Buyers expect the chosen few to perform
By Brian Milligan -- Purchasing, 11/18/1999
Keep your supply base lean. Keep a constant flow of information between producers and distributors. Make on-site teamwork a priority. And constantly look for new ways to reduce costs and add value.That's the advice coming from leading buyers of maintenance, repair, and operating (MRO) equipment and supplies. In the MRO buying world, distributors play a critical role, and buyers increasingly are asking large MRO distributors for more products and services. Distributors, for their part, say that as their relationships with producers are becoming increasingly close and watchful, those same producers must be striving to save them money.
MRO buyers are measuring supplier performance by constant monitoring and other measurements. Meanwhile, distributors are trying to set themselves apart from the pack by offering increased technical advice and ideas on how to save money. And all are learning how to use a consolidated supplier base to their best advantage.
A consolidated base
Many in the MRO industry report that supply-base consolidation has improved supply-chain efficiency. Brent Johnson, director of strategic sourcing for the Oregon-based PacifiCorp, believes the push toward having fewer suppliers has improved things dramatically for his company. He says during the past few years, PacifiCorp has gone from having about 300 suppliers to about 81. A smaller supplier base, he argues, allows large companies to develop more focussed relationships that can lead to problem-solving situations.
"It has improved things," he says. "With fewer suppliers you have the time to invest in developing that relationship. You can talk about freight issues, terms of conditions, and take the time to measure it and get to know each other.
"We are getting better pricing, giving them more of our business, and that makes sense in itself," he continues. "When you have fewer suppliers, you guarantee them better volume. And they treat us better with pricing."
Most industry representatives say they are finding that working with fewer suppliers is much more efficient. Steel manufacturers, for example, say their companies can now focus on one major supplier for valves and other parts and several small suppliers to take up the slack.
But obviously, not everyone benefits from the consolidated supplier base. While large companies may be better off in the long run, suppliers who are cut out of the picture suffer. Ronald Casbon, general manager of purchasing and transportation for the Pennsylvania-based Bethlehem Steel Corp., has witnessed this as his company sought out suppliers who could provide supplies on a national basis.
"What we are seeing is a continuing evolution of the small, independent distributor who is not able to compete with the larger national distributors because of this need to provide an increased level of service and provide a lot more on-site technical service that results in taking costs out," he says.
But on the other hand, Casbon says he is starting to see more and more small distributors banding together to form their own alliances and compete with national suppliers for the larger companies' contracts. And meanwhile, the fewer, more potent suppliers now used by Bethlehem Steel have the greater leverage, power, and ability to gain from the company's health and prosperity.
"As a result, they have more leverage with the manufacturers they represent," he says. "They can bring a stronger level of application and technical service to get involved in problem-solving and cost-reduction activities."
Monitoring the base
One of the most important advantages to having a smaller supplier base is the ability to monitor it. To measure performance, companies like the Oregon-based PacifiCorp Inc., an electrical equipment producer and major purchaser of MRO products, buy almost all of their supplies through distributor alliances. These alliances feature long-term agreements that keep the suppliers interested in staying with the company and keeping prices down.
"We get them all together in a room, and say, 'we want to get savings and you'd better work together,'" says Johnson. The suppliers' input is carefully evaluated, and they are later held close to the measurement agreement.
"It's up to us to manage that supplier according to the criteria in which they were selected," Johnson says. "We know and monitor it, and they know and understand. If we don't have performance measurements with timely and periodic reporting of benefits of every relationship we have, it becomes open to criticism."
Casbon of Bethlehem Steel says his company's buyers are now conducting performance measurements with their suppliers more than they ever have. Among other things, the steel company closely observes how suppliers handle price, service, and delivery. "The emphasis in recent years has been on suppliers identifying and helping us reduce transaction costs, make substitutions--all those sorts of areas we really measure a lot more closely than we ever did," Casbon explains.
Casbon says Bethlehem Steel makes good use of sourcing teams that develop agreements with suppliers. These stakeholders participate in the teams, submit formal reports on their progress, and lay down the guidelines for performance measurement. Company purchasing pros are responsible for coordinating these meetings, taking the measurements, and reporting results. But, as Casbon notes, in the end, the majority of the work is placed on the suppliers.
"Usually the brunt of the effort is in the hands of the supplier," Casbon explains. "He is the one who has to tell us what he has done to take the cost out. "
The team approach also has helped companies like manufacturer Framatone Connectors International USA save money. Carl Morrison, national promotions manager for the company, says the team approach between the plants and the distributors have proved invaluable as they reach toward the mutual goal of saving money.
"We have teams internally. When a new product is suggested by a customer or distributor, different disciplines are involved and a feasibility study is conducted," Morrison says. "We find out what the end result will be so we don't just sit there and say, 'We can do that.' When different folks are involved, it makes it more cost-effective for all parties concerned."
This sort of teamwork approach has also helped the company save its customers money.
"Our customers aren't annually subjected to major cost increases, and in a lot of cases the prices go down," Morrison says.
