Wholesale distributors have been a part of American culture for years, contributing to our economy and playing a vital role in the supply chain. They have done well serving as middlemen between their industry's respective manufacturers and end customer(s). A report entitled "Facing the Forces of Change: The Road to Opportunity" developed on behalf of the National Association of Wholesaler-Distributors (NAW) says that total sales derived from the WD reached $2.9 trillion in 2003; and that the industry as a whole contributed 25 percent of the total productivity gains in the U.S. economy during the past decade.

Like many other industries, the WD's role in the automotive aftermarket had been pre-determined, understood and unchanged for a significant length of time. Until now. A number of issues surrounding parts proliferation, data warehousing, warranties, margins, new competition and technology advancements are resting on the WDs' shoulders--serving up one heavy load to bear. So, just how are these issues--or opportunities as some see it--being dealt with? Many WDs we spoke to for this report are moving with the times, proving that change is good. But for those who don't get going, will they get left behind?

Author of the NAW report, Adam Fein, president of Pembroke Consulting and a leading authority on wholesale distribution, says that distributors are in a unique position to analyze and solve problems for their customers. "Distributors who think strategically about their business and invest in the future will see roads of opportunity." But, he contends, "Those that think they can go back to the good old days and stick their heads in the sand to the changes around them are in trouble."

Immense competition

It is no secret that the aftermarket is cutthroat when it comes to competition, but WDs have to be especially alert as competitors are creeping in from several different directions. Notably, large retail chains are opening stores in markets where WDs typically, in the past, had more presence. Fletcher Lord, president and CEO of Replacement Parts, Inc. (Crow-Burlingame Co.) sees the growth of retail stores as a major challenge. "We've held our own relatively well against them but it still takes an adjustment period before everything settles down." His operation has seen nearly 40 new store openings in their market region in the last year. Midwest distributor Rock Valley is experiencing the same phenomenon. VP and General Manager Jim Beasley says they've had to change with the seasons due to the number of new merchandisers. Rock Valley's strategy now includes going after other available markets, "including government business and municipalities," he says.

But retailers aren't the only competitors WDs need to be mindful of. Logistics companies are now prepared to go head-to-head with many wholesalers, which, according to Fein, "is a trend that the aftermarket should pay special attention to." He says it's happening in industries that have a large SKU base where the need for post-service delivery is low. "UPS supply chain has been investigating the automotive aftermarket." Fein recommends that if WDs haven't already, they need to benchmark their performance and find key differentiators. Though logistics companies are creating more competition in an already competitive arena by offering "pick-pack-ship" services, distributors still maintain an advantage when it comes to "post-sales service and support," according to Fein's work in the NAW report.

Industry consultant Dan Smith, president of Capstone Financial, suggests that some manufacturers may even try circumventing the WD by selling to expediters or by going direct to technicians. WDs sometimes make unreasonable demands on manufacturers, says Smith, which, in turn causes the manufacturer to look for ways to sell around them. He recommends that WDs continue to diversify products and help foster a "more balanced atmosphere."

"The WDs are no longer the major powers," Smith adds, while noting that we'll see more manufacturers trying to sell to smaller warehouses or jobbers because of the regional presence these companies have. Suppliers, though, are typically weak when it comes to distribution, claims Fein. "Services and manufacturers that try to cherry-pick to the best customers usually pay a price in the market."

The Internet has also affected business for distributors. Customers now have more access to product and parts information and availability. And Fein believes some are reaching around the channel to obtain key details like distributor cost structures. "The availability of this information is taking away a historical advantage that WDs used to have," contends Fein. "This is changing the power dynamic."

Many WDs, though, are using the Internet among other technologies as a tool to do more business and have established ways to use the accessibility it offers as an opportunity to grow market share.

The trek toward technology

Because of the already thin profit margins prevalent in the aftermarket, technology has become a vehicle for increasing profits. But whether it is being fully harnessed is still a debatable topic. It appears many WDs are still taking a "wait and see" approach when it comes to technological innovations. Basically at the mercy of manufacturers, distributors will most likely wait until their suppliers invest in the technology first before making a move. David Segal, vice president of Automotive Supply Associates, Inc. (Sanal Auto Parts), admits some are slow to change when it comes to distribution technology.

"It takes so long just to agree on something, by the time we are able to move, there is a new technology to look at," he says.

Another problem facing the aftermarket is the secrecy with which many companies guard their data, creating a potential roadblock to industrywide collaboration.

Radio frequency identification (RFID), a dynamic system of data exchange using radio frequencies, has been touted as revolutionary in supply chain management for quite some time, but many warehousing operations in the aftermarket are using bar code scanners with some others even relying on employees to manually check off orders. A majority of the smaller operations have not justified the return on investment to make the leap toward RFID, which some bigger players, like Uni-Select, are already doing. Those that have invested in RFID and have it in place say a company can increase its overhead more than it ever could without the system.

Segal says once RFID is adopted by his suppliers, he'll make the investment but that right now, "it's just too premature," though they have invested heavily in bar coding.

Considering the fact that RFID is being used by other industries like retail and pharmaceutical, it's something that's likely to stick around for a while. In the meantime, though, Fein of Pembroke Consulting suggests there are other technologies that can be used to improve productivity, including an online ordering interface, business management systems and customer relationship management tools.

"I think right now RFID is in the stage of over-hype," he says. "It has great potential to improve inventory management with some of the larger retailers, but most distributors do not sell directly to retailers using RFID."

He says WDs may not need to build this technology into their business plans for at least a couple of years. "Let's keep in mind bar code use isn't even widespread," he shares.

Other innovations such as voice recognition technology aren't likely to see general acceptance in the aftermarket, which remains behind the curve as it pertains to making these types of changes.

A good example of technology as a partner is the use of Internet parts ordering systems between service dealers and distributors. Herb Lohse, president of Midwest Auto Parts Distributors, says the use of Internet AutoParts, Inc. (IAP) enables technicians to access his store's inventory without even making a phone call. The order, in turn, generates a ticket at store locations so the company can make a delivery.

Paperless warehousing also has been an important topic among those in the know, but the fact remains that we will almost always need paper as long as we're doing business. Even if an entire chain of warehouses is automated, customers will still want receipts. And you'll want a "Plan B" for those unpopular moments when the power goes out and work must continue.

The parts and data dilemma