Adventures in Distribution Part I

February 6, 2012

Specialty distributors fall into several categories, but one thing they all have in common is an offering that exceeds the mere supply of products. Specialists typically invest in technical training for their personnel, offer expert advice regarding their suppliers’ products, and often set up regional warehouses to serve their customers quickly and efficiently.

Specialty distributors as well have ready access to their suppliers’ technical resources to help solve a problem or recommend a product for a new lubricant application. Such services can be essential to a blender’s overall success in the marketplace, and they are far beyond the abilities of lowest-cost suppliers.

On the supply side, specialty distributors offer access to markets companies may not be able or willing to serve because of geography or volume. They also provide invaluable market intelligence that allows their suppliers to plan for the future.

The big challenge for specialty distributors is to get their suppliers and customers alike to recognize the value they bring to their business. This is the only way to maintain a supplier’s business and to counter a customer’s price-based procurement mentality.

To gain insight into the role of specialty distributors, Lubes’n’Greases spoke with several who serve the lubricants manufacturing industry.

Sea-Land Chemical, of Westlake, Ohio, has been in business since 1964 and represents Infineum’s automotive products, Lubrizol’s industrial additives, Arizona Chemical, BASF, Dow Microbials, Kao Specialties, Ineos Chlor and Vayport, to name just a few. “We have over 92 suppliers and our top 10 to 15 are in the lubricants industry, representing over 50 percent of our market,” said Joseph Clayton, Sea-Land president.

Palmer Holland, North Olmsted, Ohio, was founded in 1925 as a manufacturers’ representative serving the graphic arts industry. According to Dave Leiser, vice president of metalworking, “The company has grown into a full-service, superregional specialty chemical distributor serving a national market.” For the lubricants industry, they represent Arch Chemicals, Cargill Industrial Oils & Lubricants, Cross Oil, Evonik Oil Additives, ExxonMobil, Flint Hills Resources, Focus Chemical, Henkel Acheson, Neatsfoot Oil, Rhein Chemie, Sonneborn and more.

Based in Leominster, Mass., Monson Companies has been in business for over 40 years and represents additives made by the former Ciba (now BASF), BASF’s synthetic lubricants and base stocks, and those made by the former Cognis (also now BASF). It additionally lists Ergon, Sonneborn, HollyFrontier, Teknor Apex and Lonza as some of its key lubricants partners. “Our lubricant sales force calls only on the lubricant industry and no other,” said Doug Hiple, industry manager for lubricants and metalworking there. “Our suppliers highly value that because they know our salespeople devote 100 percent of their time to the lubricants market and are respected experts in the industry.”

Establishing a Supplier Link: Specialty distributors gain a supplier’s business either by the supplier seeking them out, or by recognizing a need in the market and searching for a product to fill it. “Our customers often refer suppliers to us,” said Clayton. “For example, a European company contacted us a few years ago because they were trying to break into the U.S. market but couldn’t get the service they wanted from their existing representative. When they asked their top three customers who they would want to buy from, our name was mentioned by all three. So they called and asked us to represent them.”

Distributors also may seek out a supplier because they know their customers need a certain product. “We are active in industry groups such as ILMA and STLE where we make contacts with suppliers and users alike,” said Leiser. “If we recognize a need by our customers, we actively pursue a supplier that carries that product and that may not currently have distribution in the area we serve.”

It helps, added Clayton, if the supplier recognizes your customer base as one it wants to reach. “For example,” he said, “until a few years ago, Infineum did not deal through distributors. But we knew many of our customers needed the types of automotive additives they sold. When we approached Infineum, it happened that they were looking into distribution, so we were able to work out a relationship.”

Monson’s Hiple said, “We go through an extensive process that includes evaluating our current offerings, identifying holes based on customer input and industry trends, and determining like-minded manufacturing partners to whom we think we can bring value.”

“We like our relationships to be transparent between customer and supplier,” said Clayton. “Once we have a contract, we supply sales information to the supplier on a monthly basis. We work closely with the research and laboratory functions on both sides of the relationship and act as a conduit and facilitator for product testing. Our business model is to go into the marketplace and act as if our business card has the name of the companies we represent.”

When a distributor takes on this kind of responsibility, it becomes an extension of the supplier’s sales force. As such, it can ask for exclusivity in a geographic region, which helps maintain long-term relationships. Exclusivity means that distributor alone can sell certain products in a given region. “This type of relationship helps take price out of the issue,” said Clayton, “and allows us to sell value — both the value of the product and the value of the supplier.”

