Truck Rage - Freight Watchers

The monster truck race has begun. In the inside lane are the distributors. On the outside, headlights blazing, are the logistics companies. But are they really likely to run the traditional distributors off the road?

Hardware distribution has always been competitive. Distributors arebutors. On the outside, headlights blazing, are the logistics companies. But are they really likely to run the traditional distributors off the road? forever trying to give their service the edge by moving up the value-add curve, evangelising about cutting-edge products and taking them to market. And who can blame them? Industry watchers say the sector is the most competitive it has ever been, so distributors have to keep their businesses razor-sharp in whatever way they can.

Margins are being eroded, distribution costs are going up and vendors are asking more from their distributors - as are resellers. But, most importantly, an extra menace seems to have moved into view on the distribution landscape - the logistics company.

Some argue that logistics companies - which transport everything except PCs - are beginning to pose a threat as the onslaught of e-commerce opens up alternative avenues of sales for users; others have never contemplated them as business competitors. So are they really becoming the enemy of traditional distributors and will the two sectors soon find themselves battling it out for business?

They already appear to be encroaching on IT distributors' business space.

In October last year, IBM decided to appoint Tibbett & Britten to distribute its PC shipments (PC Dealer, 28 October 1998). Most recently, Hewlett Packard recruited freight outfit Irish Express Cargo (IEC), the parent company of Hays, to handle the UK pilot of its Shopping Village Website, over the likes of Computer 2000, Ingram Micro and CHS Electronics (PC Dealer, 19 May).

Sweden will soon host the second Shopping Village pilot, followed by Germany. Although HP anticipates the first year of business on the Website may be slow, it has forecast that up to six per cent of its UK consumer business will be sold over the Web by 2002 and that it will be worth £400 million.

IEC will not only be delivering almost 71 ranges of hardware and consumable products for Hewlett Packard's retail customers, it will also be stocking inventory and taking online orders for it. But Trudie Mitchell, e-business programme manager at HP, dismisses the idea that IEC is stealing business from traditional distributors.

'The site is selling a limited number of products that are not aimed at businesses or even those who buy from Dixons and Staples,' Mitchell says. 'These are customers who know what they want already. It is definitely not a matter of swapping one type of distributor for another. It's not traditionally the core competency of our industry distributors to focus on home address deliveries, although more forwarders do. Logistics companies can handle exchanges and, if required, make pick-ups. And they can track products for customers online. They are also taking orders over the phone from customers who feel uncomfortable giving their card details over the Web.'

She adds: 'We are not changing our strategy, we are simply addressing this particular market. Most of the products being sold on the Shopping Village Website don't require configuration or installation. They include home PCs, mid-range printers, digital cameras and multi-functional devices.

We also have a commerce centre for small to medium businesses, and that business continues and will continue to go through our channel. What we may see is the emergence of different business models and channels. The internet does fragment things a lot and people will buy where they want to. But in the short term, I really don't think distributors will be affected by it. We still believe the channel is the best way to buy.'

But some distributors are aware that while vendors such as HP are claiming their strategies concerning product to market are not changing, as Mitchell points out, the nature of the business model is undergoing a metamorphosis.

Richard Pryor Jones, managing director of networking distributor Azlan, says: 'I can appreciate why someone might suggest that it would be easy for logistics companies to move into standard products. It's all related to e-commerce. The move could certainly increase the likelihood of a change in the business structure. But freight companies will be experiencing business change too. I don't think they will be able to put a huge infrastructure in their business - they will have to subcontract or undergo a lot of capital investment. And that in turn could lead to a debate about outsourcing.

'But if it is on an absolute fulfilment basis, then yes, I think logistic companies could easily start eating into our distribution sector. However, if you are a genuine distributor - and by that I mean if you are really offering value-add services to the channel - then no, I don't think logistics companies can get in on the act. Freight is not about support, only supply.'

Joe Breen, customer services director at Ideal Hardware, believes competition is incredibly high in the distribution sector. 'I wouldn't rule out the notion of freight companies eating into the distributors' market, especially if some distributors are simply doing fulfilment. If that's the case, there's no reason why a freight distribution company couldn't do that job.

'If some distributors are not doing anything but shipping product from A to B, what could stop them? That's what the freight companies do already.

If distributors don't add value, we are going to get freight forwarders eating our lunch.'

