Industry Description

Wholesale of machinery, equipment and supplies industry as well as its sub-industry industrial supplies wholesaling are experiencing a period of transformation (Tompkins_Inernational (2013), DHL_Supply_Chain (2009), B&B_TOOLS (2012)). After the global financial crisis sales in the industry are getting back to before crisis level. However more and more industrial buyers and other customers of the industry are paying closer attention to their Maintenance, Repair and Operations supplies’ efficiency and effectiveness (Tompkins_Inernational (2013), DHL_Supply_Chain (2009), B&B_TOOLS (2012)). To understand the changes experienced by the industry and opportunities for building competitive advantage for industrial distributors this paragraph provides the insight into main industry characteristics and tendencies.

Product

Wholesale of machinery, equipment and supplies industry deals with supplies of maintenance, repair and operations materials (MRO) and supplies of other industrial consumables and components which can not be classified as MRO materials.

Its sub-industry Industrial Supplies Wholesaling, according to North American Industry Classification System “comprises establishments primarily engaged in the merchant wholesale distribution of supplies for machinery and equipment generally used in manufacturing, oil well, and warehousing activities” (NAICS 2013) .

The sub-industry supplies industrial producers with industrial consumables and not customized industrial components such as: bearings, industrial containers, crowns and closures, printing ink, power transmission supplies, mechanical rubber goods, seals, shipping containers, industrial towels, abrasives, ropes, valves and welding supplies (NAICS 2012).

As referred above some of the products supplied by wholesale of machinery, equipment and supplies industry belong to maintenance, repair and operations or MRO goods

8

which are represented by a very vast range of diverse items that support internal operations and either do not become a part of end product or are not central to the company’s output.

This array of items consists of industrial consumables and components varying from safety gloves and office supplies to spare parts for industrial equipment and tools (DHL_Supply_Chain 2009).

MRO items are characterized by disproportional workload, extensive range of items and supplies, large amount of company-specific items (such as spare parts) and both low and irregular demand for items (Gelderman, Semeijn, and Lek 2008). According to Saggioro, Martin, and Lara (2011) From the point of view of the buying company MRO goods are characterized by high cost of ownership compared to a price paid for materials (DHL_Supply_Chain 2009).

According to DHL_Supply_Chain (2009) expenses of industrial consumers on MRO represent up to 16 percent of the cost of goods – but 62 percent of total requisitions.

Characteristics of the product influence the way the supply chain of the industry is organized. Product characteristics explain the following features of supply chain of the industry:

 large amount of individual suppliers;

 necessity for intermediaries: industrial distributors;

 fluctuating demand;

 high supply chain complexity;

Market

Main customers of the industry are energy, oil & gas, nuclear, power generation, transportation, aerospace, industrial machinery, CPG, medical systems to name a few (QuEST 2013). Typically this industry is quite fragmented and is characterized by high competition from both local and global players (B&B_TOOLS 2012).

Customer preferences in the industry are: competitive prices, product breadth, availability, speed delivery and technical support (Tompkins_Inernational 2013).

On a global scale wholesale of machinery, equipment and supplies experienced a decline after the global financial crisis as many of its customers were affected by the crisis and had to cut expenses. Nowadays the industry is approaching its before crisis turnover level.

The same applies to the Norwegian wholesale of machinery, equipment and supplier industry.

Its example is used to show the development of industry market due to the fact that a case company operates on Norwegian market.

9

Norwegian wholesale of machinery, equipment and supplies industry experienced decline in sales between years 2008 and 2012 (see Figure 1) (SSB 2013). Growth index in 2012 compared to 2008 is 0,97% and growth rate is -0,03% respectively, however growth index in 2012 compared to 2009 is 113% and growth rate 13% respectively. It can be seen that even though in 2009 industry turnover declined by 13% compared to the year 2008 now the industry is approaching sales volume of that year. This might be explained by the negative influence of global crisis on the WME&S industry in Norway. Therefore the conclusion can be drawn that the industry is currently expanding in terms of sales volume and there are market opportunities for companies operating in the industry.

Figure 1. Turnover statistics of wholesale industry in Norway except wholesale on a fee or contract basis (by two months periods), MNOK.

As to the competition in the wholesale of machinery, equipment and supplies industry in 2010 and 2011 there were 3789 and 3786 enterprises respectively. Major companies in this industry are B&B TOOLS, Tess, Würth, Proffpartner and Albert E Olsen (B&B_TOOLS 2012).

