Products, parts, and productivity. For industrial distributors - often referred to as MRO (maintenance, repair, and operations) distributors - success depends on how they manage and distribute the multitude of service products and parts that their customers need.

Most MRO distributors stock a wide range of products, including tools, hoses, fasteners, electrical equipment, pumps, motors, bearings, valves and fittings, and a host of other items that are used in manufacturing and construction. They also offer a variety of value-added services, such as technical and design consulting, on-site materials management, inventory and purchasing management, and equipment financing.

MRO distributors operate in a complex environment. It's not uncommon for national distributors to offer hundreds of thousands of individual stock-keeping units (SKUs) in their catalogs and online order systems. They may purchase these items from more than 1,000 suppliers to satisfy the needs of as many as one million customers. Yet their average order consists of fewer than two line items and is valued at less than $150.

Given these numbers, solid inventory and distribution management is the key to success in the MRO business. Knowing how to manage tens of thousands of small shipments daily - and make a profit on them - is crucial to distributors' survival. In a time when more and more businesses are bypassing traditional middlemen and purchasing directly from suppliers, industrial distributors' mastery of frequent, small shipments of parts and supplies, often on an emergency basis, guarantees them a secure future.

MRO distributors' customers are very clear about what they want. In a 1999 survey of clients conducted by Grainger, a Lake Forest, Ill.-based distributor, the three most important services cited by respondents were logistics-related. Three-fourths of the respondents said that availability of replacement parts was very important. Next was just-in-time delivery with 62 percent, and third was emergency same-day delivery with 57 percent. (The total exceeds 100 percent due to multiple responses.)

The distributors reach their customers through several channels. One of the main avenues is the branch or local service center - sometimes called a "storefront." These well-stocked outlets look much like retail businesses, with product displays and service counters. Primarily, they act as mini-warehouses where customers can call in orders and pick up small, frequently used items; make unplanned purchases; pick up orders rather than wait for delivery; and discuss their technical needs with customer-service representatives. Branch stores also deliver orders to their local customers.

Many national MRO distributors operate hundreds of branch locations, which usually are located near clusters of customers. Blair Hawley, vice president of materials management at Kaman Industrial Technologies in Windsor, Conn., notes that because some contracts call for products and parts to be available within as little as one-half hour after an order is placed, where a branch is located becomes a critical service issue. Sometimes it even pays for a distributor to have a separate stocking location for a single customer. Graybar, for instance, has an on-site shop for ExxonMobil in Houston, Texas, and delivers parts and supplies every three or four hours to specific plant locations.

Storefronts and branches usually have between 5,000 and 15,000 SKUs on hand. To know what to stock, distributors analyze past sales and carefully forecast demand, according to Rick Adams, vice president of logistics for Grainger. "We can't fit our entire product line in a branch store, so we have to figure out what needs to be available in that local market to serve same-day needs," he says. Anything that's not available at a branch, he adds, can be ordered for next-day arrival.

Not all orders pass through the storefronts. Very large orders, oversized or unwieldy items, consolidated shipments for construction sites, and emergency replacements may ship directly from a distribution center to a customer's site.

Two other popular sales channels are printed catalogs, which may include 100,000 of the most commonly ordered items, and Web sites that allow customers to search for products and order them online. Customers may choose to pick up items ordered through both of these media at storefronts or have them delivered directly to their doors.

The distributors' position as middlemen between suppliers and end users puts them under a lot of performance and cost pressures. "Having the right part at the right time - I like to say that's the price of admission," says Jeffrey A. Ramras, vice president of supply chain management at Applied Industrial Technologies in Cleveland, Ohio. "We're providing inventory 24/7 ... they're relying on us to make sure that when they need a part, we have it for them." As a result, Ramras says, distributors must excel at inventory management. "The customer and the manufacturer have inventory as well, so we have to manage the amount of inventory within that whole chain to minimize costs for all involved."

That's no easy task when hundreds of thousands of individual items are involved, says Edwin Keith, vice president of logistics at St. Louis-based distributor Graybar, which specializes in electrical and communications products. "We need to be the preferred supplier offering the best value at the lowest cost," he says. That means focusing his company's attention in two directions. First and foremost, he emphasizes, is what the customer wants and needs. At the same time, distributors have to look upstream to provide their suppliers with low-cost channels to reach the end user. "The suppliers know how to manufacture," he says, "and we know how to distribute."

