Integrated supply offers opportunities, limits
By James P Morgan -- Purchasing, 6/3/1999 2:00:00 AM
One of the bright spots in the relatively brief life of integrated supply chain management is what's happening in the area of maintenance, repair, and operating (MRO) goods. While companies struggle with the incredibly complex issues of integrating whole supply chains, significant advances are being made in one small area of the supply chain. "Integrated supply," as it's sometimes called by industrial distributors, has been delivering a degree of buyer-supplier integration that is not often approached by the few integrated supply chain management programs that are up and running.
Looked at from the viewpoint of purchasing/supply managers, integrated supply is a subset of integrated supply chain management (iscm). Where iscm deals with a connected series of organizations, resources, and services in the creation and delivery of economic advantage across the whole sourcing process of a company, integrated supply is mainly about seeking economic advantage in that part of the supply chain that deals with distributor suppliers and MRO goods. (While integrated supply is not restricted to MRO goods, in practice most such agreements are for MRO items.)
To be candid, the integration that takes place in integrated supply agreements is primarily a creation of distributors seeking to expand business, while integration as it is applied in integrated supply chain management is a totally different animal. It is a much more complex relationship orchestrated by supply managers as they interact with suppliers, other functions in the company, and customers to develop strategies aimed at achieving competitive economic advantage for the company at large.
What makes it work?
Behind the integrated supply movement are four drivers:
* Deliberate reductions that buyers are making in the size of their distribution supplier bases. In many (maybe most) companies, large supplier bases are archaic, wasteful, and unmanageable. As companies reengineer and reduce the size of their procurement systems, most also are insisting that their supply chains be shrunk and streamlined.
* The growing insistence by buyers that distributor suppliers add greater value to each transaction. Where distributors in years past tended to be passive, today's distributors are being pressed to do a lot more than simply put their fingerprints on transactions. Many are being judged on how well they add value to transactions and cut costs of processing transactions.
* Supplier base reductions and the insistence by purchasing on reduced transaction costs has led to greater competitiveness in the distribution industry and greater emphasis on competition across wider product groups.
* A deliberate effort by the distribution industry and the manufacturers who supply them to concentrate more efforts on jointly selling their products. (In a growing number of integrated supply agreements, manufacturers are playing a more active role in providing technical backup.)
In looking at the mechanics of implementation, integrated supply resembles systems contracting--or at least a refinement of systems contracting. In an integrated supply agreement, a distributor offers to provide a high level of service in supplying an entire line of products at agreed-upon prices. This is pure systems contracting. Integrated supply, however, goes beyond the traditional systems contract and offers a much wider range of products--often multiple lines of products--for which the distributor assumes most of the responsibility for stocking, reordering, and forecasting future needs. A growing number of integrated supply agreements also provide for physical distribution of products within the customer's plant and for performing a specified number of logistics services.
Integrated supply agreements appear to be making significant headway in multiplant and national agreement situations. Where in the past, national or multiplant agreements tended to break down on communication issues, newer agreements are showing greater longevity. Typically what happened in the past was that the agreement was negotiated at a national level with a centralized customer buying organization or a "lead buyer." But, in most cases those doing the negotiating had only sketchy usage information and even less precise information about how levels of service were to be provided. And plant personnel often were not fully cooperative in helping get national agreements implemented. As a result, agreements that were negotiated at a central level often fell apart at the local implementation level.
Under integrated supply agreements, distributors work closely with MRO buyers to eliminate and/or streamline non-value-added activities in the process of acquiring and disbursing "indirect" items. To a great extent, integrated supply agreements can vary widely, depending on what the contracting parties include in them. For some buyers and their distributor partners, integrated supply can mean having a distributor manage a storeroom. For others, the emphasis may be on having several distributors locate branches nearby in some sort of grouping arrangement. For still others, an integrated supply agreement may entail outsourcing the entire MRO buying activity to a distributor or consortium of distributors and/or manufacturers. In some cases they even maintain on-site offices.
Integrated supply agreements have experienced their most enthusiastic reception in the process industries, where the volume of MRO goods is high and cost reduction opportunities on raw materials and capital equipment are relatively low. For some distributors, opportunities for showing huge cost savings were like walking through an orchard picking low-hanging fruit. Many large process operations in the past often were burdened with excessively large supplier bases for their MRO requirements and saddled with transaction processing systems (paper and electronic) that were hopelessly work intensive. On top of that, many large process industries were carrying years' worth of MRO inventory.
Selling points
Companies selling integrated supply agreements tend to focus on these areas in making their sales pitches:
* Supplier base. This is an obvious place to begin selling and usually is assured a sympathetic reception. It's not hard to make the point to a company with a cast of thousands of suppliers that dealing with all of them is costly and impossible to administer. It's also relatively easy to make the point that doing business with so many different suppliers negates any price leveraging position a buyer hopes to gain.
* Internal processes. Integrated suppliers usually can offer a purchasing operation immediate streamlining of the ordering process. Instead of myriad orders to thousands of suppliers, the integrator is able to offer monthly billing and simplified systems for releasing products against an agreement.
* Inventory. A well-sold integrated supply agreement homes in on all those store rooms and tool rooms and their inventories of inventories that might be needed in an emergency. Thanks to a combination of good computerized inventory systems and instant communication systems, integrated supply systems can drastically reduce emergency inventories without increasing the risk factor.
* Expanded value-adding services. Many supply integrators offer services such as JIT delivery, JIT II agreements (where orders are processed within the buyer's plant by the distributor's sales personnel), consignment, raw-material pre-processing, and contract manufacturing.
