Distribution Of Industrial Goods
( Originally Published 1939 )
American industry is its own best customer. Every factory, and to some extent every business organization, is a buyer-not necessarily of finished goods that people need in order to live, but of products which industry uses to produce the finished articles and services which the consumer demands. Goods sold in the industrial market consist of machinery and equipment and tools and supplies necessary in the operation of business concerns, but chiefly of raw materials and semi-finished products which undergo further processing and fabrication before they appear as finished goods and services ready for consumption.
The industrial market, it must be emphasized, does not apply to the large volume of goods bought by wholesalers or intermediaries and by retailers to be sold again in unchanged form. Also, for the purposes of this study, supplies sold to farmers are not included, for this trade is largely handled by retailers who deal in consumer goods. The movement of products from the farms to factories and packing plants, however, regardless of the channels they follow, is necessarily included in the industrial market.
Size of the Industrial Market
The size and limits of the industrial market are readily apparent from a glance at the Flow Chart. Purchases of supplies and equipment by the extractive industries, shown by the bands entering this rectangle from the left, amounted to $1.2 billion. Manufacturing industries, with purchases of $47.2 billion-chiefly raw materials and semi-finished products for further fabrication-were the largest element in the industrial market. Among terminal buyers, represented by the rectangles at the right side of the Chart, utilities (including transportation agencies and the construction industry) purchased $7.4 billion worth of industrial goods used in producing services sold to the public. Institutional buyers, including hotels, hospitals, government institutions, etc., accounted for an additional $4.4 billion. Goods sold to the industrial market, therefore, amounted in the aggregate to more than $60 billion, a larger total by $11 billion than the sales of all retail stores in 1929.
Nature of Industrial Market
The industrial market differs from the consumer market in many ways. For one thing, the whole setup of industrial marketing is relatively simple, as contrasted with the marketing of consumer goods. Industries generally buy for utility. Taste and style considerations are almost absent and the buyers of industrial goods, as a rule, are in a much better position to state what they want in terms of actual standards of utility, than are the shoppers for house-hold supplies. As a result there is much less guesswork, both in the production and distribution of industrial goods.
When he is ready to buy, the large industrial buyer has no end of assistance which the average consumer does not have. He has a purchasing department trained in the science of buying. In any case he is not tempted to buy a lathe or a crane because some agent assures him that it exactly suits his personality and would give him a reputation as a distinguished manufacturer. He would want to know, rather-and he would have means of finding out-just what the machine could do. Standardization and buying on specifications, in fact, have gone so far in the matter of industrial goods that it is next to impossible for dealers in most raw materials and factory equipment to successfully misrepresent their wares.
A large quantity of typical industrial goods goes through but one layer of dealers. Some manufacturers sell their large and special equipment directly to industrial consumers, leaving only miscellaneous products to be sold by the trade. The bulk of the trade to small establishments, however, usually passes through one or more intermediaries.
For many reasons the buyers, rather than the sellers, generally dominate the industrial goods market. Buying, as a rule, is planned for a considerable period in advance; and with the tendency of industries to cluster in certain centers, such as automobiles in Michigan and moving pictures in Hollywood, the bulk of the market is easily accessible to those supplying it. Of the 3,073 counties in the United States, 106 counties, each with a total of $100 million or more value of manufactured goods, in the aggregate accounted for almost 70 per cent of the manufacturing of the entire country. Nearly 94 per cent of our factory output, moreover, was produced by less than 32 per cent of our manufacturers-those doing an annual business of more than $100,000 each in 1929.
Captive Sources and Captive Markets
Many industries directly control their most important sources of supply. Steel companies, for instance, own and operate many captive coal mines. Both selling and purchasing costs are largely eliminated. This tends to reduce the costs of distribution of coal to the actual expense of transportation and accounting. There are many other similar captive sources such as ores, lumber, rubber, and other raw materials.
There are also captive markets. Utility companies, for instance, may be regularly supplied by some large manufacturer of electrical goods who has captured the market through contract or (in earlier periods) by ownership of stock in a utility holding company. In such cases it is difficult to say whether the producer or the buyer of industrial goods really dominates the market.
The economic danger of capturing either markets or sources of supply is obvious. While such an arrangement may eliminate many real costs it also eliminates competition and often tends to substitute unprogressive routine for the constantly better methods which keen competitors are forced to discover and adopt. Many manufacturers have invested heavily in sources of supply, only to find in the end that much cheaper ways of supplying their needs have been developed and are already being used by their competitors.
The Ford Motor Company is often cited as a vertical organization which achieves economies through the control of all the processes of production and distribution from the raw materials to the finished product. A careful study of Ford practices, however, shows that the company has regularly been opportunistic in this respect, readily disposing of its captive interests as soon as the special purpose of each capture has been achieved. Its control of sources of supply has generally been undertaken not for the purpose of achieving a monopoly, but in the hope of breaking one.
Distribution of Industrial Goods
The $60.2 billion paid by industrial buyers for goods bought in 1929 includes not only the amounts received by the sellers of domestically produced commodities, but also the costs of delivering these goods, as well as the money paid for imported goods entering the industrial market.
Deducting the value of imports and the estimated total of transportation charges leaves a total of $54.7 billion which represents the sales value of all American goods bought by manufacturing concerns, public carriers and utilities, hotels, mines, oil wells, government agencies, hospitals, hotels and institutions and other industrial buyers. The kinds of goods bought and the channels through which they entered the industrial market are shown in Table 16. Manufacturing industries, with purchases of $42.1 billion, were the largest buyers of industrial goods. More than half of what they bought came directly from other manufacturers. Other industrial buyers supplied nearly half their needs with purchases from manufacturers. The importance of the middleman even in this field, however, is evident from the fact that nearly $23 billion worth of industrial goods, or more than 40 per cent of the total of $54.7 billion, was distributed through intermediary dealers.
The wide variation in the channels followed by different kinds of goods entering the industrial market is evident from the table. A large proportion of iron and steel products-the most important single class of industrial goods, with sales of $7.7 billion-went directly from producers to buyers; while the almost equally large volume of food and farm products reached the industrial market chiefly through intermediary channels. Intermediary dealers also play an important-though not dominant-role in the distribution of iron and steel, textiles, machinery, paper, coal and coke, and leather products. Transportation equipment, forest products, printing and publishing, and petroleum products, on the other hand, are distributed to an overwhelming extent directly from producers to the industrial users.