Winners / Selection Rationale

General features of the manufacturing and distribution industries for indirect materials in Japan

Indirect materials are called "MRO" items. Please note that these letters are included in the company's name, MonotaRO. MRO is a three-letter acronym for "maintenance, repair, and operations," which refers to the equipment and materials used in factories and on shop floors. (Indirect materials are used to make a final product, but do not become part of that final product.) Indirect materials include compressors, pumps, and other small equipment; drills and other tools; maintenance and repair items, like lubricating oil, mending tape, and putty; and consumables, like dust masks and gloves. Nowadays, "indirect materials" also include office supplies (e.g., personal computers, copier paper, writing materials, and fluorescent bulbs).

Indirect materials comprise many product categories. There are over 10 million SKUs, and more than 10,000 manufacturers in Japan and overseas. The majority are small and medium-sized manufacturers. There are just a few large manufacturers. End users are mainly manufacturers, auto repair shops, the factories of construction companies, and the contractors who work at construction sites. End users also include offices and individuals working on their own DIY home improvement projects. The market size for indirect materials in Japan, which was about 8 trillion yen (about US$70 billion) in 2015, has remained at this level since the 1990s. (*1).

The distribution channel for indirect materials is multi-layered: (1) nationwide first-tier wholesalers; (2) second-tier wholesalers; and (3) sales agents. This is because both suppliers and customers are large in number, but small in size. In Japan, the main channel for selling indirect materials to end users has been machinery tool dealers, who visit factories and take orders. Due to financial constraints, machinery tool dealers would normally carry only a limited number of items, and those items tended to be the best-selling national brand products. If a customer wanted a product that was not in stock, that item would have to be backordered. It would be delivered to the customer at a later date. Another challenge was the industry's reliance on sales calls as the main sales practice. There is a limit to the number of customers that can be visited and the number of the geographic locations that can be serviced. These challenges were dealt with by dividing up sales territories geographically, and clearly demarcating sales territories for each vendor. Meanwhile, there has been a steady decline in the number of machinery tool dealers over the years. As is often the case, such companies are usually family-run businesses, and when aging business owners retire, business closures are quite common.

(*1) Ministry of Economy, Industries and Trade, Shogyo Tokei (lit. translation - Commercial Statistics).

The MonotaRO site is an efficient procurement platform that effectively uses IT (specifically, the Internet and database marketing). In Japanese, the word "mono" literally means "things or objects." The name "MonotaRO" takes its inspiration from the Japanese folk hero "Momotaro," and embodies both the company's spirit and its mission to "fight against the old, unfair distribution system." Customers would normally have to spend much time finding the desired product before placing an order. They would then have to wait for the items to be delivered. MonotaRO reduces the time customers spend procuring indirect materials by making it much easier for customers to search for products, inquire about price, confirm product availability, place an order, arrange payment, and confirm the delivery schedule. Customers use a huge variety of indirect materials. The price of a single commodity is relatively low, and many of the items are purchased infrequently. The individual making the purchase may have repeatedly purchased certain commodities in the past, but this accumulation of experience on the part of the purchaser does not increase the efficiency of the procurement process. Negotiating product prices and delivery schedules makes sense for direct materials, because customers buy a limited variety of products and tend to purchase the products in bulk. In the case of indirect materials, however, there is little to be gained by spending time on the procurement of such items.

MonotaRO's target customers are small and medium-sized companies. Companies with less than 10 employees account for 32% of MonotaRO's sales. Companies employing between 11 and 30 people make up 26%. Such companies conduct small-scale operations and purchase only a small amount of items. The majority of machinery tool dealers are unlikely to encourage their sales staff to make small and medium-sized companies a priority. As can be expected, most small and medium-size companies are not having their needs met. In terms of industry segment, manufacturers account for 41% of MonotaRO's sales; construction, 18%; and auto repair shops, 12% (based on the sales volumes reported for fiscal year 2017. The number of employees is based on information optionally provided by customers at the time of membership registration. Companies must complete membership registration before they can start buying from MonotaRO.)

