Over the last decade the relationship between manufacturers and distributors in the business to business sector has gone through immense changes. The growth of eCommerce has drastically changed the playing field, as more and more manufacturers are moving away from the traditional distribution routes that they have used in the past. Manufacturers are moving towards selling directly to companies and businesses by building and utilizing their own distribution channels and/or selling directly on online platforms. Is there still a need for a middleman in the manufacturing and distribution of goods and services? And how is this role evolving and changing with the times?
There are many factors that are playing a role in disrupting the manufacturing and distribution relationship in the B2B world in 2019. It has become hard to ignore. The most important piece of the puzzle in this wave of change is the rise of eCommerce. Business customers now want the same kind of self-service experience in their professional lives that they have in their personal lives as consumers – and they’re demanding that experience from manufacturers.
We now live in a world where everyone from Mom & Pop stores to mulit-million dollar manufacturers scan, take photos and totally digitalize their inventory. Most business now have an online store front and can sell directly to the consumer. For this reason, disintermediation, the process where manufacturers eliminate the middleman to distribute products directly to end business customers is having a profound influence in the B2B sector.
One of the world’s largest online suppliers, Amazon, has made entry into the B2B eCommerce industry with Amazon Business. It is similar to its consumer marketplace in offering both delivery and convenience and a broad selection of products, but it differs in it provides products and benefits that are specifically designed for businesses, government agencies, and educational institutions. Amazon’s Business growth has evolved from a looming threat to a full blown competitor, particularly in the distribution of factory-floor products, laboratory equipment, industrial parts, medical and office supplies. The effect is expected to be most pronounced in the general industrial, HVAC, and plumbing industries. Amazon Business will likely capture 10% of the country’s B2B industry and 5% of the rest of the world’s B2B industry.
In 2016 to 2018 Amazon Business was able to increase its gross merchandise sales run rate from $1 billion to $10 billion. By 2021, the total addressable market for B2B eCommerce will reach $1.4 trillion, almost twice the size of the global customer eCommerce market. Amazon’s “active marketplace” and same-day fulfillment capabilities may be the reason behind this tremendous growth as they play to the company’s advantage. It is no wonder that Amazon has jumped into the B2B eCommerce arena.
W.W Grainger Inc.
W.W Grainger Inc., the country’s biggest industrial distributor, growth has slowed down. Grainger projected its sales would grow from $10.4 billion in 2017 to $11.3 billion in 2018 only. These figures suggest that Grainger’s growth pales in comparison to Amazon Business. There is a good chance that manufacturers planning to distribute their products through a third party will choose Amazon Business over other distributors.
Additionally, medical original equipment manufacturers (OEMs), for example, will likely choose Amazon Business unless distributors and group purchasing organizations (GPOs) begin innovating soon. The automotive, electronic, and general industrial product distribution industries are expected to be disrupted due to Amazon.
Two other industries that are being profoundly affected by disintermediation are the aerospace parts industry and the medical equipment and supplies industry respectively. Two companies in the United States, GoDirect Trade and OpenMarkets are changing how products are being sold and distributed.
GoDirect Trade was launched in December 2018 by Honeywell Aerospace, an aircraft engine and avionic manufacturer. GoDirect Trade is a digital marketplace that makes the buying and selling process of aerospace parts more efficient and pleasant. GoDirect Trade ensures that each listing on their marketplace has product photos, price, and quality documents. It is utilizing blockchain technology to facilitate part traceability, ensuring a smooth and transparent process for the buyer. To put up a storefront on GoTrade Direct.com sellers will pay an annual membership fee of $15,000 which lets the buyer brand the storefront. There is no limit to how many product listings each seller can have and the site does not charge the sellers any transaction fees. Since the site went live in December, six prominent aerospace companies have opened online storefronts.
