NEDA unveils tool that estimates supply chain savings
Jim Carbone -- Purchasing, 4/21/2005 2:00:00 AM
Electronics distributors often say that buyers can reduce their total cost by purchasing through distributors instead of directly from component manufacturers by using vendor managed inventory (VMI) programs. In fact, the distributors will evaluate a customer's supply chain operation and identify areas where VMI programs may reduce cost and estimate how much savings can be realized.
However, some buyers may think that the distributor will overstate potential savings of a VMI program to their business. To help buyers determine the true cost of using distributors, the National Electronic Distributors Association (NEDA) and Texas A&M University have developed a new web-based tool for buyers that can calculate the cost of purchasing through distributors versus buying directly from component manufacturers.
"The Supply Chain Savings Calculator created by Texas A&M uses a customer's own data to determine supply chain costs and compares them to distribution costs," says Robin Gray, executive vice president of NEDA. The calculator includes multiple variables that technology companies must consider to determine the true cost of buying or selling products including leadtimes, fill rates, inventory turns, cost of capital, credit, accounts receivable, expedited orders, warehousing, obsolescence, shrinkage, insurance, tax, total number of items ordered, purchasing and line shut-down.
The tool provides buyers and suppliers with the ability to measure their individual supply chain and distribution costs to determine the most efficient go-to-market strategy for their products.
"The tool is a valuable resource for any organization looking to quantify its existing logistics, inventory and sales expenses versus the cost of using a distributor. It helps identify when it would be more cost effective to use distributors, or to buy and sell products direct from the manufacturer," says Gray.
"Our research debunks the myth that using a distributor always adds costs to the supply chain," says Barry Lawrence, director of the supply chain systems and laboratory and associate professor of industrial distribution at Texas A&M University. "In our research findings, the typical manufacturer saved between 25-64% of their overall product costs by using a distributor to sell its products."
Lawrence adds the tool allows buyers to evaluate the value the distributor "brings to the transaction so they would know how much of a cost reduction they would have to request of a supplier if they were considering taking this business direct."
Lawrence says the tool was beta tested at 15 companies.
"Some scenarios on the customer side were unique because customers may be buying one product from one supplier and therefore in those circumstances we saw the cost drop at 10%, but savings were typically in the 30-50% range."
A lot of cost involves inventory. If a buyer purchases directly from a manufacturer, the buyer's company has to hold inventory. However, using a distributor's VMI program can reduce inventory cost for the company.
"In comparing direct versus distributors you capture a great deal of specialized programs like VMI," says Lawrence. "You can capture those because you can see the lot sizes, you can set the predeteremined period for delivery and how those deliveries are managed so you can create the VMI situations within the calculator and compare distributor versus manufacturer."
He adds VMI programs result in cost reduction. "The more we saw VMI programs, the more cost reductions there were. The programs tend to drive you up to the high range of cost savings," says Lawrence.
Lawrence adds that the calculator is neutral, so buyers don't have to take the word of an individual distributor. "The calculator helps you make an intelligent decision about what you are doing in buying direct versus through distribution," he says.
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