* Advanced or enhanced technology. Improved or transaction processing can range from relatively crude enhancements (e.g. facsimile transmission) to buying on the Internet, electronic data transmission of orders, and barcoding.
As a supplier's competitive tool
In many ways, the true driver in the integrated supply movement is tough competition in the industrial distribution industry. Integrated supply set up in an alliance or consortium mode can be positioned to be considerably more than a simple value adder. And for many smaller distributors it offers a way to match the true giants of the distribution industry--Grainger, Graybar, Avnet, Arrow, Ryerson, Van Waters & Rogers, Motion Industries, etc.--in taking costs out of the transaction and also giving them a shot at big contract action.
When set up thoughtfully, such alliances have given the smaller distributors some potentially strong competitive advantages against the giants. For one thing, the small and medium-size distributors forming alliances often claim to have considerable experience in manufacturing and ostensibly can get closer to the manufacturing process than most of the giants. While the giants can generally retain an edge in reducing transaction costs, allied distributors with manufacturing savvy can turn in a good performance in both reducing transaction costs and solving product-specific problems.
The combination of integrated supply in an alliance mode appears to be developing on three distinct levels:
* Groupings of large distributors (specialists and general line) looking to cut national contracts with multiplant companies.
* Regional distributors focused on particular regions and offering consolidated packages of products and services.
* Small distributors grouped together to serve single-location customers.
When integrated supply first made its appearance, selling pitches by many small and mid-size distributors appeared to aim directly at the new class of super distributors that was answering the call of industrial buyers. Their pitch went like this: Because of our extensive knowledge in these areas, we are able to provide in-depth, value-added service. On a product-by-product basis we offer lower transaction costs and better service in such areas as credit, billing, stocking, and delivery. Unspoken, but generally implied: "We are smaller than those giants and because we are combining our expertise we can offer quality service not available from the giants plus reduced costs." Unfortunately (for the small and medium-size distributors who used the pitch) most of the so-called superdistributors soon latched onto the idea. Today, some of the most successful integrated supply programs are run by combinations of giant industrial distributors and manufacturers.
Is it for real?
For many, the integrated supply approach looks suspiciously like an earlier foray into the "one distributor fits all needs" pursued with varying amounts of success by the likes of General Electric and Du Pont in the late 1980s. In many respects integrated supply is, in fact, an expansion of the idea of having a single distributor responsible for all or most needs of a company in a product area.
What's different is that where the earlier attempts were disappointing when it came to generating cost savings, many of the recent efforts at integrated supply have had a good measure of success. Better communication, computer systems, management, and planning are beginning to result in respectable value creation where the original efforts at putting across integrated supply failed.
On the downside
Still, a big stumbling block in trying to understand the significance of integrated supply is the difficulty in separating product groups and categories into those that are primarily transaction driven (commodity products) and those that are service driven--that is, driven by added value. To be fully justified, integrated supply needs to do more than reduce transaction costs. In some areas reducing cost is the important consideration, but in many other areas, distributors are the supplier of preference because of the service they provide.
If, for example, safety products are treated like commodity products, what happens when a mainly transaction-cost-reducing integrated supplier takes them over? Those charged with making the transition in the area soon find that the safety distributor who formerly supplied the safety products also added value via such things as certification updates, record keeping, and osha compliance training. These are services a transaction cost reducer usually is not well equipped to perform. Thus, this question needs to be asked: In reducing transaction costs are new sets of costs being created?
Even looking at integrated supply through the rosiest of glasses allows little margin for complacency--especially for small distributors. As already noted, W.W. Grainger, the behemoth of general line distributors, has joined forces with Kennametal--a manufacturer, marketer, and distributor of a broad range of tools for metalworking, mining, and construction industries--to form an alliance to sell MRO products. The combination of Grainger's vast catalog services and Kennametal's well-established technical support system puts Grainger into the integrated supply swim to a degree that threatens many of the small and medium-size distributors who pioneered the concept.
In the future
It's probably too soon for long-range predictions about the future of integrated supply. Over the next several years buyers can expect to see even more alliances, consortiums, and distributor marketing groups working together to develop packages of products and services that fit purchasing's definition of added value. Some of these groupings will probably include more makers of the products taking part in the distributor alliances to cut transaction costs and add value.
Integrated supply's biggest problem for the next few years, however, may well be that it's oversold. An impression is being created in some parts of the marketplace that distributors have no future unless they are busily forming alliances with customers and other distributors in integrated supply operations. This attitude ignores the fact that 60%-70% of all distributor business will probably always be done by conventional distributors, providing conventional services. It's simply a matter of integrated supply not being appropriate for the needs of many businesses. And buyers and distributors in these businesses often have difficulty in understanding where integrated supply fits and doesn't fit.
Despite all the optimism about integrated supply in the distribution industry, there are many obstacles to continued growth or even to its spread to industries other than the process industries. One of the biggest factors clouding the future of integrated supply is its place in the future of small and medium-size distributors.
Many successful small distributors have seen the writing on the wall and have become highly specialized operations. For the most part, they have either avoided taking part in integrated supply plans at all or approached it as minor players. For many medium-size distributorships, though, alliances offering integrated supply are seen as the future.
For many small and medium-size distributorships, though, there is a tug of war going on between upgrading technology to become integrated suppliers, and going out of business. The vast majority of industrial distributorships are family owned and relatively small. Currently a whole generation of heads of distribution companies is reaching retirement age. A big unanswered question is will the heads of these companies develop the new technology and understanding needed to make concepts like integrated supply work? Or will they simply close shop and let the estate planners take over?
MRO sourcing goes global
02/11/2009Distribution redefines itself
05/06/1998
Now Playing: 