The aerospace parts industry is a $4 billion dollar market and up until recently less than 2% if the transactions are done through eCommerce. When GoTrade Direct was launched it garnered $1 million in revenue in the first 10 weeks and by May 2019 saw $2 million in revenue, and should reach $10 by the end of 2019. In an industry where a sale could take days or weeks, GoTrade Direct’s marketplace is able to speed the online buying cycle and the process is as simple as putting it in your cart and checking out. One example of this is about three months after GoTrade Direct went live, a customer with a Gmail account spent $100,000 on a used jet engine, simply put in the cart and checked out.
In the medical products industry, OpenMarkets is considered to a disruptor in the B2B marketplace. OpenMarkets is a startup whose goal is to help healthcare providers save when procuring capital and other medical equipment. The company offers savings of up to 20%, and positions itself as the “smart way” to buy and sell medical equipment. Its software offers users improved visibility into clinician needs and vendor relationships. Well-known suppliers on the platform include Fujifilm, Mindray, Faxitron, and Clorox. Its current revenue is $10.8 million.
OpenMarkets just entered into a mulit-year partnership with Resource Optimization & Innovation (ROi), a supply chain organization with a network of over 250 hospitals, over 125 equipment suppliers and over 4,103 healthcare providers buying and selling products on its platform. Over 30,000 products are offered and typically priced on average 11.8% lower than regular prices. It is clear that healthcare systems are reclaiming their purchasing processes from traditional GPOs and moving towards online eCommerce marketplaces.
The examples cited here are just the tip of disintermediation that is happening across the board in all B2B industries. This is major shakeup of the supply chain, and is forcing to manufacturers and distributors to embrace eCommerce and reconsider transforming their business models. Data has shown that a large percentage of manufacturers are now shifting over to eCommerce. The transformation is happening more and more rapidly. As of December 2017, just 40% of manufacturers even had an eCommerce website for B2B. However, 55% of manufacturers said they were working to launch their site in 2018. Among those that not have an eCommerce site for B2B, 69% planned to have one eventually. 43% of manufacturers had a B2B website that is compatible with mobile and even fewer (21%) had an app, and just 34% had social media pages.
In order to be competitive, manufacturers have to become equipped to take active steps to set up their own direct-to customer channels. The technological advancements will make them able to streamline the process for the consumer and offer valuable services such as order tracking, inventory management, data-collection, and more transparency.
eCommerce sites and platforms offer manufacturers additional value as they are able to capture data collection so they can learn better who their customers are and how they can serve them better. This personalization of service, predictive analytics, and advanced navigation systems increase the customers evolving needs relating to ordering, order tracking, and inventory management.
All of these technological advances have brought about the the rise of B2B eCommerce, but there are also advances in how the good and supplies are handled and delivered that are changing eCommerce as well. We live in a world of innovative technologies, automated warehouse and autonomous vehicles that enable manufacturers to cut down delivery times, labor costs, transportation costs, and increased operating efficiencies. Customer expectations have shifted as these efficiencies are more and more the norm, and manufacturers and distributors have to keep up technologically.
Additionally, another major disruptor in the B2B purchasing for distributors is millennials. 73% of millennials are involved with or influence product and service purchasing for businesses. They do not seem to prioritize the longstanding relationship-based models of previous generations, and prefer to work with manufacturers instead of distributors. Millennial’s purchasing decisions are based on results not relationships. They are results driven, and millennials like to get information ahead of time.
Millennials are focused on specific problem solving on their own versus having a go-to person such as a distributor to ask for help. In fact, 20% of millennial business buyers said they’d even be willing to pay a little more in order to work directly with manufacturers.
So how is the distributor able to keep up as more of the B2B customer experience moves online directly from the manufacturer? Is it the end of the middleman? It seems that marketing rather than sales will have to be the driving force and determining factor. Much of the sales and reordering has become automated. The job of a distributor is becoming less sales driven and more consultive in nature.
Distributors now have to build strong data-driven marketing practices and have a more in-depth understanding of their manufacturers and buyers. They must look to find opportunities to collect data whenever possible, and analyze that data to uncover patterns to determine other sales opportunities. Instead of driving the experience, sales is now part of the support mechanism for the commerce cycle. These sales data practices are the key to addressing this disruptor. Only time will tell if this is enough to adapt and survive.