If a supplier has multiple channels to market, however, the only differentiator will be price and the distributor starts losing return on its value-added services. “We’d rather maintain a level of exclusivity so we can maintain a certain level of support for that supplier,” agreed Leiser. “We also work hard to avoid representing suppliers selling the same type of product in a region,” he added — something that is increasingly difficult, given the mergers and acquisitions taking place in the industry.

Sales and Marketing Teamwork: Specialty distributors often become an extension of the supplier’s sales and marketing force, and also may extend the reach of its procurement and research departments. “Companies are trying to do more with fewer people,” said Leiser. “Our product mix gives us greater access to a customer’s technical department. It would be difficult for a distributor with only one or two products to do that.”

Another service a distributor provides its suppliers is market intelligence. Because most distributors call on many different companies, they are able to advise suppliers about trends in the market while keeping specific customer information confidential. Monson’s Hiple said, “We provide market feedback and intelligence they may not hear from others, so we’re actually considered the marketing and sales arm of our suppliers. We have a lot of feet on the ground.

”Finally, using distributors helps diversify the risk for suppliers. As Clayton noted, “If one customer dries up, we usually have another user for that product.”

Location, Location, Location: As in real estate, location is often a critical factor for a distributor. Even though a particular additive or chemical supplier may be a large company, it can’t always afford to support customers in certain geographic areas. For example, if a customer is located far from a convenient transportation hub, it may not be cost effective to serve it from the home office. That’s where specialty distributors can provide an essential service.

“A supplier may turn a large account over to us simply because we’re in the neighborhood more often and can visit the customer more frequently,” said Clayton. “With 12 outside and two inside account managers, we can cover a lot of customers in different areas. Even though a lot of our business is in the Midwest, we sell coast to coast for several of our suppliers.”

Leiser observed, “We have to be a national company because recent mergers and acquisitions have created a national customer base. We have over 25 salespeople in the U.S. and Canada to provide wide coverage for our suppliers.”

Broad coverage recently worked to the advantage of Sea-Land in gaining new business. In December, Lubrizol announced that it had contracted with Sea-Land to distribute its industrial lubricant additives in North America. According to Jon Ridgway, Lubrizol’s global business manager, metalworking in Wickliffe, Ohio, “Sea-Land has the industry knowledge and sales force coverage that will enable us to better serve companies in the hydraulic, metalworking and grease industries.”

And as might be expected, competition from other distributors can be fierce. This was evident in October when Rhein Chemie (a business unit of Lanxess) shifted distribution of its additives for the United States (except on the West Coast) from Sea-Land to Palmer Holland. Michael Assaf, Rhein Chemie’s Pittsburgh-based director of lubricant oil additives, said, “Palmer Holland distributes products for other Lanxess businesses so it made sense to consolidate our business with them. Their industry expertise and large sales force enables us to reach customers in areas where we have limited coverage.”

Size also matters. A distributor with multiple locations and stocking points can qualify for volume discounts that can then be passed on to its customers. Palmer Holland, for example, maintains seven stocking warehouses throughout the United States. “This enables us to bundle products from different suppliers together for our customers, saving them the expense and hassle of handling multiple orders and invoices from multiple suppliers,” said Leiser.

Similarly, Sea-Land operates seven U.S. warehouses, one in Canada, and one in the U.K. “We’re national, and going to Europe,” said Clayton, adding that when Sea-Land announced plans to open a European site, “ten of our top customers called to ask when they could buy from us in Europe.”

Contracts? We Don’t Need No … Both Clayton and Leiser emphasized the value of contracts with their suppliers. “Contracts are important because they clearly define the relationship with suppliers,” said Leiser. Beyond terms and conditions, contracts spell out the geographic area covered by a distributor and the accounts to be handled by the distributors and the supplier.

“We have contracts with all our major principals,” said Clayton. “The better the guidelines that exist between the supplier and the distributor, the better they work together.” If a supplier’s sales organization is not aware of what the distributor is doing, there can be some issues. Even so, a contract’s terms can be somewhat dynamic, because customers and product mixes change through acquisition and growth.

“Contracts are good because we don’t want to compete with our suppliers. We want to work with them,” said Clayton.

Monson’s Hiple added, “While contracts are not always necessary, whenever the chemistry involved is sophisticated and involves a fair amount of sweat equity before the potential of success, it really is important to have a written agreement.”

Occasionally, a customer grows so large that the supplier decides it wants to take the account in-house to be served by direct sales. Having a technically savvy sales force can reduce this risk for the distributor. “Our salespeople are technically trained so they bring more to the table than just facilitating the distribution of material,” said Clayton.

“It’s rare for a supplier to take over an account,” said Leiser, especially today, as many suppliers have cut back on their sales and technical staffs. “We’ve had to hire extra staff to assist our account managers in providing support that a supplier can longer afford.”