Graeme Watt, managing director of Computer 2000, takes a less cynical view of the potential competition. He says: 'There may be a little of that going on, I suppose. On one level, I can understand vendors going direct on the basis of not wanting their brand to be diluted. But the logistics companies can't offer the breadth of products that we can. And at the end of the day, resellers or customers need a multi-vendor or multi-distributor. Logistics companies can't offer that.'

Eric Roth, manager of market intelligence at ICL Multivendor Computing, also dismisses the concept. Taking into account the infrastructure of freight companies, he agrees that they would not be geared up to deal with the IT business the way traditional distributors do.

'The idea has been talked about for years, but logistics companies would have to be doing something different from what they do now if they were to be in with a chance of taking business from the IT distributors,' Roth says. 'Freight companies would have to do some stock holding - it wouldn't be a matter of just shipping the product to the customer, as they do now.

Currently, they don't have the expertise. Stock holding requires expert inventory control, negotiation skills, export skills to deal with DOAs plus returns and financing - it's a complex business. Manufacturers can't provide the speed to do that type of deal anyway. We are able to bridge that gap by stock holding, which protects the reseller or the user from manufacturers' deficiencies.

'Logistics companies want to move product as fast as they can because they don't want to run the risk of holding the cost of stock. But if transport companies really want to get in on the act, they have to buy their way in, which will mean a big investment. It's easy to say, but difficult to do.'

Roth points out that manufacturers are, in fact, heading in the opposite direction and attempting to supply kit to fewer companies. 'They really want to work towards two-tier distribution and reduce the number of points they have to deal with in the supply chain. Distribution is less about transportation and more about where to hold stock, run a profitable business and not incur costs,' he says.

Mandy Birtles, marketing communications director at Datrontech, agrees: 'We are providing more than shipping services for our customers. It's not just something that can be handed over, it concerns flexibility of ownership and stock management. A lot of companies prefer bespoke order fulfilments, so we can put various additions directly in the order. It's a lot more complicated than just moving product from one destination to another.

'To handle IT products, you need a special set of skills. At least customers know they are dealing with IT specialists, that we understand the business and the fact that there is an identity to a box. To a logistics company the box is just an item, like a piece of furniture.'

Such a defensive attitude on the part of the traditional distributors, as they brace themselves for possible rivalry from the logistics market, will be uncalled for. Some logistics firms do not even subscribe to the belief that they are becoming competition.

One logistics company that falls into this camp is TNT, which works with a number of IT distributors and manufacturers in the industry. Its many clients in the industry include C2000, Ingram Micro, Westcoast, Toshiba, Compel, Hewlett Packard, Computacenter and IBM.

Tom Newall, divisional general manager of TNT Technology Express, explains that TNT works closely with distributors but is different from the traditional IT distributors. 'I have heard this rivalry situation mentioned, but we are specialists in home deliveries,' he says. 'Our core business is the collection and delivery of product. Technically, we do not have the infrastructure to do what the IT distributors do.'

Newall confirms that TNT does carry out installations for some clients, but stresses it would involve nothing more than swapping out some monitors.

'We may do that for a large customer but not for a member of the public, and we couldn't handle anything more complex such as networking. When I talk about installations, I'm referring to swap-outs of keyboards, monitors or PCs - low-key jobs like that. If we were asked by a customer to do that for a user, we might do it but it would be a one-off. Our business is moving goods, not selling computers. We wouldn't want to get into the business of having to deal with users in that way.'

TNT has invested a lot of money in technology that enables it to track deliveries and in installing in-cab technology into their carriers. It also has hi-tech scanning equipment in place that can provide detailed information about a package and where it is up to in its delivery cycle.

'We are more concerned with doing our job to the highest level we can,' says Newall. 'People want deliveries the next day and some distributors want us to drop-ship kit for them, so we have to keep up with those demands.

It's a competitive business. Customer costs are rising and margins are being reduced all the time, so I guess some distributors are trying to cut costs by offering 48-hour delivery instead. But that's not what the market is asking for. Dealers are placing orders the night before for kit they want the next day. And we get it there for them. That's what our job is and what we are concentrating on.'

The argument at Tibbett & Britten, which provides logistics services for IT vendors such as IBM, Compaq, HP, ICL and NCR, runs along similar lines. Ken Gregory, business development director for manufacturing logistics at Tibbett & Britten, says: 'We do deliver IBM PCs but what we don't do is configure them, as some people may believe. We don't have the facilities or the skills to do that. The only products the company might end up configuring would be point of sales terminals or retail mechanisms, but never PCs - that would be a completely different ball game.'

