TRENDS IN PPE DISTRIBUTION IN THE US MARKET Daniel K.

Shipp, president, International Safety Equipment Association International Trade Conference Distribution of PPE Today and Tomorrow Dsseldorf, Germany November 6, 2013 As I was preparing for this talk, I interviewed PPE manufacturers and distributors, industry analysts and observers, all of whom were quite willing to share their views. The presentation that results from these conversations is not a scientific review or an economic analysis, but rather a snapshot of an industry in transition, and one whose challenges are how it will adapt to the pace of change over the next few years. The people I interviewed identified a number of trends affecting the PPE marketplace too many for a brief presentation but four stood out: Changes in the channel what kinds of companies are supplying PPE. Changes in the brand the emergence of private labeling and in-house PPE brands. The importance of knowledge-based selling helping customers find solutions to their health and safety issues. The emergence of e-commerce and on-line buying, and its potential to bring about radical changes in the way PPE is sold.

The association for which I work, ISEA, was founded in 1933, and is the association for manufacturers and distributors of PPE. For about 40 years, the distribution side of the business had its own association, the Safety Equipment Distributors Association, or SEDA. SEDA prospered for a number of years, but struggled to keep up with the changes in distribution and went out of business two years ago. Nearly all PPE for the industrial marketplace in the US is sold through distribution. Here are the products were talking about: Head, eye/face, hearing protection Respiratory protection Gloves Protective apparel, including chemical protection, FR protection, and high visibility apparel. Protective footwear Fall protection Gas detection

Distributors also carry associated products such as first aid kits and supplies, emergency eyewash & showers, signs and warning devices, and hazardous material containment and cleanup supplies. Most PPE distributors in the US do not carry uniforms or workwear, nor do they sell sporting and recreational PPE.

In this business-to-business market, there is a small volume of sales direct from the manufacturer to the user, usually high-value items; and some retail sales mostly to small businesses, individual contractors and specialty markets. There are specialized distributors in markets such as welding, fire and emergency services and healthcare, but the great majority of products get to the customer through safety distributors that carry a full range of PPE. Trends in this industry are common to most industrial distributors in the US, but some are unique to the nature of the products we make and sell. Changes in the Channel One of the most important comes under various names: consolidation, channel proliferation, channel convergence even the tongue twisting disintermediation. What they all mean is that the number of independent distributors is falling, the number of different sources of PPE is expanding, and yet an increasingly large share of the market is being concentrated in a few large companies. Not that many years ago, safety equipment distribution was a specialty, a business of independent companies operating locally or regionally, prospering on intimate knowledge and relationships with customers in a defined geographic area or type of business. The sales people knew the safety directors, the business owners knew the CEOs, and the products they sold bore brands from established manufacturers. Today, as one observer told me, it looks like almost everyone is in the PPE distribution business. The big distributors of PPE are industrial giants, with broad product offerings, national or continental reach and global connections. In some cases they have built their safety portfolios by buying independent distributors, in others they have developed a safety business from the ground up, as an add-on to their core sales. These include full-range industrial distributors, tool suppliers, power transmission distributors, and even electrical and plumbing distributors. Their influence on the market is substantial, with the top four or five companies accounting for an estimated 50% of PPE sales in North America. For customers, especially large industrial customers, these distributors are able to sell simplicity and convenience, providing a one-stop shopping experience for a broad range of supplies. For the manufacturer, they offer high volume and sales forces able to promote a brand nationally. For everyone in the chain, they offer sophisticated e-commerce capabilities, reducing paperwork and time, taking costs out of the process. These companies are logistics pros, and they are bringing fresh concepts to the supply of safety equipment. One of these concepts, mentioned by almost everyone I talked to, is vending. Its not a new idea a worker goes to a machine in the plant and keys in an ID or swipes a card, open a door and gets a tool, a pair of gloves, a set of goggles. But with technology, vending offers more than convenience. It is a tremendous source of data. The safety director knows whos using what, the employer knows how much is being used company-wide, the distributor is getting information about product delivery in real time and restocking the machine as needed. Its vendor managed inventory with automation thrown in.

