Digital Differentiation: An MRO Distribution Update with Ian Heller

We spoke to Ian Heller of Distribution Strategy Group, and formerly of Grainger, about the ways in which MRO distribution companies can differentiate from the digital and marketplace disruptors.

Way back in the “before times” of late 2019, we examined what was then seen as the greatest threat to Maintenance, Repair and Operations (MRO) distributors: the rapid rise of online marketplaces.

Given that significant macroeconomic challenges like inflationary pressure and inventory shortages – not to mention a global pandemic – have entered the fray with a vengeance since the publication of that article, we thought it prudent to revisit the topic. Macro events may have stolen the headlines from the technological disruptors, but that doesn’t mean distributors can afford to take their eye off the marketplace threat. What is the competitive landscape looking like today, how are they differentiating their value against digital players, and how have differentiators helped leading MRO distributors go on the offensive?

Read on to find out, as we update that widely read 2019 piece with some help from Ian Heller, founder and chief strategy officer of Distribution Strategy Group.

Marketplace Penetration

In 2019 we wrote: “Amazon, Alibaba and other marketplaces have taken a huge chunk of B2B sales in 2019 and will continue to do so at an increasing rate. Your buyers and employees are getting younger and more digitally savvy, making pent-up expectations for B2B eCommerce and a real-time digital experience akin to floodgates bursting open.”

Now in 2022, digital is no longer a trend; it’s the dominant B2B sales channel. This faster-than-expected changing of the guard was certainly fueled by the pandemic. As Digital Commerce 360 wrote in January: “In the last two years, the pandemic literally altered the course of how distributors and wholesalers do business. What was once a world of mail, fax, e-mail, face-to-face sales, and manual orders has morphed into a world where nearly all aspects of business are digitally driven. eCommerce sales are projected to top $1 trillion for U.S. distributors for the first time in 2021 and post year-over year growth of 17%.”

These numbers reflect all digital sales in B2B, not just marketplaces. But those aforementioned B2B marketplaces have also grown dramatically while being joined by new behemoths like Varis and even niche players that target MRO products specifically. Not to mention the biggest name in the business, Grainger, which reported its Endless Assortment marketplace as its fastest growing channel in 2021.

MRO Exposure

2019: “Distributors of all sectors are scrambling to deal with this new normal. But Maintenance, Repair & Operations/Industrial (MRO) distributors may be the most exposed. There are two big reasons for this. First, products in this sector are typically of small sizes that fit neatly into standard packages, which lines up perfectly with an Amazon or Alibaba business model. The other threat comes from disintermediation, wherein an increasing number of suppliers are choosing to move to a direct sales model or sell through marketplaces, cutting distributors out of the loop.”

While these projections have been proven true in many instances, there are plenty of product SKUs and services that distributors offer that still can’t be easily matched by marketplaces or manufacturers. Heller points to two examples in which distributors have a decisive advantage.

When it comes to digital-only players like Amazon Business: “Marketplaces have a specific value proposition, which is they only really solve simple needs. They can’t do any value-added services because those require people. It’s all digital and everything’s standardized. Amazon has an enormous delivery fleet, but those trucks are even smaller than UPS trucks. You not going to get construction supplies on them – you can’t carry a forklift.”

As for manufacturers selling direct: “Manufacturers want to produce and ship in rail car quantities to keep factories efficient. Consumers buy in units of one or two, whether they’re business consumers or retail consumers. Distributors generate demand, they offer customer service and technical support, and there’s this important financing function which manufacturers don’t have to cover, because distributors do. Suppliers will sell direct in some instances and that’s OK, because there’s a limit to it. They can’t sell a wide assortment of products unless they start selling the product from a bunch of other manufacturers, in which case you’re becoming a distributor.”

For traditional MRO distributors, it comes down to a decision on where to prioritize and focus efforts. It is increasingly clear that the more complex, service-driven offerings must take precedent over the highly commoditized items that are being picked off by marketplaces and disintermediation. There is a natural advantage there that non-traditional distribution channels cannot touch.

“If you’re going to support a complex customer, whether that’s a hotel chain or a manufacturer or an airport, they have many needs and have to talk to people to figure out how they’re going to support them,” Heller said. “You can’t do it all at Amazon because you can’t even call them.”

Defending Against Customer Churn

2019: “Data science, tailored to the unique needs of B2B MRO distributors, can build a metaphorical firewall around your entire customer base to protect from outside competitive threats while at the same time growing your share with them organically.”

This statement remains as true as ever, and the ability for MRO distributors to execute against these data science-driven insights has been enhanced by the introduction of Zilliant Campaign Manager™ to the market. This application works in concert with Zilliant Sales IQ™ to translate AI-driven customer insights and commercial strategies into targeted actions in a highly measurable closed loop system.

