Max Talking to Tom Gale, CEO Modern Distribution Management
On the occasion of a visit by Tom Gale, CEO MDM from Denver / Colorado, USA at Ludwig Meister, Max seized the opportunity to question this renowned distribution expert in 3 consecutive interviews.
Following the already published crossover podcast, in which Tom has asked Max about his assessments of the market and the development of Ludwig Meister, we are now turning “the pike”. Max asks Tom about current trends and developments in the US market around distribution and supply chain.
What are the challenges, what is Tom’s view of Amazon business´s development and, most importantly, what kind of learning is there for Europe and Germany? How far ahead are the US in developments?
In a third part of this round of talks between Max and Tom, which will be released in a few weeks, they talk about an analytic software presented by Tom – so far unfortunately only for the US market – but very interesting, as it shows and helps lift regional / local sales potentials.
But for now, have fun listening to today’s podcast episode. Transcript, and links can be found below. And as always: your opinion please. We welcome comments, suggestions, criticism at firstname.lastname@example.org
Max: Welcome to Max and the Supply Chain Heroes. Your entrepreneurial podcast about challenges and changes in procurement and distribution in the context of digitization. Thoughts, experiences and above all findings by experts in supply chain management. Completely free of any consultancy mission, easy understandable, just plained business prospected. I am Max Meister and I hope you enjoy this episode.
Welcome to a new episode of Max and the Supply Chain Heroes. My todays guest is Tom Gale, CEO of Modern Distribution Management. They serve all people that are interested in information about Wholesale Distribution in the US. And I think this episode is very interesting, because you can get many insights in the actual state of distribution in the US and also have some insights about the situation for distributors in Germany. I think mdm.com is very share-worthy and I think it would be good if you checked out their homepage. I will put it in the description below. The have a so called „Premium Part“ and I think it is very interesting to get some insights there. I also attended a convention last year in Denver and yeah, I think they do a good job. I wish you interesting 30 minutes and as always, when you have feedback, just write me an e-mail to email@example.com. Have fun.
Okay welcome to a new episode of Max und die SupplyChainHelden today I have an English speaking guest. Tom Gale is sitting here. Before I start introducing you halfway, maybe you just tell the audience who you are and what you do.
Tom Gale: Thank you Max. Delighted to be here with you today. I am the CEO of Modern Distribution Management. It is a market research and media company based in Colorado in United States and we have been actually a newsletter journal that covers wholesale distribution since 1967. In 1992, I bought the newsletter and particularly in the last ten years we have really invested more in our research and digital channels and really tracking key trends in distribution. So we don’t really cover products, we cover all verticals of distribution, but it’s really around the operating best practices of distributors. The key trends that are changing the industry and the strategies of companies. So we do a lot of work in terms of mergers and acquisitions, competitive dynamics and that includes some of what’s taking place in Europe as well as the United States.
Max: So your focus until today is mainly the US market?
Tom Gale: Yes up until I would say in the last ten years in particular, there’s been a few different ways of acquisitions going in both directions but primarily there were some European distributors including Eriks and Sonepar across a couple of different product verticals that started buying up US distributors and building us a platform in North America. And so, that was roughly 10-15 years ago that started to take place. So when that started happening we became more interested in covering those companies in Europe more closely.
Max: So I got to know you a couple of years ago, when I asked you about which companies I should visit in the US. So we are mainly trying to figure out what’s going on in supply chain management and in supply chain optimization. So I think it would be very interesting to draw out what is the actual state of the whole topic, supply chain management and disruptive distribution as you always call it in the US.
Tom Gale: Sure. A final piece of introduction because I think it´s important. But on the media side of what we do, we produce a daily e-newsletter that reaches about 15,000 wholesale distribution executives as well as the suppliers to them. So about 85% of our audience are distributors, about 10% are manufacturers of products and I’d say 5% are service providers so it’s the software companies and the ERP systems that cover and the consultants that are working in the industry. So we’ve really built out a community across all these different distribution sectors with our biggest strength really in the industrial products. So power transmission, MRO, fluid power, electrical, and fasteners, those are really the strongest areas where we have our largest audience and then as well, also in construction supplies, building materials.
Max: So as you finished up with the introduction, you’re talking, your audience is basically covering all parts of the supply chain. So you have the manufacturer, you have the distributor, you have some software companies, so what is the actual state?
