Distributors take on bigger role

Some assume total responsibility from stocking to ordering.

By -- Purchasing, 9/7/2000

Out with the old. In with the new. Results of a recent Purchasing Magazine survey of 1,000 MRO buyers clearly show respondents putting old ways of acquiring maintenance, repair and operating goods and services behind them: An overwhelming majority is currently working to consolidate their companies' supplier bases, expanding the role of distributors to assume ever increasing responsibility for the MRO purchasing process.

Gone are the days when purchasing's main function was to handle the mountains of paperwork generated by ordering habits of end-use requisitioners, who used to buy supplies through local distributors that promised them the lowest prices.

Now, MRO buyers have more control over the process-selecting suppliers, negotiating pricing and service levels, and managing agreements, often for multiple plant locations.

These suppliers selected by MRO buyers have capability to run onsite store operations, managing inventory and placing orders for end users, often electronically. In most cases, buyers will not consider doing business with a supplier unless he has capability to process transactions electronically, via EDI or the Internet. Many suppliers also have far-reaching geographic scope, with some suppliers capable of providing services to buying operations on a global basis.

Cost reduction, improved efficiencies and customer satisfaction are among the reasons MRO buyers have pushed for changes in the ways their companies manage the maintenance purchase. Yet there also is growing realization among companies that purchasing-and the supplier base-has a huge impact on the bottom line and future competitiveness. Many of these companies, in fact, are aligning purchasing goals to strategic objectives of the company.

"Purchasing is charged with responsibility for developing the supplier base, managing costs and keeping our company competitive," says a purchasing manager in North Carolina. "Keeping up to date with the latest materials and processes is one way good suppliers help us keep our company competitive."

"We made changes in MRO buying to capitalize on the scope and size of our organization in order to reduce overall cost in an effort to compete in this global economy, says Jon P. Martin, director of purchasing, Photronics Inc., Brookfield, Conn. Consolidating suppliers has not only reduced the price of items through volume discounting but as a by-product of the consolidation we have improved delivery, reduced inventory needed, and have become a better customer, which has improved our positions with the suppliers improving our customer service."

Martin and other MRO buyers have made great strides in helping to make their companies more competitive. First off: Many consolidate the supplier base to an optimum number for their companies. Martin, for example "has consolidated our supplier base by finding suppliers with capability at least to service all our U.S. sites and we prefer that they can service Photronics on a global basis. We have six sites in the domestic U.S. and four international sites. Suppliers able to perform electronic services (online catalogs specific to Photronics, EDI, etc.) are more apt to become a supplier of choice." Other survey respondents are involved in many of these same activities:

• Richard D. Gist, purchasing manager, J.R. Simplot Co., Helm, Calif., says his company "has formed a team of purchasing personnel to analyze procurement of MRO at each of our locations. A program has been developed at each location to provide specific products, i.e., power transmission parts, pipes, valves and fittings, electrical, etc. We enter into a contract for 100% purchasing from that supplier with benefits like consignment, reductions in inventory by having the supplier provide sufficient support stock, single invoicing, special monthly computer reports, monthly inventory checks, and 24-hour service. The supplier gets 100% of our business and any other related products that we can buy from him. We utilize the primary supplier at a tier-one supplier and work on getting cooperation from other suppliers of like products to avoid setting up additional suppliers and processing more invoices.

• Gary Heuer, purchasing manager, is consolidating the MRO supplier base at Aluminum Alloys, Sinking Spring, Pa., using suppliers more to track inventory and set minimum inventories. Suppliers also provide the company with usage reports that help with future planning. Where practical, we use suppliers to stock minimum inventories at their site for regular deliveries."

• Tom Roberts, purchasing agent, MRO, contracts, maintenance, services, Ellwood Texas Forge, Houston, Texas, "has issued 41 consignment contracts (supplier stocks, inventories and bills me once a month). "With these consignment contracts I have reduced my supplier base to one. Monthly invoicing has reduced accounting and purchasing paperwork by 97%."

• A purchasing manager in Wisconsin has formed "a consortium of three local distributors that handles existing and consolidated business. The consortium has provided an onsite buyer who will execute orders under the guidance of a strategic buyer."