Today there are an estimated 90,000 united in use in the US, and one company, Fastenal, says it will add 30,000 new machines this year. It doesnt work for everyone. A successful vending strategy demands a physical presence near enough to the worksite that the machines can be monitored and stocked efficiently. It demands careful planning, so that the right PPE is available to specific workers, based on their job, hazards, training etc. For manufacturers, there may be requirements for packaging products into vendor-friendly portions. But its an important and growing trend, and more distributors are finding it necessary to offer vending to meet customer demand. So where does that leave the independent safety specialists? Challenged by constant pressure on prices and margins, they have to adapt to new ways of doing business to prosper, or even survive. Some are growing by acquisition, buying other safety distributors. They are banding together in buying groups, to leverage their purchasing power with suppliers and serve national accounts through cooperative arrangements between regional distributors. Some have expanded their product offerings into other MRO type products, although others have told me they considered this approach and decided against it, preferring to stick to their core business. They are focusing on markets where they have special expertise or long term relationships, and maintaining sole-source safety equipment contracts with major customers to whom they are linked electronically. And they are offering their customers specialized services such as safety audits, hazard analysis, assistance in planning safety management programs, even assistance in implementing engineering and administrative controls and behavioral safety. They are selling not only products, but their knowledge of product application and use. But there will continue to be challenges, as profit margins shrink and the giant distributors competing against them become more sophisticated in selling safety as well as PPE. Knowledge-based selling is a reality. Industrial MRO distributors are hiring safety specialists, adding toll-free hotlines to advise customers, writing papers on safety topics, airing Webinars with safety experts. Like the safety distributors, they are capitalizing on a shortage of knowledge and time in some companies, offering them comprehensive safety solutions as a way of enhancing their PPE sales, or even as a separate profit center. Changes in the Brand Ask manufacturers how they feel about distributors and at some point youll hear the phrase private labeling. Its an important trend that affects the manufacturer-distributor relationship in a peculiar way. Theres nothing new about offering house brands. For a long time they were low-cost alternatives to the manufacturers brands, something round out a product offering and sell to the customer who was especially cost-conscious. Often they were made by established manufacturers. Everyone was satisfied with this arrangement.

Today house brands look different. Responding to pressure to keep lowering prices and the availability of high-tech manufacturing in other parts of the world, manufacturers went to Asia to source PPE. Before too long, distributors realized they could source the same product directly, put their own brand name on them and knock some pennies off the price. Customers responded favorably, and private labeling expanded to the point where today the line between PPE manufacturing and distribution is blurry. Distributors have the financial and market strength to manufacture and market their own brands, and instead of offering them as low-cost alternatives, their sales forces are leading with them, the companies are advertising them in national publications, and working to build brand awareness and loyalty. The advantage is obvious lock the customer into a brand for which your company is the only source. Many distributors see their private brands as enhancing their credibility in a market sector, offering the customer more choices, and incidentally enabling their suppliers to sell a higher, more feature-laden level of PPE. But many manufacturers see this trend in another light: their distributors are becoming their competitors. As they bring their own brands to the forefront, how well are they serving their suppliers? Are these products cannibalizing the R&D and design work done by other manufacturers and copied by contract producers? What kind of technical support are the distributors able to provide for housebranded products which theyre simply buying off the shelf? The customer isnt going to know the difference. When the customer buys a branded product from a distributor, he likely thinks that its been made by, or at least under the direction of, that company. The distinction between manufacturer and distributor is unimportant at that level. If the customer sees the mark of a standard on the product, he also expects that its been tested and that the company selling it to him knows that it meets all the requirements. Knowledge-based Selling This points to another critical issue, one potentially made more serious by distributor private labeling. In the US, there are no uniform requirements for testing and evaluation of most PPE. Government certification is required for respirators, there are some product standards that require certification, and some markets such as fire and emergency services demand it, but there is no national mark or anything equivalent to the CE mark to provide customer confidence. The user trusts the supplier to provide a compliant product. So a knowledgeable customer is important. We all know thats an elusive goal, especially as industrial companies are pressured to do more with fewer people and the occupational safety responsibility is delegated to an environmental manager, purchasing agent, or in the worst case a clerk with a computer and instructions to buy at the best price he can find. ISEA is working to develop a voluntary standard for PPE conformity assessment, which would enable suppliers including distributors to provide a declaration of conformity for products bearing their brand.