Tom Gale: Well so we also do a lot of surveys of our audience and what we’ve really seen a shift in what’s really forming our themes this year is really around a couple of different areas. One is around analytics being a really critical aspect of what… We really track what the leading distributors are doing to really differentiate themselves in their respective markets. And it really comes down to three things that we’re tracking now and really seeing, making a big difference. One is in analytics, and really companies that are able to better leverage their data and understand what’s happening. The other aspect is in digitalization and in particular starting to think differently in terms of becoming more platform companies. And then the final piece is around talent development. And in distribution at least in the US, that’s always been put in the back seat, it really hasn’t been so important. We really think and what we’re seeing here is that, things are changing so quickly now, that finally distributiors are recognized and they need to bring new types of talent into their businesses that five years ago they weren’t thinking about.
Max: Yeah I always say company culture eats strategy for breakfast. So I think it’s very important that you have young people that really understand how the company is working and try to evolve step by step. And you cannot make a strategy in digitalization in the ivory tower and know what is happening in ten years. So you always have to adapt quickly. You mentioned three topics, if you look at the analytics part, can you tell us some services or some thoughts you have where some distributors do a good job in terms of supply chain optimization?
Tom Gale: Yeah I think you know it divides into two areas – internally but then externally. I think really, where we´re seeing the real gains being made are in those distributors and their manufacturer supplier partners in data sharing. And just increasing the visibility around inventory availability, stocking. All this sort of the transparency of information which is really… that’s translating into much better customer service at the customer level. Because ultimately that’s what this is all About, right. So it just makes sense that those distributors that are essentially starting to be strategic in picking their partners, their supplier partners around those who can supply good data and information to make them much smarter to their customers, that’s the shift we’re starting to see. I think in terms of there is still exclusive distribution, there always will but there’s another level that’s entering here in terms of “you can’t be all things to all people”. And I think that’s a shift that’s starting to get faster right now.
Max: Do you see new distributors going to the industrial market, so we all know about Amazon business but do you know other companies that use that kind of data analytics?
Tom Gale: Absolutely. And this is where… And of course this all comes together in terms of, I talked about digitalization, analytics and talent. Of course all of this all mixed up into one very important mix of how a company builds competitive advantage. So to your question, what we’re seeing now are new models of Distribution. Where in a similar way to what Amazon business is doing, their cost structures are entirely different than the traditional branch models that have worked for a hundred years in distribution. And what that means is, it’s becoming very difficult for traditional distributors to operate in the same model with the same type of cost structures. Particularly in outside sales and the typical outside sales cost for most distributors are very expensive. So, what we’re really seeing right now is a very quick transition for some distributors to really attack that problem of a sales model that’s not sustainable in the future. With all the digital competitors that are emerging out there. So again what’s happening out there is you’re getting another fragmentation taking place in terms of what the market looks like. With a much smaller type of distributor but they still have access to product one way or another. But they don’t have the same carrying cost for inventory, they figured out how to operate that more leanly. But they also have a much leaner sales model as well.
Max: I think it´s a similar situation here in Germany. Also the cost for outside sales are quite high. But what we see is that you can really help with some digital tools. You can help to make the outside sales more efficient for us. But also for the customer. Because we have more and more customers that say, we don’t want to have any visits. Or at least maximum once a year. And I think it’s the same in the US. I talked to Jonathan Bein from Real Results Marketing, and I think he made a survey how many customers really want to have visits from outside Sales? And it´s declining, year by year. So it will be difficult in the future to really get contact to the customer.
Tom Gale: Yeah. And Jonathan has been a great research partner and good friend to mdm.com our web platform, for many years. But it’s not just about digital as you know, because… We just had a conference about this, about three weeks ago in Las Vegas. In our third annual conference around transforming the traditional outside sales model and Distribution. Where you have more of a generalist doing a lot of things for customers to creating more of a team based approach. So it’s a change in culture and a team… Really a change in structure about your sales process. And what we’re seeing is those distributors that are going to having their outside sales people much more specialized in terms of business development specialists. But then you have the customer managers who are really handling more the day to day, what a lot of people call inside sales roles. By splitting that up and defining them better, it´s solving a lot of problems for distributors. It’s making them much more efficient and creating much stronger customer relationships in the process.