• Charles J. Meyer, purchasing agent, Associated Naval Architects, Portsmouth, Va., says that about 25 local businesses have formed a purchasing consortium to share best practices.

• "Purchase orders are all created, received and invoiced on our new ERP system, and we are transacting via the Internet with seven companies," says Tom Bistayi, purchasing agent, The Andersons Inc., Maumee, Ohio.

Still, not every survey respondent works for a company that sees purchasing-especially MRO buying-as a competitive weapon. And, in fact, many appear dismayed by this. "Spot buying is still our way of doing things," says a purchasing agent in Michigan.

"We are a small company," says one purchasing manager in California. "We do purchasing the old-fashioned way-PO by PO, with a few blanket orders. Not every company is a large corporation. We take a practical approach to MRO and only devote the time and attention commensurate with the dollars spent."

A purchasing manager in Indiana says, "We now use the Internet a little. We are tied to old methods by our corporate culture. It would be nice to get into the early 90s in our approach instead of where we are."

No method to madness

For the most part, however, respondents' companies have left all that behind them. "When I came to work at ETF five years ago, there were no contracts," says Roberts of Ellwood Texas Forge. "Everything was still purchased on individual requisitions, having to have two or three signatures of management.

Other respondents share similar experiences: Dave Simpson, purchasing manager, says Green Industries, Morgantown, Ind., had no system to speak of. "Whoever was closest to the phone handled the orders for MRO supplies. It was out of control."

Currently in the process of consolidating an MRO supplier base from 413 to four, a purchasing agent in Massachusetts says MRO used to be purchased by individual requisitions-as required by each department.

Adds a purchasing manager from Indiana, "There was no method to our madness."

Aluminum Alloys made changes to its systems "first and foremost to eliminate the headaches of the purchasing manager! I was in the proverbial 'Chinese fire drill' every day," says Heuer. "Second, I now know the pricing structure of what we buy. Third, 'downtime' has been considerably reduced. Fourth, with a supplier/customer relationship, suppliers now know more of our operations and can recommend new/better products for the application instead of me depending on whatever the supervisor asked for. Fifth, inventories have been reduced."

Heuer's reasoning for making changes is similar to those of a good number of respondents to the survey: Reducing costs, improving delivery and eliminating inventory are reasons a PM from North Carolina has consolidated his company's supplier base-with additional benefits to come. "Purchasing can then spend more time monitoring or finding dynamic suppliers that can keep our company competitive."

"The changes are good," says a purchasing manager in Michigan. "It will allow purchasing to concentrate on larger buying activity and let the "expert" supplier manage the high-volume, low-dollar activity."

"The main reason was to eliminate stock-outs of these items," says Stuart of Grede Foundries. "Then we realized there were major cost advantages and value-added services related to these programs."

"We want to reduce costs through leveraged process improvements and some consigned inventory programs," says the purchasing manager from Wisconsin. "We also needed more strategic buyer resources, so the buyer the consortium supplied helped us to refocus our MRO buyer on strategic levels."

Taking matters in hand

Mostly MRO buyers take matters in their own hands, often leading efforts to consolidate the supplier base, improve efficiencies and reduce costs.

Purchasing responsibilities range from the mainly mundane-such as preparing usage history-to putting together sourcing teams and developing purchasing systems that make use of the Internet to place orders with suppliers.

The purchasing manager in Wisconsin who formed the consortium of local distributors "manages the people who are responsible for implementing the program. I developed the bidding process and created a competitive database for use in evaluating bidders and awarding orders by manufacturer."

One purchaser from Texas "investigated usage history and prepared a list of items to be changed, qualify different or alternative sources and/or products, and proceed with new inventory controls for better understanding of material needs."

"By getting these consignment contracts in place I have reduced the number of POs I issue from 45-55 daily to 5-10," says Ellwood of Texas Forge. "The number of invoices the accounting department has to handle has also dropped similarly. I am 100% responsible for this change."

