B2B Manufacturer/Distributor Disruptors
Amazon Business, disintermediation, and innovative technologies coupled with evolving customer needs are three factors disrupting the traditional manufacturer-distributor model in the business-to-business (B2B) space in the United States. Both Amazon Business and disintermediation are pushing traditional distributors out of the supply chain, while innovative technologies and evolving customer needs are prompting manufacturers and distributors in the space to reconsider and adjust their business models. As requested, we provided statistics supporting the disruptive nature of these factors. For each, we were able to provide data specific to the United States. Statistics particular to the United States were limited in number, though, so we supplemented them with global statistics.
Formerly branded as Amazon Supply, Amazon Business represents Amazon's entry into the B2B e-commerce industry. It is similar to the company's consumer marketplace in the sense that it offers both delivery convenience and a broad selection of products, but it differs in that it provides products and benefits that are specifically designed for businesses, government agencies, and educational institutions. The findings of Justin Post, an analyst at Bank of America, suggest that Amazon Business is disrupting the conventional manufacturer-distributor distribution model in the United States' B2B space.
According to Post, by 2021, Amazon Business will likely capture 10% of the country's B2B industry and 5% of the rest of the world's B2B industry. It will also likely generate an additional value of $125 billion to $245 billion for Amazon. Post expects that, by 2021, the total addressable market for B2B e-commerce worldwide will reach $1.4 trillion, almost twice the size of the global consumer e-commerce market. The huge potential for growth is evident in how Amazon Business has grown in the past two years. Between 2016 and 2018, Amazon Business was able to increase its gross merchandise sales run rate from $1 billion to $10 billion. The unit now has a gross merchandise sales run rate that is 10 times bigger than what the run rate was two years ago. Amazon's "active marketplace and same-day fulfillment capabilities" may be the reason behind this tremendous growth, as they play to the company's advantage and they place the company in a great position to remove bottlenecks.
The disruptive nature of Amazon Business can also be seen on the unit's impact on W.W. Grainger Inc., the United States' biggest industrial distributor. It appears the growth of this industrial distributor has slowed down, as there were forecasts indicating the industrial distributor's sales would grow from $10.4 billion in 2017 to $11.3 billion in 2018 only. These aforementioned figures suggest that Grainger's growth pales in comparison to Amazon Business's growth and that Amazon Business has evolved from a looming threat to a full-blown competitor, particularly in the distribution of factory-floor products, laboratory equipment, industrial parts, medical supplies, and office supplies. There is a good chance that manufacturers planning to distribute these products through a third party will choose Amazon Business over other distributors. Medical original equipment manufacturers (OEMs), for example, will likely switch distributors unless distributors and group purchasing organizations (GPOs) begin innovating soon. The industries that Amazon is expected to disrupt the most are the automotive, electronic, and general industrial product distribution industries.
Sources suggest that disintermediation is disrupting traditional distribution models in the B2B products space. Digital technologies are making it easy for manufacturers and distributors alike to set up their own direct-to-customer channels. Companies that were once partners and clients are now becoming manufacturers' biggest competitors. In what a CEO calls "a major shakeup of the supply chain" and what is typically known as disintermediation, manufacturers are now taking active steps to eliminate the middle man and distribute products directly to end clients via online channels or stores. Distributors are now losing business as a result.
Over 100 senior manufacturing executives in the United States were polled in 2018, and based on this survey, manufacturers project that the direct-to-customer's share of sales will grow in succeeding years and that distributors' share of sales will drop slightly. Disintermediation is expected to be most pronounced in the general industrial, heating, ventilation, and air-conditioning (HVAC), and plumbing industries. Fourteen percent of manufacturers hoping to get more direct-to-customer sales say they want to capture the margins of distributors.
Moreover, a global survey revealed that of 44% of 559 B2B manufacturers opened an online store to be able to sell directly to end customers. Twenty-four percent of these B2B manufacturers plan to open an online store "as an additional revenue stream in the future with the intention of moving away from selling across channel." The survey revealed as well that half of wholesalers see this trend among B2B manufacturers as a threat and that 33% of companies in the B2B space believe this trend among manufacturers, wholesalers, and other middle men distributing products directly to end customers is resulting in price drops. Also, 63% of distributors consider wholesalers their biggest competitor, especially in light of the possibility of large-scale consolidation.
In the aerospace sector, there are indications that OEMs are trying to capture their fair share of the support and services sector by offering customers end-to-end maintenance solutions. Though this is more a vertical integration than a disintermediation, this trend signifies how manufacturers are going beyond their traditional roles.
INNOVATIVE TECHNOLOGIES AND EVOLVING CUSTOMER NEEDS
A report published by McKinsey suggests that innovative technologies and evolving customer needs are disrupting conventional B2B business models. Innovative technologies such as predictive analytics, advanced navigation systems, automated warehouses, and autonomous vehicles are slashing down delivery lead times, labor costs, and transportation costs and increasing operational efficiency, while evolving customer needs relating to ordering, order tracking, and inventory management are prompting manufacturers and distributors alike to reconsider their business models. Customers of manufacturers in the United States indicate they expect a 30%-increase in their online purchases. The expected increase is even bigger among customers in the electrical segment, with customers in this segment projecting a 50%-increase in online purchases. Robots in automated warehouses are reportedly slashing order-picking labor expenses down by as much as 80%. The United Parcel Service (UPS) also reports that its latest navigation system enables it to save $300 million to $400 million in logistics expenses.