Max: I hope this is true and I hope this works. Because I think this can be a chance for traditional distributors to really have a role in the future in the whole supply chain. Because if you do not develop this to positive, I think it’s difficult to really compete against the big online players.
Tom Gale: Yeah.. And this is the key question. Because I think we’re going to see a lot of consolidation take place here over the next few years. And particularly, you know given the economic cycles, we may be due for a little bit of contraction. I know in the US we’re looking at… We’ve had a very long cycle of economic growth and nobody knows what’s going to happen in the future. But all the economic forecasters are saying that 2019 is likely to be softer than 2018. And the writing is on the wall. So what I think this means is, universally, is you’re going to see some distributors that aren’t making these changes really being forced to sell. And I think what that means is these more nimble type of, sort of new distribution models are going to be very successful because they can adapt and adjust to what customers are asking for much more quickly.
Max: Okay, I see and I think it’s the truth. If you can adapt you will survive. That’s what I truly believe. If you look at the distribution in the US, and you also know some distributors here in Europe, can you give us an impression, do you see any difference or do you see many similarities and what is the time difference between maybe the continents? Are the US distributors ahead three to five years or can you give us a general impression about that topic?
Tom Gale: You know, five years or ten years ago, I think I would have said: yes probably. But because I think my Impression… and I’m far from knowledgeable about European markets but it´s, there were more barriers five or ten years ago in terms of cross-border expansion capability. So in ways there was more limitations in terms of growth. But if you take a look at what’s happened with Rubik’s and the whole growth and some of the other larger distributors out there, I would say it’s really become much closer to what is happening today in the United States. So I think technology has had a lot to do with that as well. I think it’s really leveled the playing field internationally. And it certainly has in terms of… Within the United States, technology has leveled the playing field where you have the large nationals and they tend to have large customers want to deal with companies that look like them. So… And you have the smaller distributors who tend to have higher customer service levels and that local relationship that’s always been very difficult for these big national companies to try to establish. And so… I think in many ways you have the same type of customer dynamics and what’s happening there. And I would say especially in the last few years with the whole digital explosion that we’re seeing, it is becoming very much the same challenges. And ways that people are creating good competitive businesses or good – I would say – differentiated positions in their markets. Where they (are) clearly have strong customer relationships that are hard to take away. You know an example of that I guess is really in the value added services. And it’s hard for a large national distributor to really be able to create some very customized services at local level for customers. And so… I don’t ever think that is going to go away. And particularly in manufacturing environments, that there’s a need for… where a distributor can actually be more efficient in terms of actually saving costs, increasing productivity, than what they can do internally or by going with another larger type of a distributor necessarily. So I think markets are becoming healthier overall, and more challenging. But I still don’t see, we’re not gonna go all digital. Or all the business aren’t going to go to national Players. And it’s not going to just go to either in the United States or anywhere. I don’t think it is going to, were just going to see three distributors rule the world. Now I know we’re going to talk about Amazon business and that’s a different conversation. But even with that I don’t really believe, I still think there will be very strong niches that distributors will not only be able to defend but compete very effectively in the future.
Max: Okay you started with Amazon business, this is for sure one of the main topics. We also were discussing in Denver a bit about that. I would be very interested in the actual situation in the US. Because what I think in business to business the situation with the competitors like Granger or also MSC, the other big companies and in combination with Amazon business, I really think that the situation you have now in the US, is maybe the situation we are looking at in Germany in five years or in four years. So I think it would be interesting to know what is the situation with these competitors and the development.