The purchasing manager from Indiana "helped assemble the inquiry package, solicited proposals, arranged presentations and led the selection team."

One purchasing manager in Indiana served on a "non-production strategic sourcing team to find the supplier for the corporation."

What they do best

More and more survey respondents are turning to MRO suppliers for their expertise at ordering and managing inventory. "We have six suppliers that do the ordering and inventory," says a purchasing agent in Michigan. "They have guidelines (shelf min/max) to follow."

"The supplier's role has increased dramatically," says Stuart of Grede Foundries. "They are totally responsible for the items in the area that they supply, from stocking to ordering to ensure that these items are available at all times.

"I think this has made a major impact on the cost of the MRO items we purchase," Stuart continues. "Before our personnel were responsible for the inventory and ordering and we did a poor job at this. The suppliers have taken over and we always have the stock we need (no downtime) and a guaranteed low price."

"Our key supplier of manufacturing tools and supplies now has a significant responsibility of providing MRO goods to our production floor," says a purchasing manager in Arizona.

"The supplier is expected to provide the same level of technical support and lead the charge to reduce future costs," adds a respondent.

Sometimes disastrous

Change, however, isn't apparently always for the better. At Outboard Marine Corp., Waukegan, Ill., where purchasing selected an integrated supply provider for all the company's facilities, T.A. Hadsell, facility purchasing manager, "worked with the supplier to learn our needs and install their purchasing system."

Yet, he says, "these changes were disastrous: line stoppages, substitution of inferior supplies, increased costs and inventory. We are going back to our original way of business."

Another purchasing agent in Missouri says her company "is still trying to adjust to having a primary supplier. Sometimes having a primary supplier is not the way to go. It does not give you opportunities to seek competitive pricing."

"Purchasing should always weigh the cost of these services against the cost of doing these tasks in-house," says Joseph S. Delrie, purchasing agent, Cerro Copper Tube Co., Bossier City, La. "Many companies have the opportunity to take excessive profits for the services they provide."

"The jury is still out," says one respondent who requested anonymity. "But, I like the way the Internet orders are processed."

"It will take time to get people into the contract loop and out of the back-door sales system," says a purchasing specialist from Minnesota.

Next big challenge

When asked what they see as some of the next big challenges to MRO buying in the new millennium, respondents say they plan on expanding the scope of some of the activities they've already implemented: more supplier-managed inventory/consignment; increased use of the Internet to place orders for MRO goods and services.

"We would like to purchase whole assemblies in a kit with all the parts included in the kit for a particular piece of equipment," says Grede Foundries' Stuart. "When we place the order, all items for a particular machine are included in the package and ready to install onto the machine."

A purchasing supervisor in Missouri says her next challenge is "keeping suppliers aware that they need to be innovative in helping keep the customer's cost down so we can be competitive in domestic and foreign matters."

For Zoltan Lengyel, manager, indirect purchasing, Robert Bosch Corp., Braking Systems Division, South Bend, Ind., it's "giving users the ability to 'order' directly on the Internet from an 'internal catalog' containing all MRO items. Giving the users the greatest possible flexibility and at the same time restricting the sources and the items to the supplies and suppliers contained in the catalog." Robert Bosch is currently purchasing office supplies via the Internet. The system designed and implemented by Lengyel includes a catalog tailored by the company's office-supplies provider.

In many cases, MRO buyers' responses to the survey seem to indicate that purchasing still needs (rightly) to get its house in order before embarking on Internet ordering. Many buyers see the folly in simply automating bad processes.

In many cases, the Internet still is used mainly by purchasing for research purposes. "We use the Internet to find new suppliers," says the purchasing agent in Michigan. A purchasing assistant in Missouri uses the Web "more for product searches and quotes."

"Explore the opportunity for buying on the Internet," is a next step for the purchasing manager in Michigan." For a purchasing assistant from Missouri, it's "all ordering being done online and convincing those resistant to change to utilize this resource."

E-procurement: "How quick and how far will we go?" asks a purchasing agent in Virginia.

At the same time, one purchasing manager in California sees as his challenge "Not being replaced by a fully automated computer system."

THE SURVEY