MonotaRO's logistics transformation: Pioneering digital efficiency in Japan's B2B market

It is an exciting time for Japanese manufacturing. The past three years have seen large supply chain disruptions due to COVID as well as the US-China decoupling situation, and as a result, corporate groups are looking to diversify their suppliers for reliability reasons. Known for their reliability, Japanese firms are in an interesting position. Combined with a weak JPY, many observers argue this is a unique opportunity. Do you agree with this sentiment, and what are the advantages of Japanese firms in this current macro environment?

In Japan, there was a recession known as the lost of 30 years. Economic development in any country starts with industries that take advantage of cheap labor and a division of labor, where parts are made separately and assembled. As the economy gradually developed, domestic labor costs began to rise, and manufacturing parts and other products started to be ordered from countries with lower labor costs to generate profits. This case applies to China, Taiwan, Korea, and India. I think that these countries start with primary industries such as agriculture in order to feed the growing population. However, once a country starts developing and the death rate of children starts declining, then there is no need for such a large working population, especially with tools such as automation and mechanization. This allows the countries to move on to industrialization.

With the advancement of technologies and education, the cost of said education becomes higher. The value of education within society also becomes more important as society moves further with industrialization. This is when we see people flocking to major cities, creating mega cities like Tokyo, Seoul, and Shanghai. With that, the cost of education continues to rise and fewer children are born. This situation was seen in Japan in 1990 where the birth rates of major cities saw a big decline. The same situation is now occurring in both China and South Korea.

The Japanese economy was able to avoid inflation thanks to neighboring countries like China which had over 1 billion people and low labor costs. I feel that Japanese companies still have strength in manufacturing parts and components for products such as smartphones as well as materials for semiconductors, however, Japanese firms could be stronger at making final products or assembly. Recently, I have been talking with Japanese tool manufacturers about going to the US. Handling costs overall are expensive, but taking into account the depreciation of the JPY, you can sell products in the US for 2.5 times more. There are huge opportunities waiting in the US market for Japanese companies. Although there are barriers such as the language, I think that Japanese companies need to channel more of their adventuring spirit that was synonymous with the 1950s.

I foresee the depreciation of the JPY will continue and the interest rates lay in the hands of the Japanese government. Unlike the US which is at 5%, the Japanese government will simply not be able to raise the interest rate that high, so depreciation will continue for a while yet. It is true that it is a favorable situation for Japanese companies, but it is up to each individual and firm to take up this challenge and not squander this chance.

In the 1950s, there was nothing to lose for Japanese companies that were rebuilding themselves after the ashes of WWII. Expansion was inevitable and this sort of challenging spirit was necessary. Recently there have been some startups going abroad aggressively and I think these are good examples of Japanese companies taking up the challenge of going overseas. However, having said that the depreciation, while good for exports, is not great for imports. I think that because of the situation, an advantage that Japanese firms now have is that the labor costs have gone down when compared to other countries.

Japanese products are known for their high quality and reliability. Additionally, Japanese people are known for their high discipline in manufacturing, and these elements are actually creating effective cost-to-performance ratings.

You talked about startups going overseas, and startups also often bring new ideas to industries, one that is picking up traction is digitization. Japan is very slow in the adoption of digital technologies and if we look at certain sectors within Japan they are beginning to be revolutionized by technology, such as logistics. On one hand, digital technologies are set to increase the speed, efficiency, and reliability of logistics services, however, on the other hand, digitalization has led to new market entrants who are able to threaten the established competitiveness of existing logistics companies due to their utilization of digital tools. How have digitization and digital transformations (DX) impacted your firm, and can you explain some of the technologies you have implemented to ensure same-day shipments?

Our parent company is named Grainger and we work with them along with many subsidiaries across the globe. From my experience, I think that the Japanese market is unique. Take Tokyo and Osaka as an example; between these two major cities there is a distance of just 500km, however, there are 80 million people living across the areas. That kind of population creates an easier and more comfortable life. Mr. Seto, the founder of MonotaRO thought about the impact or the meaning of the Internet, or even other networks that expand across society. He considered the value of the Internet coming from the ability to search for things. We as a company thought about the things that take time to search for. Mr. Seto and I were both working at the steel division of Sumitomo Corporation; a general trading company. The original intent was to create a platform for trading steel. Steel is a raw material, however, the volume of transactions may be small, but at the same time the transaction value is very high. There is economic viability in taking time and negotiating the price among clients and suppliers. On the other hand, indirect materials are necessary for business operations and there are many users who do not understand what kinds of items there are or the pricing. These items are purchased only around once per year. These companies and clients were spending a lot of time finding out what products were in the market and receiving quotations.

