Onan looks to distributors for inventory reduction, fast delivery

By Staff -- Purchasing, 10/19/2000

Several years ago, Onan Power Electronics Division made the transition from buying direct from electronics component manufacturers to buying about 70%, or roughly $12 million, from electronics distributors.

Onan wanted to reduce its supply base and maximize volume buys for better pricing, says Barb Pivec, commodity manager for Cummins Power Generation, Onan Power Electronics Div., Eden Prairie, Minn.

The company has three preferred distributors-Kent Electronics, Future Electronics and TTI Inc.-for electronics components, although it buys from three additional distributors due to their linecard items. Determining the preferred distributors were based on several criteria including those who did the best job of providing service in design, technical help, and on-time delivery, Pivec says.

While Onan takes advantage of all three of its preferred distributors' services, it also makes use of Kent Electronics' technical people early on in the design phase, Pivec says. The company's relationship with Kent spans more than 13 years.

"Their technical people spend a lot of time with our engineering department and meet on a regular basis to review our new designs to ensure that the manufacturers and components are ones that they represent and are not unique," Pivec says.

The biggest benefit of these reviews is that it keeps us from designing in a part that may be at the end of its life cycle, Pivec says. "But we don't want to be too early in the life cycle either. We want to be at that point where we're maximizing the volume that the manufacturer is producing and the distributor is selling to their customers," she adds.

Onan's products have a relatively short life cycle, a maximum five years, and mostly in the three-year range. "It's important that as the product reaches the tail end of its life cycle that we don't need to evaluate and qualify a replacement component because it's being obsoleted, Pivec says. "That's a big role that Kent has played," she says.

Another key value-added service that Kent provides is bonded inventory.

"We don't operate off of an MRP system. We operate off shop orders as they're released to the production floor," Pivec says. Parts are held by Kent in bond until it receives an electronic release from Onan. Parts are usually shipped in two days after the release.

Onan is just now beginning to track the savings that these kinds of services provide. Pivec is in the process of determining the savings that the company will realize by moving to bonded inventory for the majority of its materials based on several factors including the amount of time people spend placing or rescheduling orders, the cost of warehouse space and transaction costs. "The preliminary results are that it's definitely a savings and we plan to expand the program," she says.

Onan's goal by the end of the year is to place 90% of its materials including electronics and sheet metal in a bonded inventory program or in a vendor release program, which is based on automated ordering, for raw materials that don't require bonded inventory.

"In this way we can use the warehouse space currently used to store parts for manufacturing," Pivec says. About 60% of Onan's electronics component buys are in a bonded inventory program.