Gregory insists that IEC's engagement by HP should not be viewed as taking business away from the distribution community. 'To view it as such could be missing the point. Manufacturers are looking for companies that can fulfil the roles of tracking and communication, to give customers access to the process of their order,' he says. 'That means manufacturers are looking at what all providers can offer and logistics can offer that particular service.

'But that doesn't mean logistics companies are going to take over every aspect of delivery. On the contrary, they are complementing the growth of the market, supporting the manufacturers and the channel. We are more of a parallel community than a competitive one, so to see us as the latter is a misconception. We don't run the risk of buying and selling products.'

Like TNT, Tibbett & Britten is proud of the technology it has in place that can add value to its delivery role. It has a number of partners globally that can be interrogated about deliveries through its Web system. 'That's not unique to us,' says Gregory. 'That is a cost commodity offering. Our differentiation is a key element. We cater for needs such as choosing warehouse sites, having our own information system or running customers' sites, which we already do for five of our customers. That's not an attempt to take business away from the traditional IT distributors. We are not a volume configuration service, nor do we offer volume for resale. Our prime focus is providing a strong service for manufacturers.'

So, traditional distributors have nothing to worry about then? Many logistics companies say they want to stick to their core service - collecting and delivering product. There may be a little installation or configuration going on here or there, but nothing that would be deemed threatening in any way to a distributor's business.

However, the situation is not that clear-cut. Some logistics companies and industry watchers have very different views about the role of the IT distributor compared with the logistics companies and believe that a battle for business is inevitable.

Decklan Murray, corporate logistics manager at IEC, makes no bones about the situation. 'Logistics is eating into the distributor's business and the hardware contracting business too, and we are eating into the raw materials markets. Logistics companies are moving into testing, reworking and assembling products. There's no doubt we will be competition for IT distributors. We have electronics engineers, process engineers and quality engineers at every depot, who are testing, reworking and assembling electronic components. Our core competencies are widening all the time.

'We have to do this because, just like any other company, we have to add value. It wraps us around the Dells and Gateways of this world. We are happy to do as much as we can. We have to deal with the raw material of these products, so if manufacturers ask us to do more with it, we will.

Prices are being eroded all the time and everyone wants their share.'

Murray is confident that these changes will come into effect through e-commerce, because it increases the competition by giving users access to direct sales. 'As with our HP appointment, we handle everything,' he says. 'The vendor doesn't have to do anything apart from get the money at the end of it.'

Murray claims e-commerce is already proving to be big business for another IEC customer - Dell - which he estimates makes almost £6 million per day through its Website. 'It is definitely big business and we are talking to a number of companies on that front,' he adds.

Mick Jackson, head of logistics at the Freight Transport Association, also believes that logistics companies will come into their own within the IT distribution market and says there is no reason why logistics companies could not hit on the distribution business.

'In the older days, logistics companies that worked with computer manufacturers had to be skilled in handling product with care - and then it was products such as mainframes. Logistics companies would have to invest in special air-gliding suspension equipment because you couldn't just use a forklift truck. Many didn't invest in that type of equipment unless other customers could make use of it too. That type of restriction no longer applies. Logistics companies have been searching for years for ways to add value, rather than just moving goods from A to B.

'Initially, added value included order processing, handling returns and packaging goods. But any distributor worth its salt will be looking for ways to upgrade its services and add value in any way it can. If the computer industry is hell-bent on de-skilling various aspects of PC installation, that is an area logistics companies can start moving into. There's no logical reason, either, why logistics firms cannot hold inventory and stock.'

Murray is not yet hailing the battle cry for the IT distribution sector because he believes the reality will not kick in until e-commerce takes off - which could be anytime within the next five years. When and if that does become the situation, it is Murray's belief that partnering and forging global allies will be the best way to deal with the situation, as opposed to head-on competition.

'We don't pretend to have all the skills,' he says, 'but one way for logistics companies to go is partnering with those that have skills in different fields - repair, manufacturing and maybe even resellers.'

The market is still wavering as to whether the logistics companies will succeed in overtaking the traditional distributors or not - if, indeed, that is their intention. In the meantime, it's a case of keep on trucking and wait and see.