MonotaRO has a one-price policy to improve the efficiency of the procurement process for indirect materials. Before MonotaRO started its service, the standard practice in the industry was to withhold the price. This forced customers to make inquiries, and then negotiate a price each time. Price negotiations were possible because volume discounts were available. MonotaRO sets a price for each product (not the lowest price, but a reasonable one), and the price is listed on its website. MonotaRO does not negotiate on price. If customers are sufficiently happy with that price, they will not have to waste time looking for cheaper-priced items from other sales agents.

MonotaRO provides the convenience of one-stop shopping for a broad assortment of indirect materials. MonotaRO was selling more than 17 million products as of the end of October 2018. Nevertheless, customers can easily find what they want, thanks to the effective search function on MonotaRO's e-commerce website. By analyzing the transaction data of more than 3 million customers, the company is able to recommend the appropriate product to customers at just the right time. Recommendations are personalized, targeting the interests and preferences of individual customers. In addition, MonotaRO issues 19 catalogues, each focusing on a different product category. When customers peruse these catalogues, they will often find appealing products that they had never considered buying. It has been the company's policy to expand its product lineup over time. As a separate trend, customers tend to spend more on their purchases from MonotaRO as they continue to do business with the company.

MonotaRO also provides the benefit of a shorter delivery lead time. The company keeps about 400,000 products in inventory at its distribution centers. Products will be shipped the same day if an order is received before 3:00 p.m. MonotaRO also carries in its inventory a single unit of a product that rarely sells because customers would seldom buy that product, and what's more, customers are not likely to buy more than one unit. Regarding products that are not in the company's inventory, MonotaRO can take the order and have the item shipped the same day for 100,000 products, by working with its suppliers.

MonotaRO is able to provide quality products at reasonable prices. This is possible through the development of private brand products. By focusing the private brand on products with high expected sales volumes, the company can offer both quality and lower prices (compared with national brands). Private brand products include consumables such as cotton gloves and rubber gloves, office supplies like copier paper, cleaning supplies, blue sheets, and nuts and bolts; they comprise generic general-purpose items for which customers do not usually have a brand preference. Sales of private brand products accounted for about 20% of the company's total sales in 2017.

The unique features of MonotaRO's value chain are the marketing, procurement, and human resource management functions. Using its superior data analytics capabilities, the company studies its merchandise mix, and continually makes adjustments, to better meet its customers' diverse needs. In addition, MonotaRO conducts experiments and introduces improvements that will make product searches and the procurement process more convenient for customers.

Merchandising and procurement
MonotaRO selects products and suppliers for each category, based on the results of research about customers' purchasing behavior and the market conditions for a given product. Depending on the analysis results, the company can decide whether to source an item from a manufacturer or from a wholesaler. The company has created teams that specialize in merchandising and procurement. The accumulation and sharing of know-how enable product categories to be expanded without having to substantially increase the size of the staff that handles merchandising and procurement.

When MonotaRO first starts selling a new product, it will order that item from a supplier after an order for that item has been received. Whenever possible, MonotaRO will ask the supplier to deliver the item directly to the customer. Once that item has achieved a certain frequency of sales, MonotaRO will begin carrying the item in its own inventory. Regarding general-purpose items that are expected to achieve a stable sales track record, MonotaRO will offer such products under its own private brand. In this way, MonotaRO is able to offer customers good-quality products at lower prices, and with a shorter delivery lead time.

Marketing
MonotaRO has developed its own original product database. This database contains extensive product information that allows for easy product comparisons. With the aim of making the product selection process a more pleasant experience for its customers, the company has: (1) improved its search logic; (2) upgraded its product recommendation function; and (3) created a system for customizing its services by enabling the swift and accurate functioning of the abovementioned features in response to specific actions taken by each individual customer. The company's sales techniques include e-mail messages, catalogues, fliers, and a combination of these. MonotaRO identifies the best approach for each customer by continually working to further improve accuracy (making full use of the analysis of data accumulated through machine learning), and by pursuing optimization utilizing tools such as the probability calculation of cost effectiveness and AB tests (a comparison of various patterns)

MonotaRO acquires new customers mainly through keyword searches on the internet. The company improves the chance for customers who conduct Internet searches to find the MonotaRO site through search engine optimization. Also, since 2013, the company has been advertising on television to raise brand awareness in the Osaka area. Since 2015, MonotaRO's TV commercials are being broadcast nearly nationwide (some geographic areas are excluded). Brand recognition for MonotaRO has reached 80% in areas where the company's TV commercials are broadcast.