Efficiency

Main activities that are performed by supply chains are transportation, storage and marketing of stock (NAICS 2012). All these activities are quite labor-intensive and, according to NAICS (2012) report, majority of ongoing capital expenditures on this market could reach 70%.

Profitability of the industry depends mostly on operational efficiency especially in inventory management area (First_Research 2013). Big distributors that have the major share of the market have a large distribution network of warehouses and outlets (First_Research

10

2013). This leads to a higher economic efficiency as long as a company has lower inventory/sales ratio.

Tendencies and key success factors

Main tendencies in the industry are formed with respect to five main customer preferences referred above: competitive price, product breadth, availability, speed of delivery and technical support. The buyer is in the focus of the supply chain and customer satisfaction is the main pillar of success in the industry.

More and more industrial buyers become focused on total price of ownership. “The ability to have total price transparency presents a clear expectation for price competitiveness”

(Tompkins_Inernational 2013). Both customers and distributors “lack comprehensive tracking systems that provide visibility into the total cost of ordering, warehousing, transporting, receiving, payment and other supply chain costs” (DHL_Supply_Chain 2009). Therefore distributors are expected to offer competitive prices by reducing total cost of ownership in the future and transparent pricing policies.

When it comes to product assortment more and more industrial buyers require wide,

“full-line” product range (Tompkins_Inernational 2013). Therefore there is a tendency for growth of product range offered by a wholesaler in the future (Tompkins_Inernational 2013).

Availability is also very important for customers as they are more and more often looking for perfect order (Tompkins_Inernational 2013). Order accuracy, shorter lead times and efficient information flow are the main areas customers, distributors and suppliers are going to collaborate on in the future (Tompkins_Inernational 2013). Distributors need to collaborate closely with suppliers and manufacturers to prevent unnecessary rise of the stock and reduce non-moving stock (DHL_Supply_Chain 2009).

Speed of delivery is going to increase to same-day or next-day delivery even though now customers accept three- to four-days delivery (Tompkins_Inernational 2013).

Collaboration between distributors and suppliers or manufacturers becomes crucial to comply with customer requirements. Supply chain network, logistics and operations should be re-adjusted to meet the standard of same- or- next-day delivery (Tompkins_Inernational 2013).

Technological support also becomes increasingly important on the market (Tompkins_Inernational 2013). Consultancy services, help in searching for the best possible solution and ability to talk with an expert will become more important in the future customer requirements (Tompkins_Inernational 2013). The companies that provide customers with specialized services (as delivery solutions, product expertise, product functionality

11

optimization), specific suppliers have a competitive advantage on the market (First_Research 2013, QuEST 2013). In the future this trend will become even more noticeable.

Another tendency in the industry is to move the stock from the manufacturer closer to the end user in terms of location (NAICS 2012). However, in terms of ownership the tendency is completely opposite: the stock is moved from the end user to the supplier or manufacturer (DHL_Supply_Chain 2009). Therefore there is a trend for on-site management of MRO procurement and inventory and consignment inventory (DHL_Supply_Chain 2009).

On the Norwegian market consolidation of distributors is going to be the main tendency when it comes to the market structure (B&B_TOOLS 2012). Currently Norwegian market is very fragmented. Taking into account that industrial buyers are trying to reduce the number of the suppliers of MRO materials, growth of mergers and acquisitions is expected.

In general, DHL_Supply_Chain (2009) has defined the following points of leverage in the industry of MRO supplies: lack of complete understanding and transparency of MRO costs, fragmented and inefficient supply chains, lack of visibility into MRO supply chain.

Skilled workforce of customers spends too much time trying to find the right item on stock.

Furthermore risk issues increased importance due to security aspects when multiple suppliers enter warehouse or on-site facilities. These areas are expected to be addressed in the future by customers, distributors and suppliers, (DHL_Supply_Chain 2009). Points of leverage, described above, indicate opportunities for the future development and competitive advantages.

To summarize, wholesale of machinery, equipment and supplies industry as well as its sub-industry of industrial supplies wholesaling are experiencing a period of transformation (Tompkins_Inernational (2013), DHL_Supply_Chain (2009), B&B_TOOLS (2012)). Main products offered by the industry (MRO and other industrial supplies) are characterized by high demand volatility, in some cases low consumption levels and relatively low price per unit. At the same time they often are responsible for considerable amount of stock and customers’ spending (DHL_Supply_Chain 2009). Norwegian market of MRO supplies is rising and main tendencies include: competitive prices, product breadth increase, higher level of availability, faster delivery speed and higher level of customer technical support.