It’s actually in the percentage decreases that the competitive mindset is perhaps most obvious this year. “Supplier Web sites” burst onto the scene in 1999 as a competitive threat. Of last year’s supplier-respondents, one-fifth noted the phenomenon as a significant source of competition. This year: only two suppliers mentioned Web sites as a concern – down to 0.7%.

Perhaps the drop was inevitable, given that so few suppliers actually utilize the Internet as a marketing tool. Less than 20% say they use the Internet for e-commerce; fewer than 25% use their Web sites primarily for marketing and/or self promotion; and only a quarter of them have turned to the Internet as a way to research markets.

Price-Cutters Go South

The sting of “price-cutters” apparently lessened in 2000 as well. This form of competition slipped to fifth place in 2000, drawing only a 7% response, compared to 20% in 1999. This mirrors a similar decline in concern among distributors. Therein may lie the explanation: As fewer distributors pitch their clients based on price, fewer suppliers must compete on dollars and cents to win their favor.

“There are a lot of price-cutters by the wayside,” says Joe Collins, president of Opus by Collins (asi/75175). A couple of years ago, distributors were asking for products “a nickel less.” When he stuck with quality over price, some would move on to suppliers who’d slash. Now the distributors have lost their clients who went on to find sources with better quality and better service at a “competitive” (not necessarily low) price.

This, in part, mirrors the evolution of the industry. “It’s definitely getting more sophisticated,” says Charles Reichmann, CEO of Dri Mark Products Inc. (asi/50840). “You can see it in the ads and in the behavior at trade shows. The strong ones are more professional, and the others are failing.” It’s this strong/weak dynamic, however, that could actually make for an even more competitive environment.

The overall trend of less concern with competition – whether from price-cutters or from suppliers within the same product categories – comes as a surprise to Eddie Hall, director of sales/marketing at Georgia Tees Inc. (asi/56536). 

“With the business climate stale, the worries over competition should be more,” he says. “Companies with a solid base and in a positive capital position should – and most likely will – seize the opportunity to make the weaker competitors ‘bleed.’ While this strategy requires deep pockets (and lost profits), when the dust settles there are fewer competitors and the opportunity to make higher margins.”

For others, the lessened tension may be a good indicator. Sam DiBiase, corporate vice president at Leed’s (asi/66887), sees a bright-side: “If there is less concern about competition among suppliers, it might stem from the fact that dot.com companies, Web sites and new-to-the-industry suppliers have all become a part of our world without having negatively impacted the traditional supplier/distributor business relationship. The sky has not fallen!”

New Products, New Business?

So if the sky hasn’t fallen, what are suppliers doing to ensure it stays firmly in place? It’s all about the product itself – or shall we say products. “Adding new product categories” was by far the most popular way that suppliers diversified their businesses, even though the 50% who said they did actually represented a decline (from 67% in last year’s survey). Perhaps fewer are planning to diversify their product lines because of bad experiences they’ve witnessed among some of their peers, suggests Collins. 

“We just went through a transition period where some suppliers became so big they went beyond what was reasonable,” he says, adding he hears complaints that in some instances larger one-stop shop houses failed – whether in terms of service or quality: “What works for one supplier doesn’t necessarily work for another. You’ve got to go with what you know.”

Many feel the same as Collins. Diversification didn’t appear to be the linchpin in suppliers’ strategy during 2000. A full quarter of respondents actually indicated “not applicable” (N/A), suggesting they did nothing to diversify.

Nor were vast numbers of suppliers “entering new markets” – either new regions within the promotional products industry or new arenas such as retail, licensing, or premiums/incentives. Was status quo the tactic du jour (to mix metaphors and languages)? Though this year’s SOI survey didn’t ask directly, we posed the question to suppliers we interviewed.

“My observation is that the promotional products industry was so strong in 2000 that most suppliers were pleased with their growth and didn’t feel the need to expand beyond their current base of business,” DiBiase says. “If promotional product dollars become tighter in 2001, my belief is that you’ll see more suppliers entering into new markets to supplement any reduction in growth they might be feeling from within their core promotional products market. This expansion could include licensing, premium/incentives and retail.”

One-word Strategy Ahead: “Expand”

DiBiase may be right about the economy encouraging expansion. When asked about their approach for 2001, a large percentage of suppliers (62%) described their market strategy as “expanding their number of distributor customers,” and 56% intended “to expand current lines/add new product lines.”

The dynamic, DiBiase explains, is simple: “Sometimes it takes a change in the business environment to remind suppliers and distributors alike that, regardless of how good business is, we can’t lose sight of basic business disciplines. These include keeping a product line fresh and new, and continuous expansion of a distributor base, regardless of the size of your current base of business. My personal opinion is that no matter how busy you are or how good business is, there’s always more business out there to be grabbed.”

Which begs the question: To expand the number of distributor-customers a supplier services – or to add product lines – does either: 1) the supplier have unused capacity? or 2) is the supplier investing in expanded facilities/equipment? A cross-tabulation of those companies who said they were adding new product categories found that only 28% were also adding/expanding facilities. And what about those who plan to grow their customer base? One-quarter said they expanded/added facilities last year, and 15% plan to in 2001.

Customer Base On The Rise

The bid by suppliers to grow their customer base appears to have been successful. In 2000, the average number of “overall distributor customers,” “first-time distributor customers” and “distributor-customers new to the industry” were all up over 1998’s averages.

For 2000, well over half of suppliers (59%) did business with more than 100 distributors. More than one-fifth (22%) serviced over 1,000 distributors. The average number of distributors suppliers did business with was 870; the median, a more realistic (and less skewed) 200. 

Many of those distributor customers were new blood. The average number of distributors that suppliers did business with for the first time in 2000 was 186; the median was 55. A fair number of those new customers were new to the industry in general. The average number of “new distributors” that suppliers serviced was 69; the median was 10.

And it seems that “a distributor is a distributor” to a supplier seeking business – 97% of suppliers surveyed have a “general distribution policy,” meaning they accept orders from any and all recognized distributors.

While one might logically think it’s the largest distributors that are the bread and butter of suppliers, that’s not necessarily the case. Well over half (58%) of suppliers say the size of distributor that buys from them most frequently is under $1 million in annual sales. The size of the average distributor that spends the most money with them? One-quarter of suppliers say it’s distributors with sales volumes of over $500,001 to $1 million; another fifth say distributors with sales between $1 million and $5 million – indicating the mid-sized distributor is often the biggest yield. 

“There’s a tremendous amount of business to be had in anybody’s backyard,” Hall explains. “This is often the most overlooked place for new business. The moral: Dig harder in the sandbox you know has some buried treasure in it. When the economic climate is favorable, you can afford to dip into some areas that may or may not produce results. I think most companies, for the moment, are content to grow business in areas most familiar.” 

Kathy Huston and Tonia Cook Kimbrough are contributing editors to The Counselor.