Using distributors can lower acquisition costs
By Staff -- Purchasing, 3/25/1999 2:00:00 AM
Original equipment manufacturers (OEMs) are increasingly realizing the cost benefits of outsourcing at least some of their production to contract manufacturers. But now another trend is emerging: Some contract manufacturers are outsourcing their purchasing and materials management to distributors. Case in Point: Electronic Manufacturing Services (EMS), a box-build contract manufacturer.
EMS builds systems for Cisco, Sun Microsystems, and Bay Networks among others. Its Longmont, Colo., facility buys 90% of its component needs from three distributors: Arrow, Avnet, and Annixter. Its total production materials spend is about $25 million per year.
The three distributors reside on-site at EMS and run in-plant stores. Arrow and Avnet supply virtually all of EMS's component requirements: connectors, terminals, resistors, capacitors, and switches that are used in system integration. Annixter supplies wire and cable.
Prior to 1996, EMS purchased everything directly from about 125 suppliers. "We took a close look at the total cost of material acquisition," says Bob Hansing, materials manager. "We did an analysis and a clear picture emerged from a total-cost standpoint. Looking at the labor overhead associated with running the purchasing group for those items and the distributors overall buying power, they are a far more cost-effective way to go than a direct buy," he says.
EMS's purchasing department was reduced from seven to two. Because of the size of the distributors and their purchasing power, EMS actually got a lower price on the parts than it had when buying direct. "When you look at the in-plant stores, the distributors are holding it and we don't pay for it until we use it. That has a significant impact on my inventory level and our cash management," says Hansing. Hansing says EMS' cost of acquisition has been reduced 15%-20%.
The three distributors were chosen after EMS sent out 46 RFQs to major suppliers of the OEMs plus a limited number of distributors, says Barbara Aune, purchasing manager. "We reviewed all of them and selected these three because they covered the majority of our needs with their line cards," she says.
The distributors essentially have automated EMS's purchasing process. The in-plant stores transmit EMS's requirements via electronic data interchange. "We give them our forecast, which is basically our MRP. They see our requirements and keep a bonded quantity in the in-plant stores and then release to us on demand," says Hansing.
The distributors also each have one employee at EMS's facility. Although they work for the distributors, they are virtual EMS employees. "We totally integrate them in any new business," says Aune. "They attend the same meetings that we attend. We are a seamless organization."
"They are an integral part of our production meetings," says Hansing. "They are part of our production planning process."
While EMS considers the distributors to be partners, it also does a reality check on prices. "We benchmark them on price every six months. Our agreement with suppliers is that they will always be competitive. If we find an area where they aren't [competitive], we make adjustments," she says.
The distributors work with EMS on cost issues. "At the first quarterly review of the year, we establish for the year what our cost management objectives are going to be and we investigate through our partnerships ways to meet those objectives.
The distributor program has been successful and EMS is considering rolling it out to its other facilities in Maine, California, Virginia, and Northern Ireland. "It's the best thing that has happened to us. It's allowed us to respond to our customers very quickly with new products and design-change requirements. It has been wonderful," says Aune.
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