MonotaRO has been issuing product catalogues from early on. (The company currently issues 19 catalogues, targeting different product categories.) Internet searches are conducted by customers who are looking for a specific product. Catalogues, however, help customers discover entirely new products--ones that they did not know about before seeing it in the catalogue.

Distribution: MonotaRO has three distribution centers: (1) in Kansai region (the central western area of Honshu, which includes Osaka); (2) in the Kanto region (the eastern area of Honshu, which includes Tokyo); and (3) in Hokkaido (the large island in the northern part of Japan). Products in inventory will be shipped the same day that the order is received, but only if the order is placed before 3:00 p.m. on weekdays.

Human resource management
MonotaRO's first action guideline is "respect for others." This concept of "respect for others" is the core of its corporate culture. "Respect for others" is what enables MonotaRO employees, who come from various backgrounds, to work together and maintain a positive attitude. This commitment to maintaining respect for others helps the company to build healthy relationships with its suppliers and customers, and coexist with them in society.

Another core value of its corporate culture is the willingness to learn (i.e., to learn from one's mistakes). MonotaRO encourages its employees to: (1) frankly admit their own mistakes; (2) accept the mistakes of others; and (3) undertake small-scale experiments as a way to analyze and learn from data. The company also promotes mutual cooperation between employees. Employees are required to submit a report to their supervisor once a week, and have meetings with their supervisor on a weekly basis.

MonotaRO has made three core strategic choices that are central to its competitive strategy: (1) Continuous improvement of the search function; (2) continual increase in customer traffic to its website and expansion of its customer base; and (3) a shorter delivery lead time. These three factors reinforce each other. The improvement of the search function is achieved through the analysis of data that has been accumulated as a result of the increased customer traffic. Meanwhile, increased customer traffic is supported by growth in the number of customers and the expansion of the product lineup. The growth in the number of customers is supported by: (1) expansion of the product lineup; (2) an increase in the number and quality of keywords connected to advertisement links on search engines; (3) search engine optimization; (4) mass advertising; (5) a shorter delivery lead time; and (6) an easy-to-use e-Commerce website. A shorter delivery lead time can be achieved through growth in the customer base, more widespread use of the site, and the resultant higher sales, which would enable the expansion of the product lineup carried in inventory. All of this is supported by investments to raise the efficiency of operations at distribution centers. (Please refer to MonotaRO's activity system map, which appears at the end of this report.)

• Created an efficient procurement platform (an e-Commerce website) that enabled the creation of a nationwide market for indirect materials. Previously, the market was divided up by geographic area, with numerous customers purchasing only a few items at a time, after selecting from a broad product lineup. The e-Commerce website makes product searches, delivery schedule confirmation, and order placement quick and easy.
• Introduced a one-price policy to the indirect materials market. The previous standard practice in the indirect materials market was to withhold pricing details. Customers had to ask for a quote, and then negotiate the price each time. By disclosing product prices, MonotaRO saves customers time and energy, as they no longer have to worry about price comparisons and negotiations.
• Discontinued the industry's standard practice of making sales calls and assigning dedicated sales staff to the accounts of particular customers (except for a few sales staff members who exclusively handle the accounts of large corporate customers). MonotaRO has developed standard operational procedures for new customer acquisition and sales promotion to existing customers. (Both of these activities are conducted online.)
• Developed a corporate culture that embraces diversity (by hiring people with various backgrounds) and encourages experimentation. MonotaRO encourages employees to actively undertake experimentation on a small scale, and the company also tolerates failure.