Has a churn/retention issue been detected? Is it possible to detect where spend is declining at the product category level, even as total customer revenue remains constant? Can all instances be detected across massive MRO product and customer counts? MRO distributors can create, filter and run recovery campaigns that alert sales reps to customers that are showing signs of defection at the product level, with specific talk tracks to help reps save the business.

Is inflation triggering the need to update prices across thousands of customer agreements? A mass price update action can be created and pushed out to each seller in their CRM application in a fraction of the time it took to compile and email spreadsheets to the field.

Inventory shortage on a popular brand name item? Quickly push product substitution guidance to sellers to alert them to a similar private-label product to offer, rather than lose the opportunity.

Concerned about sales reps’ ability to follow-up on so many actions? Easily filter, scope and prioritize actions based on strategic consideration or impact.

The Playbook Going Forward

In the previous three sections, we checked our prior work and reconciled it with the benefit of two years’ hindsight. Now we’ll focus on why the winning MRO distributors going forward will operate from an offensive, rather than defensive, playbook. This means shifting the perspective of the threat landscape to consider it instead an opportunity landscape. Traditional MRO distributors have a massive opportunity to differentiate themselves from the digital-only players.

Value, Value, Value

In product categories where MRO distributors are commoditized, the game might be up. Items that are mostly sold on price and can be easily picked, packed and shipped are the bread-and-butter for Amazon Business, Zoro, and the like. The recovery actions discussed above can certainly stop the bleeding here, but there is not an opportunity for long-term differentiation. Fortunately, the MRO product catalog is vast, with no shortage of opportunity to stand out with value-added services.

Consider the delineation between what Heller calls “on-the-carpet” versus “on-the-concrete” MRO. The former is comprised of the office supplies and janitorial products that digital players thrive on. On-the-concrete MRO offers wholesale distributors a lot more opportunities to add value to their customers’ core operations.

“If you’re selling to a manufacturer and you are the provider of machine tool inserts to keep their machines running or you're doing delivery to a Kanban line or you're supporting industrial vending or even something basic like bin replenishment, then you've gone beyond just dropping products off at the dock and you're actually helping that customer make money,” said Heller.

Traditional MRO distributors that focus on the value play and invest in AI-driven price optimization that can ensure pricing reflects their value will continue to strengthen customer buying relationships while simultaneously growing margins.

Getting Digital Right

Your distribution business may not be digital-only, but digital should hold a growing share in 2022. As mentioned earlier, digital B2B sales have surpassed traditional channels at this point. MRO distributors need an intuitive, intelligent selling presence on digital channels and an airtight eCommerce pricing strategy.

An omnichannel approach to pricing and selling is paramount, and it must be data-driven to avoid common pitfalls like price imbalances wherein prices across channels are not aligned and consistent. Sales and profit measurement in an omnichannel environment also must be approached differently. Even if you have built the best customer portal in the industry, complex sales may still require a phone call to a sales rep to complete. Heller advises MRO distributors to think of their website as a point guard. Why? Because there are different ways point guards can win. Chris Paul doesn’t score nearly as many points as Stephen Curry, but he dishes out far more assists. The math in terms of points created, however, reveals the two are almost identical over the past 12 years.

“If you think about your own website, who cares whether the website shot the basket? In other words, if the order came through the shopping cart or whether it drove points through another channel, that’s just as good – that’s an assist. So, distributors have got to understand how to measure the sales their websites generate that don’t come through the shopping cart. Otherwise, they might conclude that customers don’t want digital, so they stop investing in it and the gap between their digital capabilities and these digital disruptors grows just because of a measurement problem,” Heller said.

Additionally, MRO distributors must ensure their pricing is consistent across channels, so that when a customer browses online they don’t see better prices than they receive today, and when they call their rep, the quote they receive is consistent with the pricing they saw online. Sales reps must then be provided guidance that prevents over-discounting. This means not overpricing online, while offering a deal envelope to the field and inside sales teams that take the order. At times, a sellers’ instinct is to discount, in which case it’s ideal to provide price ranges that maintain an acceptable margin. The only way to power this functionality across channels for every product and service SKU in your business is through price optimization and management software.

Better Decisions, Made Faster

Two of the hallmarks of the digital marketplace that cause customers to flock to it are dynamic, consistent pricing and relevant product recommendations. Marketplaces have a built-in advantage in these areas, because as previously mentioned, they toil in simple product offerings. They were also born online, with a distinct digital leg-up and without having to worry about traditional sales channels.

That said, proactive MRO distributors can absolutely power intelligent commerce and both keep pace with marketplaces and gain a digital advantage over their traditional peers. With advanced, end-to-end pricing and sales guidance software, distributors can equip their internal teams with actionable guidance to reach financial goals, while providing a best-in-class omnichannel customer experience.