The business model we created was to offer value by eliminating the time to search for the product as a B2B business. Searching is a labor cost for companies, so reducing that would give firms more economic viability. 23 years ago, when I was 25 years old, my first project was to convert paper-based catalogues into digital form, and 3000 pages took me about six months. 23 years ago, there was no Google, and realistically there were not any good search engines. The purpose of the establishment of MonotaRO was to build e-commerce and in the first three years, we received 70% or more of our orders through fax. Currently, we only have 1% of orders through fax thankfully. MonotaRO has always been contemplating what DX is, and from our understanding, it is converting physical work into digital or software-based work.

Screenshots from https://www.monotaro.com

The recent trends have been the introduction of AI, but now humans are no longer creating digital rules or algorithms. It was in 2008 that we first introduced machine learning. At first, we had a few million different customers that operated in different industries with different needs. We calculated what is needed by them and what is not.

Currently, we have 750 permanent employees and one-third of them are engineers and marketers. 25 of them are actually data scientists. We utilize algorithms and machine learning in various fields. Our main field is online search functions as well as online recommendations. Along with online offers we also provide offline, paper-based catalogs which we customize for each customer.

In terms of logistics, data science can actually take care of the forecast of demand as well as the requirements for inventory. We delegate the delivery of logistics to a third-party logistics company. Japan as I mentioned is an efficient country with a small landmass and congregated population. We as a retailer focus more on our main business and delegate logistics to a third party. However, in the upcoming 10 years, this might actually change once we are able to create a more fine mesh-like network of customers in certain areas. Through this network, we will be able to automate and do our in-house delivery services in certain areas. In Japan, there is an upcoming challenge with the decline in population. With this decline, there is a growing need for more automation in order to sustain society in the near future.

One thing we wanted to learn more about is your proprietary purchasing system. It allows you to offer approval flow analysis to different customers, and furthermore, you can offer fully-fledged support, for example, a call center that understands the rules and approval flows for each customer. How do you plan on further improving and building upon this service going forward?

23 years ago, we started our new business with no customers, no inventory, and only one supplier. We started as a direct sales business centering around the manufacturing industry, especially in the field of machinery assembly and steel manufacturing. Through data analysis, we learned about different industries and the fact they use common materials. We provided welding materials for the metalwork industry but at the same time, constructors required the same. We expanded our business to the construction industry by providing for painters and plumbers. We then learned that the automotive industry required things like paint and other materials, so we began providing that industry the relevant products they needed. Within 10 years we were able to acquire numerous customers, and although certain products might not sell well, by having multiple customers, we were able to sell in bulk. With the advancement of computer technologies, the search engine became a daily necessity. For the first five years, since we were not able to really leverage our business model, it was not very effective to register products online that were not selling well. However, after 10 years we were able to acquire enough users to enhance our business by focusing on a wide variety of products. Then, customers also began to tell us that they could find most of the products they were looking for on Monotaro, and long-tail products also began to sell well. What we saw from the analysis is that different countries, different companies, and different industries all have different demands.

The purpose was to provide an enterprise procurement system, however, a variety of products and services were insufficient to do business in an enterprise. Now, thanks to the feedback of our customers, we have a variety of products that are all-encompassing for the generic demands. With this increase in scale, we decided to re-enter an enterprise-focused business.

The difference between major enterprises and SMEs is the number of people involved. The decision-making process for SMEs is much quicker because there are fewer people involved. Major companies have certain approval processes in place. The service we provide is called One Source Lite which is one that provides procurement services that become universal across the company. Before procurement was done each sales office and plant, but by using the One Source Lite system or with MonotaRO’s product database and connecting it to their procurement system they are able to procure products universally across the company in a very efficient manner. This is one of the key DX approaches we are taking.

