Supplier's role takes a giant step up
By Agatha Ciancarelli -- Purchasing, 11/19/1998
For several years, MRO buyers have been forming tighter relationships with fewer suppliers. In many cases, integrated supply relationships are established to get MRO buyers and distributors working together to create efficiencies in the purchasing process and to shift a number of value-added responsibilities to distributors.Most MRO buyers agree on the basic elements involved in measuring supplier performance. Buyers want their MRO distributors to:
* Reduce costs.
* Manage service and delivery.
* Source new products.
* Provide technical assistance.
Beyond these basic criteria, purchasing pros who have set up successful integrated supply relationships also say that what truly separates the best MRO distributors from the rest of the pack are factors such as trust, similar company culture, and ethics.
Bryan Vonfeldt, manager, materials and sustaining services with Texas Instruments, says, "When you are integrating your processes with a supplier, it is imperative and is the foundation to a strong partnership that the integrity and ethics of you and your supplier are in alignment. You need trust."
Also very important are the supplier's ability to be innovative and effectiveness of the overall process to reduce costs. Says Vonfeldt, "The supplier needs to be flexible, innovative, and creative in cost savings. They need to be willing to think out of the box in terms of new and different ways of doing things."
One reason the Foxboro Company selected one MRO supplier--wesco--from 500 is that purchasing believed the supplier has a truly progressive style. "wesco offers help in processing transactions, and they developed a special system for purchase price variance (PPV) to track cost savings over time, which was key and demonstrated their flexibility," says Suzanne McAuley, commodity manager at the Foxboro Company.
Michael Rowda, manager, strategic sourcing with National Steel, and McAuley agree that measurements and goals should be defined when establishing the agreement. Rowda emphasizes the importance of having the supplier measure itself and present measurement performance to purchasing.
Delivery is critical
As in other product areas, the success of a relationship with an MRO distributor greatly depends on delivery performance. "Quality is a given for MRO supplies, once you decide on a specification. Delivery is the biggest criterion in performance," says Rowda.
Emphasizing the importance of technical support, Catherine Williams, business development consultant with BP Exploration, says, "The supplier that is involved with the technical side keeps the goods."
Another significant quality a supplier should possess is sourcing knowledge. "Effectiveness in expediting and rush ordering if there is a stock out is very important," says Vonfeldt. "The supplier is also responsible for the market sourcing of some products. They need to know about new and better products, if there are any on the market."
Closer relationships with fewer customers also contribute to a greater need for sourcing knowledge on the part of the distributor. "Our supplier needs to have the right knowledge and facilities to source to other tiers of suppliers. We are trying to strip the activity from our buyers and shift that responsibility to the supplier," says Williams.
For Williams, along with the critical criterion of a local stocking site for their Alaska-based company, inventory management is an important component in the matrix of qualifications. "Our contracts involve our supplier to share the responsibility of managing our warehouse inventory. They need to be able to help us address access. We have developed an intense program in which the supplier helps us go through every product line."
The supplier is moving from a sales position (always pushing to be sure he gets the next purchase order) to one of servicing National (improve, provide technical support, and help with the inventory control of the products they supply) says Rowda. "It is a hard bridge to cross from the traditional buyer/seller relationship for both National personnel as well as the supplier."
Some buyers have integrated supply relationships with one supplier--The Foxboro Company, Texas Instruments, and BP Alaska, for example-- while others have one supplier for a group of commodities--National Steel, for example. "The process took a huge amount of activity," says Williams. For sourcing industrial hardware, BP Exploration shifted from 1,200 suppliers to Fairmont. Says Williams, "The new program is saving $11 million in internal costs." Texas Instruments has also recently consolidated their manufacturing stock rooms with Graybar Electric. And Vonfeldt agrees, "Our facilities' MRO process paid back many times over. At the conversion to the Graybar-run integrated supply, we saw a 24% savings, and from there, an annual 5%-9% savings."
Along with being BP Exploration's one integrated supplier for industrial hardware, Fairmont's responsibilities also include managing supply and process outside the realm of industrial hardware. "We have moved some of our activities within our organization to the supplier's business, such as sourcing the goods," says Williams. The supplier is given a real wide breath of a commodity and with that they source to other tiers of suppliers. "With the consolidation of suppliers, our core group uses a wider market. Therefore, their ability to source and their low-cost operators are key," says Williams.
However, on the other side, some companies are opposed to consolidating all their relations to one supplier and tiering. Example: "National Steel," says Rowda, "still has 1,500 MRO suppliers. Twenty-five of those get the majority of the MRO business. However, when the main suppliers do not have the items, we go outside those main suppliers."
"National Steel has a mechanized purchasing system which allows streamlined order processing. Therefore, some of the advantages of tiering are gone. Also, many of our suppliers would resent being considered tier-two suppliers, which we feel would reflect in their service and pricing to National."
Programs for improvement
"This switch has enabled us to be more focused on the supplier's performance because there are fewer (suppliers)," says Williams. "It has made the organization become more effective and efficient."
To help see their supplier's strengths and weaknesses, BP Exploration did an assessment based on an Intel program that pre-qualifies suppliers. "We found that the Alaskan suppliers were fairly strong in delivery and price, but they fell short in their internal quality systems and their analysis of problems. Those were not a general part of their operation. Therefore, we assessed those weaknesses and supported a program to close those gaps," says Williams.
Both Rowda and McAuley stress the importance of establishing systems geared to continuous improvement. "Getting the suppliers to self report forces them to realize their pluses and minuses," says Rowda. "Also, with our 25 main MRO suppliers, we set meetings up with cross-functional teams to evaluate the performance on both ends. The feedback comes from upper management of maintenance and operations department. In another effort to improve performance, three suppliers from different regions work together as a team to supply us with items. By working together, they get a better response from manufacturers, and they learn and improve through their interaction with each other," says Rowda.
"Because we require constant improvement," says McAuley, "goals are constantly made tighter once they are met. wesco started with a goal to fulfill orders within seven days. Now we are down to four days."
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