Manufacturers Should Not Be Distribution Police

Feb. 1, 1999
The fact that consolidation is happening in our industry is part of a natural business cycle. People in our business should be thankful that the industry

The fact that consolidation is happening in our industry is part of a natural business cycle. People in our business should be thankful that the industry is experiencing growth at the same time as consolidation.

Equipment users will be and should be the beneficiaries of the changes in our business. We should all be oriented to delivering the user better equipment at a lower price or cost of ownership. If we do not do this, no matter where we stand in the value chain, users will and should go elsewhere for their needs.

In my view, the value chain includes component suppliers to original equipment manufacturers, the OEMs themselves, distributors, rental companies, finance companies and the users.

I started my career at Procter & Gamble in marketing. I worked there for 10 years on a broad array of businesses that had little to do with equipment. When I first became involved in the equipment business in 1989 at Case, it was shocking to me how this business viewed the Caterpillar formula with such reverence. Its excellence inspired this reverence, but if you were anywhere else but at Caterpillar, you had a David and Goliath problem.

Caterpillar's strength is its excellent distribution, service and ability to market its product. If other companies try to imitate Caterpillar, they will lose every time. They need to develop their own strengths and nurture those.

Nowhere else could this have been more pronounced than at Terex in 1992, when I joined this company, which was very troubled at the time. It seemed to me that to be successful, one needed a user-focused distribution plan not a manufacturer-convenient plan. A manufacturer should build the best value equipment and deliver it to the user through the channel that best serves users' needs. If those needs could be best served by a traditional dealer, then the dealer is the right channel. If a rental company can satisfy the user's needs, then that's the right channel. And if the customer is big enough to buy direct, and sophisticated enough to service his equipment, then that channel will work successfully.

It's only natural that rental is going to become passe as a term, that just pure distribution is going to be the relevant phrase. Any company interfacing with the user has to offer the product in the form the customer wants it, whether it's short-term rental, long-term rental, rent-to-own or straight sale. What's driving the business is the user, the person who pays the bills. Rental specialists as we know them today are in the distribution business and must be focused on satisfying the customer, no matter what form of distribution the customer prefers. Rental companies are successful because they provide value to equipment users.

Even John Deere, Komatsu, Case and Volvo need to be aware that some of their independent dealers may lose their independence. In the coming years, many traditional dealer organizations are likely to be acquired by the big consolidators. These dealers will have to make a decision. Are they in business to be representatives of those particular manufacturers, or are they in business to distribute equipment, whether by selling or rental, in the most cost-effective manner that serves customers' needs?

A manufacturer cannot be the distribution police force. A manufacturer's job is to create the best possible equipment, but not to dictate the method of distribution. Let value determine the relationships between user and manufacturer. Having said this, we must not undermine the valuable relationships that exist between user and dealer.

Too many people in our business are designing equipment to win engineering awards rather than for the functionality of the product. This will be stopped with the growth of large rental companies. They will ultimately know more about user needs than the manufacturers because they are on the front line. The engineer will have to get out of his or her office and into the market in a way that takes into account how a piece of equipment is rented, sold, used, fixed and later resold.

This is the new world for industry, where what's important is not the latest electronic wizardry, but whether our products are delivering a return to the equipment owner.

The mission of a manufacturer is to deliver equipment that provides a better return on invested capital than the competition. To do this, we need to have less overhead and more competitive prices than the alternatives. We need to continue to develop products that customers want and that allow them to earn money. This - rather than nice-guy awards from the competition - wins repeat business for a manufacturer.

The growing rental companies should take notice of the large crane rental companies, which have been around now in a consolidated form for almost 20 years. A $150,000 crane rents for the same price as a $60,000 telescopic forklift. Pricing is great today on smaller equipment, and margins are very good, but heavy competition cannot be far behind, and that will drive prices down. To be large is an advantage; to have access to the capital markets is a necessity, and to control costs and buy at the best terms are parts of the fabric of this business.

All manufacturers must wake up to this reality. It will literally change this industry in the next five years or fewer. We should expect some dislocations as a result of these value-driven changes. Equipment must be simple to use, available on short notice and cost-effective for all parties in the value chain. If you stick to this approach and eliminate everything that does not contribute to this, you can make good money in this business in good times and bad.