Taking initiative
Johnson points out that the most capable suppliers today aren't waiting around for companies to dictate performance measurement standards. He says the best suppliers today are putting the onus on themselves and coming up with their own standards.
"Many suppliers think that it's a company's job to hold them to that criteria," Johnson says. "In reality, the supplier has as much interest and responsibility in his own performance measurement, and in making sure that they show savings to the company. Those that do so can continue to have a long-term relationship with us. If they don't show and demonstrate cost savings, it's time for us to check the market."
Johnson says PacifiCorp takes a decidedly homespun approach to keeping its relationship with suppliers fresh. He says the company plans a special picnic each year, inviting all MRO suppliers to come out and meet with staff members. He says a simple touch like this goes a long way toward keeping suppliers happy and interested in the company's future. It also fosters a sense of teamwork among the suppliers of pumps, motors, and pulverizers.
"We have an alliance fair every summer on the lawns of the power plant," Johnson says. "All the suppliers set up booths, and we bring in hot dogs and hamburgers for four hours.
"It's important that the people who need the products know the suppliers, and we get them connected," he continues. "They say that one day is worth 20 plant visits because of the atmosphere."
Johnson says the company likewise holds an annual supplier conference in Salt Lake City each year, in which suppliers are encouraged to attend and review how their alliance is coming along. This conference is designed to showcase success stories and encourage other suppliers to join in on the process.
"We let the best suppliers tell their success stories, and for some, it opens up their eyes on why others are having success," Johnson says.
Johnson says distributors, in turn, must also try to help companies save money. He says he expects these distributors to check for new products, examine databases, and generally come up with more efficient ideas. To help grease the wheels, Johnson says his company holds quarterly meetings with the distributors to make sure they understand the company's needs for inventory reduction and reduction of prices through standardization. After the meetings, company representatives will go back to suppliers and ask them if they know of other ways to save money through training and technical expertise.
These close relationships between the factories and distributors are important, says Morrison of Framatone Connectors International USA. The company's electrical division provides electrical connecting devices and installation tooling for maintenance plants for the telecommunication industry.
"It's partnering," he says. "For all practical purposes, as big as these organizations are, this is an industry where everyone knows everyone else. We don't stray too far from home, and we know who each other are on a first-name basis."
Many agree that it is imperative that a distributor be intimate with a facility and understand its workings and nuances. Such distributors can inform them about newer and better products coming out on the market and make recommendations.
A 'live body'
But others say the best distributors will break away from competitors by providing their customers with the best customer support they can. They say distributors who can provide a "live body," someone who can come into a plant site to repair something like a broken air compressor, are going to be deemed most valuable in the end.
One steel manufacturer noted that seven distributors were once trying to establish a relationship with his plant. His company decided to do 75% of its business with the distributor who, in the end, agreed to have a representative on-site for a certain period of time each week to answer questions or address technical problems.
Some manufacturers say they go out of their way to schedule monthly or bimonthly meetings with distributors, making sure that they understand the companies' philosophy and needs. They say these meetings were ideal because they gave both sides the chance to provide feedback and seek ways to streamline the operation. They also say the constant focus on meetings and feedback gives both distributors and suppliers the chance to air their differences, seek reasonable agreements, and help increase efficiency in the plants.
Working on-site
Casbon also says the best distributors are proactive on the plant sites. These distributors get involved in the operation and integrate themselves into the day-to-day work. They take part in maintenance and repair operations and help drive a company's costs downward.
"They provide a lot of on-site application engineering, problem solving, technical evaluation, and the type of on-site services vs. the old times when you would have a commercial sales person doing this," he says.
In emergency situations, Casbon says, distributors will prove their worth by stepping up to the line and looking for solutions to vexing problems. He explains, for example, that a good distributor will help out if problems arise.
"If a bottleneck comes to the surface, and we have to shut down, we bring in the distributor and he serves as an expert and says who in the manufacturing world has a replacement for this application," he says. "It may be more expensive, but maybe we are willing to pay."
The company's level of success here has been impressive, Johnson says, as suppliers try to save money through everything from tool repairs to new services. "Sometimes they can save us on operation time because they deliver something in the middle of the night for us, and we give them credit for saving us on downtime," Johnson says.
Johnson recalls, for example, how a bearings supplier was willing to drop anything it was doing to get PacfiCorp the bearings it needed to keep its assembly lines running. "We needed it in the middle of the night, and they went to Utah to get it, and the plant was up and running the next morning," Johnson says. "It saved significant downtime. A plant being down can be as costly as $10,000 an hour."
Those suppliers that take the extra step like this can also look forward to long-term relationships, he says.
"They need to look at me and try to save me money as if they were part of me," he says. In turn, I will give them more of my business for longer and longer periods of time.
"The suppliers I trust are the ones who won't get complacent on me or up the prices when they know I'm not looking," Johnson says. "If I know they are willing to save me money, I will share any savings with them."
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