Tom Gale: Yeah we spent a lot of time analyzing Amazon business and it’s not easy. Because they’re very quiet. It’s hard to get information specifically about their business segments. They don’t report a lot. But we spend a lot of our time trying to figure out and then reporting on what they do. It really depends on who you are. And the types of products that you sell. And, you mentioned Granger, they are particularly vulnerable. And I think more than Fastonal, because of the types of products and the types of customer segments. You know at an overall level, if you are more selling commodity type products and of course MRO products (are), many of those are very commodity. That doesn’t require a lot of additional application or technical expertise. Those are very vulnerable. And what we’re seeing is that Granger’s model, I think, is more open to being disrupted by Amazon business than many more technical distributors. And so, it really depends on how large you are and your focus. What we’re seeing is, the nationals are really more vulnerable to Amazon business, taking a larger percentage of what they’re selling today. Because they don’t have the backup. It used to be that Granger was the convenience store. They had the ability to… If you needed something you could get it tomorrow. Well, Amazon business is taking that away, right? And you can get it today, in many cases. With the smaller distributors, what we’re seeing is that they are definitely getting some of the products that are not their core products, that they really built the business on. But they… The products that were sold along with their main products, their areas of expertise. So let’s say, if they were cutting tools specialists let’s say, or bearing specialists. Many of those products aren’t going to go away, but then if they had other products that were added on by customers. Customers are getting much more price shopping and looking competitively to fill that in. And Amazon business is definitely taking that away. So it’s hurting the overall – what used to be a product mix – that would increase your overall profitability. Because particularly those other items used to be not very price sensitive so, they were add-ons the customer didn’t really care. Well the customer is starting to care now. So this is where, again, the distributors that aren’t really addressing their cost to serve models, whether that be in outside sales or in inventory management or supplier management whatever it is. They are having trouble because their profitability is very challenged. Margins keep getting tighter, you know we´re in an area where we keep getting pricing increases as well. I think 2019 is going to be a year of transition for Distributors. I know in the US, because the equation for profitability has never been more difficult than it is now. And that’s really the Amazon business impact I think.
Max: Yeah I can imagine, this plays quite a big role. You mentioned Fastonal before. A couple of years ago, Granger was celebrated for switching such a big piece of its turnover to online. And now he’s very vulnerable for this. And also a couple of years ago everybody said what is Fastonal doing with 50,000 vending machines pushing into the market. And I think now, it was a great move because they owned the contact to the customer, and they can reduce the amount of outside sales visits. Because maybe a guy from the logistics is there every week anyway. So, I think these two companies are good examples for the speed of change.
Tom Gale: Yeah the other aspect with Fastonal that’s interesting is, because they have a different product mix and customer base, and they’re more heavily construction suppliers. I think they have a little bit more defense against an Amazon business because of the nature of the types of products. And they’re going out, there’s job sites that they’re serving and that. So it’s a slightly different equation in terms of the customer relationship. And I think that’s harder for an Amazon business to take away than it is for that Granger kind of convenience store model that they used to be successful in.
Max: Okay, maybe for the first part, I only have one question left. So, you know about analytics, digitalization and also about the race for talents. What would your main focus be if you sit on my chair and try to run a successful distribution business?
Tom Gale: So, we talked a lot about moats. And it’s about how can you create that differentiation for the value that you provide to customers and I would say for suppliers as well. What can you change in your business to really create an extremely differentiated experience for your customers? Start with that, and I think you need to build from there. And once you start looking at it from that way and identifying, I think then you start to say: well you know, if we’re doing kitting of parts or for putting vending machines in. Or if I have a technical specialist who knows that customer’s problems let’s say, you’re a specialist in beverage bottling packaging, whatever or food production. If you have a specialist that your customers respect because of that knowledge, that’s a very difficult position to try to attack. So, if you can focus on your moats, I think every distributor needs to focus on their moats over these next two to three years. And to do that, that comes back to both the digitalization and the capabilities to be more efficient but also really around the talent development. Because you really need different type of talent I think to continue to develop that then you did five or ten years ago. So, I guess an example of that is not only the technical expertise. But really it is the way that customers (think) because there’s a generational shift taking place with those customers as well. I think distributors need to start bringing in the people who can talk to and connect and do business the way that those customers want to. And what we’re seeing and I know we’ve done some research again with Jonathan Bein the Real Results Marketing around more email orders being placed but even there’s texting orders and you know people are placing orders through text. I mean it’s not just email but there’s now, if you don’t have the capability to accept email orders and then translate those digitally, and manage those, that’s a very difficult manual process. And there’s some good software out there to do that. So it´s not like it hasn’t been solved. But if you’re not even looking at that, I think that those are the types of problems that I think distributors have to solve over the next few years here, to really be competitive with all the digital competitors.
Max: Okay that’s I think, an interesting wrap up. Maybe we have to talk about the race for talent a little bit longer or in a later episode, because I had the honor to make a speech at your event in Denver the last year in September or October. And the topic of educating people was one of the biggest. So I think I have some more questions about this. Okay so for the first time we stop here and later on we will come back with an episode about the second part of MDM and it’s called, MDM analytics. It’s a special software and I think it’s very interesting. And yeah we will make a short break.
Tom Gale: Thanks Max it’s been a pleasure.