But even with the most sophisticated customer, it is vital for the seller to have the knowledge to guide the customer to the right product. Manufacturers and distributors in the US agree that the need to train their sales forces to understand not just the products they are selling, but their application and the role of PPE as part of a companys safety management programs. It is not enough to have a comprehensive mix of products and brands. It is not enough to have the best prices and quick delivery. These are common, and offer slight competitive advantage. And they do very little to help a customer solve his safety and health problems. But what if the PPE salesperson can sit down with a safety director, managing director or company owner, and talk knowledgeably about safety and health identification and evaluation of hazards, management approaches to environmental safety and health, how all the parts of a safety and health program work together, and the role of personal protective equipment as part of the program? ISEA and SEDA recognized the value of informed marketing and sales for PPE, and jointly developed a training program we call QSSP Qualified Safety Sales Professional. It is a five-day course, designed and taught by experienced safety professionals, which provides its students with an overview of the technical and regulatory fundamentals of worker safety and health. Students learn the basics of occupational safety and health. They study air sampling and exposure levels, respirator fit testing and fall protection basics, electrical safety and confined spaces. They dig into US government regulations to learn about standards, compliance and enforcement. The centerpiece of the course is an innovative way of looking at the health and safety value proposition. Students learn how to calculate the real cost of an injury or fatality, how workers compensation insurance premiums are affected by your companys safety performance, and how health and safety management should be viewed as a business asset. To get the right perspective, they learn to calculate the cost of an injury in sales equivalent dollars, showing how poor safety performance affects profits. Since the course started in 1996, weve trained over 1100 people, who have come away from the course with practical information that enables them to make the case to their customers management for a strong, sustained EHS program. E-commerce The final trend is probably the most critical for the future of PPE distribution. Some distributors have invested heavily in e-commerce, and its paying off for them. But are other online purchasing channels going to overtake them? Purchase decisions are no longer being made over lunch, or drinks, or in face-to-face meetings. Theres still a role for a good salesman with a sample case and a winning smile. But when the salesman leaves the room, the customer can, with a few keystrokes, discover not only the technical specifications of the products hes shown and every competing product he can read reviews from users, compare prices, get shipping details, and place an order with a click of a mouse. 5

When the customer feels comfortable clicking the buy button on a Web site, the salesmans job gets infinitely harder. And when that Web site delivers the product as specified, in the specified time and at a good price, the salesmans going to have a harder time making the next sale. Surveys of B2B procurement specialists consistently show that they want suppliers who can offer digital commerce as well as traditional sales channels. Distributors need to have a robust e-commerce infrastructure, with electronic access to their catalogs, real-time product information, inventory availability, order status and all the other features that provide a seamless customer experience. But if the distributor is no more than an electronic link, has he lost his advantage in the marketplace? The value proposition for distribution includes a number of factors: among them are product inventory and availability, product knowledge, a geographic location thats close to the customer, price stability, and customer relationships. How do these hold up in an e-commerce world? How do these hold up against amazonsupply.com? Inventory and availability? Today, Amazon Supply offers over 123,000 products in the occupational safety and health category, including 55,124 separate items listed as PPE (at the time of this presentation). That number is going up every day. Geographic location close to the customer? Amazon Supply offers free 2-day shipping for orders over $50. Product knowledge? The amount and level of technical information available on the Web is comprehensive. Users can get technical data sheets, instruction manuals, use and selection guides, videos, APPs on just about any kind of PPE. Manufacturers and consultants offer hands-on training. User forums and rating systems provide feedback and a level of product information thats probably not available anywhere else. Price stability? Amazon Supply doesnt care about price. They are able to constantly scan the market and adjust their pricing to a level where they are going to be competitive. Customer relationships? Think again about the last time you bought something from an online site. How was the experience? Ecommerce providers like Amazon have made the user experience a fine art, doing everything possible to make it convenient and comfortable. If thats not your experience, it will be the experience of the next person to sit at your desk. So what does this mean for distribution? Manufacturers and distributors are going to have to figure this out, and do it quickly. The pace of change will not allow for business as usual. The impact of Amazon Supply may seem minimal today, but in a recent survey of industrial purchasing executives, 45 percent reported that they had made a purchase from the site, and 25 percent use it frequently. I need to be careful that this doesnt sound like a commercial for Amazon. Its not. I recognize that there are other e-commerce players in the marketplace, some aggressively pursuing similar strategies to 6

capture parts of the B2B marketplace. Im also not suggesting that I think anything Ive said here represents the way things should be, but rather the way things are. But lets be realistic. Amazon has a user base of over 170 million people, it is building warehouses around the country, and I am willing to wager that nearly everyone in this room has been a customer. Are we approaching a post-distributor world? Its hard to say. Distributors occupy a critical space in the PPE supply chain. As I said at the start, companies will survive as they adapt and manage changing buyer habits. One thing is certain: The marketplace in which we design, build and sell our products is unique. When I started in this business 20 years ago, I was fortunate to be guided and inspired by industry leaders people with a lifetime commitment to making products to keep workers safe and healthy. One of them, Jed Bullard, shared a phrase that sums it up: Safety is special. We all know that that means. The products were making and selling, whether theyre low-cost commodities or technically sophisticated devices and systems, all are used and worn by men and women to enable them to go into hazardous environments, do work, and come out in one piece. I use this phrase because I also think that selling safety is special. Its not just a matter of having a comprehensive catalog, getting products to the customer on time at a good price. PPE manufacturers and distributors arent selling tools or motors or pipe or paper. Regardless of how our products get to the customer, were selling life, and health. I can think of no better business.