• MonotaRO's sales staff does not negotiate product prices or the terms and conditions of transactions with customers. The company has a one-price policy, and openly discloses the sales price for all of its products.
• Does not sell direct materials. If the company were to sell direct materials, price negotiations would be unavoidable because of the big impact that price has on the customer's profitability.
• Does not focus on products other than indirect materials. The determining factor for including an item in the company's product lineup is whether selling that product would help to improve the efficiency of the customers' procurement process. In its product lineup, MonotaRO does not focus on articles for daily use in offices.
• Does not operate its e-Commerce site as an online shopping mall. In a mall-style e-Commerce site, numerous sellers compete in terms of their product lineups and prices. Firstly, it would be difficult to provide the same kind of standardized information for each product. Secondly, the customer would have to move around from page to page, to see the prices and delivery schedules being offered by different merchants for any given item, and make comparisons.
• Does not seek to improve productivity by eliminating collaboration among employees. Short-term gains in productivity might be achieved if employees were to work autonomously. However, such higher productivity is not the company's goal. MonotaRO's priority is to continually improve the quality of its services. According to the company, this is best achieved when people work together and learn from each other's mistakes. For this reason, the company requires employees to submit weekly reports, and have weekly meetings with their supervisors.

In 2000, MonotaRO was established as an e-Commerce retailer for indirect materials. Since the beginning, the company's value proposition has remained unchanged. MonotaRO aims to improve customer productivity by reducing the time and effort spent on ordering indirect materials. MonotaRO adopted a one-price policy from the very beginning, and considers the adoption of a one-price policy to be indispensable to the success of its value proposition. However, MonotaRO's commitment to openly disclosing product prices met with resistance from some manufacturers and wholesalers who did not want the product prices to be disclosed. Consequently, the company had much difficulty amassing the kind of broad product lineup that it offers today. Nonetheless, MonotaRO wanted to provide customers with the benefits of one-stop shopping. Starting out, MonotaRO selected small and medium-size manufacturing companies, ironworks, metal works and machine asembly companies as its first target customers. In selecting the merchandise it would offer, MonotaRO focused exclusively on the needs of these target customers. Back then, small and medium-sized factories seldom placed orders online. MonotaRO had to approach to these companies via fax and direct mail to collect their orders. In 2003, online orders accounted for less than 30% of total orders. Then, in 2004, Yahoo and Google started advertising businesses linked to keyword searches on the Internet. This is when MonotaRO began attracting new customers through the Internet.

MonotaRO added new target customers based on an analysis of its new customer acquisition, to determine from which industries the new customers were coming. The company expanded their target markets and merchandise lineup accordingly. The company added new product categories for auto repair shops in 2008; contractors and construction companies in 2009; research labs and R&D divisions in 2010; offices and shops in 2011; agricultural and kitchen equipment in 2014; and medical/nursing care facilities in 2015. Adding new product categories increases the sale of products that sell less frequently. MonotaRO will begin carrying an item in its own inventory once it has achieved a certain frequency of sales. Items kept in inventory mean a shorter delivery lead time for the company's customers. To summarize, the company's expansion of its target customer categories results in greater convenience for both existing and new customers. Thus, MonotaRO has created a true virtuous cycle. The company has enhanced customer convenience by providing private label products--primarily generic general-purpose items that are expected to generate steady sales. In this way, MonotaRO has succeeded in strengthening its value proposition, by providing good quality products at reasonable prices, with a shorter delivery lead time.

Although MonotaRO's target customers have traditionally been small and medium-sized factories and offices, since about 2010 the company has been getting orders increasingly from the factories and offices of large corporations. The procurement of indirect materials in large corporations tends to be delegated to the local offices and factories (unlike the procurement of direct materials, which is usually centralized at the headquarters). MonotaRO has introduced purchasing management systems for large corporations ("MonotaRO One Source" in 2014, and "MonotaRO One Source Lite" in 2017). The company has also assigned sales representatives to each of its large corporate clients. In addition to these new initiatives, the traditional activities that MonotaRO developed for small and medium-sized customers are being used by the large corporate clients. In short, MonotaRO has been able to successfully serve large corporate clients while maintaining the core of its competitive strategy.

MonotaRO CO., Ltd.'s five-year averages for the return on invested capital (ROIC) and the return on sales (ROS) exceeded the industry average by a wide margin. (Profitability analysis was conducted by PwC Japan.)

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