ECONOMOS, AN AUSTRIAN COMPANY, MAKES seals. These are rubber or plastic rings that arc fitted at joints in fluid pipes to prevent leakage. It is difficult for anyone, even engineers, to get excited about seals. Economos. however, can. The company, founded by Helmut Mayerhofer, has achieved tremendous success in this $4 billion annual worklwide market through an impressive series of innovations in materials and production technologies and distribution methods. Economos has shaken up the world seal industry, and distribution advances have been a cornerstone of its marketing strategy.
There are thousands of seal types and sizes. Customers expect their distributors to keep stocks available of most of them. Seal makers like Economos also expect their distributors to buy large stocks. In this business, it is also apparent that the firm's own production technologies and the injection moulding process it uses encourages it to manufacture large batches of the product. The traditional production methods, however, mitigated against fast response to customers that ordered a small quantity of an item not in stock. Economos was considering how to overcome the inflexibility which, in a way, confined the company to the use of third-party distributors that are put under pressure to keep large inventories.
In the mid-l&SGs, Helmut Mayerhofer and his associates started to examine the possibility of developing compounds that could he machined on a numerically controlled lathe. When a customer ordered a small quantity of an item that was not in stock, the firm could simply take a rough block of synthetic rubber or polyurcthane and turn out the required number of pieces. At that time, few of the existing polyurethane substances could be machined. Those that could were not sufficiently flexible to make suitable seals, Economos approached the Department of Material Science and Material Testing of the Mining University of Leohen in Styria in 1988, whose assistance resulted in the development of a formula that produced machinable polyurethane suitable for seals. A plastics machine maker that Economos was working with developed a process for extruding the material into rough seal moulds, resembling lengths of pipe, in industrial quantities. The company also came up with a third innovation - a lathe, cutting tools and software for machining the rough stock into precisely dimensioned seals. This enabled the firm to produce a finished product that had highly consistent elastic properties arid was tree of bubbles. As a result of the speed and automation of the company's lathe, it could now machine a seal in about one minute, slice it off the rough stock and immediately machine another from the remaining stock. Economos could use its system to produce normal as well as occasional seals.
It is clear that once such a system is enforced, Eeonornos could create a competitive advantage in fast, flexible, manufacturing that could be translated into higher service levels for its customers: that is, any size of seal could be delivered to them in small or large quantities and, most importantly, quickly.
Since production could be done in immediate response to orders, Eeonornos decided to set up as close to customers as possible. Its distributors would no longer need to carry large inventories, which meant lower prices and higher margins for their customers. Machinery makers could also contemplate abandoning the stocking and supplying of replacement seals. More recently, Economos has set up, together with local partners, seal service centres worldwide. It supplies the rough blocks of materials and the lathes to the local entrepreneur, who, under a franchise agreement, machines and supplies seals in response to manufacturers' orders. To date, there are 250 such service centres operating with the brand name Seal-Jet, The company's managing director, Ernst Stocker, estimates that its combined annual sales arc about Schl,424 million. Economos' own revenues of over Sch420 million have come from selling not only seals, but also, increasingly, machines and materials.
The Austrian group is set to adapt its strategy to obtain greater control over its seal service businesses in overseas markets. Through investment in technological innovation, the company has transformed the way it delivers vulue to its distributors and customers, while creating extra revenues for the firm. Through the transformation ol its distribution method, Econotnos has been able to improve its delivery service in particular, thus lowering costs and improving margins for its customers. A seal is a seal is a seal - maybe i'or most people, hut for Eeonomos it is serious business in which the integration of production (in this case) and marketing channel strategics have created a significant source of competitive advantage, and a win-win situation for the company, its customers mid distributors alike.!
1. In the ease of Eeonomos, who are the main players in the distribution channel for seals? Identify the supply chain.
2. What are the channel service needs of (a) Eeonomos; (b) Eeonomos' customers?
3. How would you describe the channel approach used by Eeonomos (a) up to the mid-1980s; (b) following the introducion of the series of technological innovations that streamlined its production-delivery system?
4. Why is it important for the company to work closely with channel partners at different levels in the supply chain?
5. What are the changes in the channel environment that companies such as Eeonomos and its distributors must be aware of?
6. How might these changes impact on Eeonomos' business? Suggest a channel strategy that would enable the company to sustain n competitive advantage in the global seal market.
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