In the automotive industry, a majority of manufacturers are using our system. Our website is also effective for facility maintenance and some major companies are using our services. I think a uniqueness we have is the fact that we can connect our database to customers’ procurement systems so that they can procure a variety of products through their systems. Conventionally, sales are done physically through people, however, with the rise of labor costs, we were not able to manage this as a service. Internet sales have been replacing traditional sales staff and these kinds of sales are actually more efficient in terms of business. Despite this, I do feel that once we establish a closer customer relations network, we can go back to physical sales again. With the client population in Japan, it is important to increase productivity, and I think that the network and the utilization of the network drives that increase in productivity. It is important in that sense that we provide services to support customers and increase their capabilities through our services.

You have your own private brand that offers more than 300,000 products. What is your strategy for increasing your private brands going forward?

The importance of retail is to enhance the value of services. 23years ago, we entered this market as a newcomer and in the year 2004, we started our own private brand. The purpose was to provide product and price choices that could not be found anywhere else. We do not have a physical store, so we are not primed to replace national brands with our private brands. We feel that providing options is important and sometimes price rather than quality is the key factor that drives purchases. Securing different procurement channels in locations such as Southeast Asia, India, and Europe is important for us.

We offer around 20 million products but it is not like we are offering a marketplace. Basically, we did merchandising and as a result, we have a variety of product lineups. Sometimes a customer might not be satisfied with the quality, and the responsibility in those cases rests with us. Finding the right products at the right price is key here, and that is actually converted into a labor cost. We actually see that some customers are confused by Amazon’s marketplace since there are too many product lineups and quality is not insured by Amazon themselves.

First, with a limited number of customers, we were able to provide commodity products as our branded products, and that included things such as gloves, masks, and tapes. Now, with more customers, we are able to expand into new fields. By securing our own procurement and pricing, one of our differentiating factors as a business is that we offer the option of original brands, and we believe this is something we can continue to promote vigorously.

We also know you have an international presence in South Korea, Indonesia, and India. Moving forward, which countries or regions do you believe are key for the continued corporate growth of MonotaRO, and what strategies will you employ?

First and foremost, I must say that it is very difficult to achieve success in overseas retail businesses. Regardless of whether it is a Japanese, US, or European company, the ones that are successful are the manufacturers. On top of the actual manufacturers, you might also have Specialty store retailers of Private label Apparel (SPA) like Uniqlo who design and then delegate manufacturing. That kind of business has been proven to be successful. The advantage of our services is that we can provide a comprehensive set of products that can be delivered quickly. Our business model is more applicable to more mature and developed markets where the value of increasing the productivity of a business is highly valued. The South Korean market was very similar to the Japanese one, so it was easy to operate in. We are now expanding to countries which have high potential such as India and Indonesia. Both of these locations have massive populations and present significant opportunities. Right now, we do not plan to open up any bases in any other countries.

We did actually have some business with Grainger in Germany. Distribution varies based on the country, and usually the standard is first having the manufacturer, then the wholesaler, then finally the retailer. As a retailer, we provide national brands along with our own original branded products. However, this hybrid approach is not necessarily applicable in all markets and sometimes there already exists a dominant player in the market. We feel it is difficult to expand aggressively overseas, so instead we would rather focus on gaining experience overseas and applying that to the domestic market.

Could you give us your personal goals or ambitions for both the mid-term, which would be in two years' time, and the long-term for 2030?

This is my 12^th year as president of MonotaRO. I was 36 when I became the president and I have just turned 48. This is not actually a company that was started by my own capital so as the company grows, I do not believe it is good for one president to hold the position for too long. I do not know if I will still be the president when you come back but for sure MonotaRO will enter into a maturity phase. Any company that reaches maturity must understand that taking up new challenges becomes more difficult.

In November 2001 we started our first trials for online sales and we only had JPY 110,000 as income. Now we are selling JPY 20 billion per month. I think it is important to look back and reflect on the challenges of yesteryears and despite the increased hurdles, continuing to take on challenges is more critical.

Procurement is only one arm of our business, and stepping into the future we want to provide new value and business to add to this procurement scheme we have. We feel that AI is definitely a market disruptor with products such as ChatGPT. It feels that these days technology and society are changing on a daily basis and evolving at a rapid rate, so it is important for our firm to constantly look for new services and new ways to provide value to our customers.

The ideal situation in seven years time is that together with our global team members we are taking on new challenges so that we can provide new value and new services for our customers.

Interview conducted by Karune Walker & Paul Mannion