More collaboration is on agenda of MRO buyers, suppliers in 2009
By Susan Avery -- Purchasing, 1/15/2009 2:00:00 AM
Under intense pressure to keep costs in line amid tight credit markets and an unsure economy, maintenance, repair and operations (MRO) buyers are renegotiating agreements with suppliers and taking a hard look at inventory levels heading into the new year.
While these certainly are sound remedies for the coming months, both MRO buyers and suppliers say 2009 is a good time for purchasing to leverage its internal and external relationships and consider activities to remove inefficiency from the supply chain and lower costs over the longer term.
Distribution Outlook. Adam Fein, president of Pembroke Consulting in Philadelphia, and author of The 2009 Economic Forecast for Wholesale Distribution, watches the distribution industry. Industrial distributors as a group, he says, had "a not necessarily terrible year." In fact, through the third quarter of 2008, the industrial distribution sector saw sales rise 12% over the same period in 2007.
Fein cites three reasons for the growth. First, distributors that sell to companies that manufacture goods for export experienced a good nine months due to the value of the dollar increasing demand for U.S.-made goods overseas. Second, commodity price inflation in the first half of the year helped boost revenues for that period. And last, many industrial distributors are insulated from the residential housing downturn that has impacted other distribution sectors.
Fein's forecast shows growth for industrial distributors slowing next year to 2–3%. Worth watching, he says, is how distributors—and their customers—deal with falling commodities prices and the credit crunch. "Buyers will see a difference between stronger and weaker industrial distributors," he says. "Some are better positioned and able to compete more aggressively. Others are limited in their ability to offer price concessions or deal with new payment terms."
Fein suggests buyers pay attention to the financial condition of suppliers now more than any time in the past. "We are at an economic inflection point," he says. "If the credit crunch doesn't ease, it is going to put pressure on many privately held companies, while public companies that are highly leveraged will see debt costs rise. This will limit their capability to run their operations and offer better pricing."
Purchasing's Point. To meet these challenges, purchasing professionals with responsibility for sourcing MRO are stepping up efforts to improve communication with internal customers and are turning to distributors—and their suppliers—for help.
Mike Filitti, senior buyer for strategic procurement and planning at Alliant Energy in Cedar Rapids, Iowa, has created a three-way alliance between his company, one of its distributors and the distributor's supplier, the manufacturer. The three meet to discuss ways to better manage costs up and down the supply chain.
"Historically, I haven't had much communication with the manufacturer," he says. "Now we are talking about ways to streamline the manufacturer's internal production processes, limit and control price increases, use forward buys and better manage freight costs."
Another manufacturer has suggested that Alliant consolidate more of its spending with the supplier. "Leveraging spending and consolidating our supplier base for certain commodities has helped realize substantial savings," says Filitti. "It's also provided us with consistent pricing for all our locations." Now, he's applying this thinking to the company's fleet buy, a new responsibility for him.
Darryl Husenits, general manager of supply chain management at Consol Energy in Pittsburgh, is working with a staffer from the company's warehouse on a project to reduce inventory of some products. Involving both the distributor and its manufacturer supplier, the plan is expected to reduce costs by $1 million, Husenits says. "And I think it's only the beginning. We can refine the project further."
He's also developed an alliance with a distributor and its supplier of high voltage cable through which the distributor helps keep tabs on inventory levels at Consol Energy's facility. "When we need cable, they let us know that we don't have to order it because we have it in our yard where it is undergoing repair and can be used again," says Husenits. "We've also gone back to the manufacturer and hedged some copper buys to protect our budget in this uncertain market."
Supplier Role. Distributors and manufacturers are doing their part to remove inefficiencies—and costs—from the supply chain.
From his vantage point as director of market development at Corporate United, a group purchasing organization in Cleveland, Ara Arslanian says deploying vendor management inventory (VMI) programs and conducting process mapping activities are two tools MRO buyers and suppliers can use to control costs.
"Some companies may not be comfortable looking at suppliers as partners, but for those that do, opportunities are available and when they take advantage of them they create a greater spirit of collaboration," he says. "There's really a commitment to achieve total cost savings."
Collaborating with purchasing is not new to Deb Oler, vice president of sales at Grainger in Lake Forest, Ill., who says she has had discussions with a customer on a lighting retrofit project that included a representative of a local energy company. "Proposed cost reductions along with incentives from the energy company helped reduce the payback to less than six months for the customer," says Oler, adding that projects to cut costs related to energy usage are still high on purchasing's list for 2009. "If I were a buyer, I would tell my supplier, 'Here are issues we are face. What can you do to help?'"
John Mansfield, vice president, corporate accounts at Graybar in St. Louis, agrees that energy management is an area for purchasing and distribution to work on in 2009. In addition to providing audits for customers, Graybar also has the capability to monitor and verify the accuracy of their power usage.
"It is one of a company's largest bills and often doesn't get a lot of scrutiny," he says. "It's so complex. We can help validate power usage. Sometimes there were assumptions made when a facility was constructed that are no longer true. Changes made over time may qualify customers for a lower rate."
Bill Moore, senior vice president of sales development and channel management at SKF Service Division USA in Kulpsville, Pa., too has been involved in discussions with distributors that sell and service his company's bearings products and their customers. Like Pembroke's Fein, Moore suggests buyers looking to better manage costs conduct a thorough review of their companies' supply chains.
"Getting out of the cycle of working feverishly in response to the same problems over and over is opportunity for cost savings," he says. "Make sure the suppliers you're doing business with are providing you with the best working environment. Purchasing has better visibility to this than anyone else in the facility."
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