Process control end users, systems integrators, and engineering firms purchase prodigious amounts of control system hardware and software from distributors. Purchasers like this distribution model because it provides them with local stock, local support, and free donuts. But manufacturers can no longer support traditional distribution networks, and distributors cannot survive on the margins that manufacturers are willing to grant.
Maturation of the process control industry, open systems, and worldwide competition are putting unprecedented pressure on product margins. As detailed in our March Control Report, both manufacturers and distributors are moving into services in an attempt to increase revenue and improve margins. Manufacturers are also taking a hard look at distribution costs, and distributors are feeling the squeeze.
Many distributors are responding by dropping marginal second and third-tier product lines. They also are very reluctant to invest the time and money required to establish new product lines. As a result, the situation for many manufacturers has deteriorated to the point where they feel they have to investigate new and more direct means of reaching end users.
Three methods of direct product distribution already exist: a direct sales force, toll-free phone numbers, and e-commerce web sites. A direct sales force is the most expensive option and is not feasible for most products. Toll-free numbers work well, but they must be accompanied by extensive and expensive product brochures backed by a bevy of technical personnel.
E-commerce web sites can provide both product information and a means of placing orders, but it is expensive and time-consuming to create and maintain these sites. eBay is entering the industrial automation market to make e-commerce sites feasible for a wider market.
"We are making an aggressive push into the industrial automation market through our eBay business-to-business initiative," says Jordan Glazier, a senior director and the general manager of eBay Business-to-Business (www.ebaybusiness.com).
eBay Business-to-Business provides a marketplace for buyers and sellers of new and used industrial components. This includes everything from supplies to machinery to control systems. Sellers are able to list products on their own storefront and through "general stores" that feature a host of items in that product category. Sellers are able to choose auction-type sales or direct sales at a set price.
Whats in it for sellers? The ability to instantaneously create an extremely low cost distribution network via a well-known company along with a means to collect immediate credit card payments without setting up a merchant banking account. eBay charges as little as $10 a month to maintain a store, and there are no set up fees.
eBay does charge an array of fees to list a product, sell a product, and process credit card payments. For most products, these fees add up to a total commission of about 5% of the sales price. By contrast, automation product sales through traditional distribution networks account for about 30-40% of the sale prices, and direct sales through a firms own sales force account for more than 50% of price.
Another benefit to sellers is direct feedback from buyers. "Buyers can automatically e-mail comments to sellers through eBay. These communications can provide valuable market information unfiltered by distributors," adds Glazier.
Whats in it for buyers? A vast array of goods at rock bottom prices along with some assurance of performance by the seller. Sellers with negative feedback from buyers cannot survive on eBay, but there are ways for unscrupulous sellers to get around this, so buyers must beware.
A competing option with a very different business model already exists in the automation industry. AutomationDirect (www.automationdirect.com) has an e-commerce web site, an extensive product catalog, and a toll-free number. Unlike eBay, this company offers stocking, first-line technical support, and extensive product information for all items listed in its catalog.
Most products are branded with the AutomationDirect name, but manufacturers such as Cutler-Hammer are now starting to use AutomationDirect as an alternative method of distribution. "In many cases, our sale prices for other manufacturers products are less than the prices they charge to their own distributors," says Tim Hohmann, the founder and president of AutomationDirect. This type of pricing pressure will be a death knell for many distributors.
AutomationDirect will be 10 years old next year. It provides an effective and established means for distribution of many automation products. AutomationDirect can act as the sales, technical support, and distribution department for a manufacturer, allowing the manufacturer to concentrate on building high-quality products at a low cost.
By contrast, the eBay distribution model still requires manufacturers to provide all sales, marketing, and support functions. All eBay wants to do is provide a low-cost electronic sales channel. eBay hopes to create a new distribution method for business-to-business sales worldwide. Its manufacturer neutrality, reputation, relative longevity, and consistent profitability give it a fair chance of success.
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