All the while, distributor executives agree, they are working under time pressures brought to bear by customers who can't afford to have a manufacturing line shut down or a construction project delayed for lack of a part. For that reason, most national distributors are committed to shipping orders the same day they are received and delivering them the next day. "Customers are looking for instant service," says Hawley. "Our logistics challenge is to create a pipeline from suppliers through the distribution centers while getting appropriate turnaround times and fill rates."

One of the critical factors in designing an MRO distribution network, therefore, is the ability to deliver quickly - usually overnight - to the majority of the company's service centers and customers. Typically, there is a tiered approach to stocking distribution centers, with regional centers that stock full product lines supplying smaller "zone" or "master" DCs, which, in turn, supply local branches and handle direct-to-customer shipments. These DCs usually range in size from 100,000 to 300,000 square feet. Where they are located depends on where the customers are and what it takes to deliver products to them overnight.

That's one reason Graybar is creating a new network of 16 distribution centers. "We designed our network to enable same-day and next-day delivery to 96 percent of our customers," says Ed Keith. The distribution centers are responsible for replenishing up to two dozen branch locations via United Parcel Service or regional LTL carriers such as A. Duie Pyle, Pitt Ohio, Southeastern Freight Lines, Central Freight Lines, Overnite Transportation, and Condor Freight Lines. The branches, in turn, deliver orders to customers via Graybar's private fleet of 450 trucks.

Grainger has also begun to redesign its distribution network, which it calls the "DC of the Future." "I believe it will be the first 'click and brick' distribution network that will combine branch replenishment and direct-to-customer order fulfillment in the same distribution center," says Rick Adams. The centers will be designed to accommodate those two very different types of operations, he adds. Four new DCs will be built and several others will be retrofitted.

Next-day delivery also was the deciding factor for locating Applied Industrial Technologies' eight distribution centers. They are able to deliver orders to 70 percent of the company's branch stores by 8:00 a.m. and to 98 percent of branches before the close of business the day after an order is placed, says Jeffrey Ramras. The company uses third-party dedicated transportation services, including Action Expediting and BestWay Systems, to deliver overnight. "The drivers have keys to our stores. Throughout the night, they deliver products and pick up any returns or items that have to go to another store on their route," Ramras says. For stores where that system is not economically or geographically feasible, he says, shipments move via national and regional LTLs.

Kaman Industrial Technologies has the smallest number of distribution centers at five - four in the United States and one in Western Canada - and the smallest number of branch stores of the companies interviewed. But Hawley says his company can keep pace by focusing on speedy order processing and using regional LTL carriers. "For orders that we receive up to 5:00 p.m., we will ship that same day to reach more than 82 percent of our locations the next day," he says. One thing that works in Kaman's favor: the Louisville, Ky., DC is located next door to United Parcel Service's national hub, allowing orders to be shipped as late as midnight and still arrive the next day in most locations.

Deciding what to stock in each distribution center and branch store is as important as where to locate those facilities. Accurate analysis of sales by customer, service center, region, and product line is critical to the availability of products and parts on demand.

A new sales-analysis system is an integral part of Graybar's supply chain redesign. The company analyzes 12-month sales figures from all angles. But, Keith points out, what customers have purchased in the past doesn't always indicate what they will purchase in the future. The historical data serve as a baseline for stocking service centers and DCs with a basic "market basket" that every location should have, he explains. Slow-moving or specialty parts are located in the zone distribution centers, but that's not carved in stone. "We evaluate every branch's sales every 120 days to check for demand changes," he says.

That information is also used to determine replenishment strategies for the zone and branch locations. All of the national distributors use software to analyze daily "point-of-sale" data from their branches and direct-delivery information to ensure that each stocking location has the necessary items on hand. Proprietary software allows customer-service representatives to locate items at any branch or distribution center online and request delivery, within specific cost and service parameters.

Although sales analysis and inventory-management technology play an important role in enabling MRO distributors to serve their customers quickly, they're not the whole story. Success in the MRO business, says Keith, comes down to one overriding principle: Serving the customers must be the top priority. "If we focus on their needs and continue to provide value-added services," he says, "we'll be there for them for a very long time."