|
|
|
|
|
|
By Richard Trombly | Industrial Distribution: October 2002 The integrated supply channel is becoming increasingly more effective across the supply chain Some critics have said that integrated supply is
dead. Far from that, the integrated supply channel is thriving and will
grow up to 25 percent in 2002. According to the recent report integrated Supply:
The Overlooked Giant, integrated supply grew 18 percent in 2001. The report
is the fourth investigation into integrated supply produced by management
consultant firm Frank Lynn & Assoc.,
Inc., in Chicago, Ill. The study covered the top 17 integrated supply
distributors, those with more than $100 million in annual revenue. These integrators accounted for nearly 40% of the
$12 billion integrated supply market in 2001, says chairman and founder
Frank Lynn. He expects the market to swell with a 20 percent compounded
annual growth rate to reach $26 billion in 2005. "The 2001 growth rate was astounding, since
it occurred in an MRO market that was down seven to 10 percent,"
adds Lynn. "I firmly believe that the 25 percent growth rate will
be reached in 2002 due to a heavy backlog of plants that are under contract
but are not yet online." Lynn says integrated supply can be defined as a
long-term partnership whereby an end-user outsources to a supplier some
or all of the MRO products the end-user needs to keep its plant operating,
with the objective of reducing total acquisition and usage costs. This
definition doesn't define the diverse complexity of supply models and
payment structures of the individual contracts, however. The origins of this marketing channel rose out
of traditional distribution and early models emulated the standard buy-sell
relationships distributors have with end-users, says Lynn. Integrated
supply is essentially an outsourcing model, however, so a different relationship
is needed to effectively fulfill the expectations of the contract, primarily
to take costs out of the MRO purchasing process. There is a saying in the industry that if you've
seen one integrated supply contract, you've seen one integrated supply
contract. That is changing, says Lynn. There are now two major models
and two primary means of remuneration. There is nearly a 50-50 split between sole source
and commodity-line integrated supply contracts, he says. The sole source
model offers the advantage of a single point of contact for all MRO purchases
and fits well with large multi-plant contracts that cover a wide variety
of operations. The weak point of many single source integrators
is in offering technical support. Single source distributors often rely
on manufacturers for support they can't provide themselves within the
constraints of the cost structure, says Lynn. Commodity-line integrated supply contracts involve
several specialty distributors that each manage a product grouping. The
commodity-line model is a better fit for process industries and other
types of manufacturing operations where specific technical product lines
are critical. The primary advantage of this model is that it can provide
higher levels of technical support to end-users. The most common means of pricing is fee for service, which is used effectively by companies including Bruckner Supply, ISA, IDG, Setech and Grainger, says Lynn. Many companies, however, retain a traditional cost-plus model. Both of these models are frequently (29 percent) supplemented by a risk/gain sharing element to reward or penalize the distributor according to its performance. "Many observers say that integrated supply distributors
can't be making any money," says Lynn. "That is as much a myth
as saying that integrated supply is dead." Can it be profitable? The average pre-tax operating profitability was 3.8 percent
with more than 60 percent of respondents reporting between four and six
percent. Lynn expects profits to rise above five percent and even top
six percent for the best performers. This business has grown to include 25 percent of the
large plant MRO market in 2001, which represents nearly 40 percent of
the overall MRO market, says Lynn. "This means that manufacturers must learn how to
manage channel conflict between traditional industrial distributors and
the integrated supply market," he says. "Manufacturers will
need to develop new policies, compensation structures and support programs
for integrated supply." While all distributors act to serve their customers,
the traditional distributor will usually market and sell their own lines
and seek to maximize profits on each transaction. This is at odds with
the goals of integrated supply--to procure products for the customer at
the lowest total cost. Many integrated suppliers never take ownership
or directly handle the products. Considering that integrated supply could become the dominant
supply channel, it is necessary to find ways to adequately pay integrated
suppliers appropriately but only for the services they perform, says Lynn.
Manufacturers who provide products at the same terms to distributors and
integrated suppliers are compensating integrated suppliers for functions
they do not perform. Movers and shakers Attitude matters in the success of integrated supply.
Lynn describes integrators as movers and shakers, commodity movers or
wanderers. Business attitude is an indicator of companies that are
likely to be most successful, says Lynn. Some of the elements of being
a mover and shaker are: being aggressive and articulate about goals; discussing
their business in terms of its greater role in the supply chain; having
a separate business unit devoted to integrated supply and a strong focus
on their processes; providing flexibility in terms and pricing 10 meet
customer demands; and having a sophisticated understanding of the cost
drivers in their own and in their customers' businesses. According to the report, Bruckner Supply is one of the
integrators that falls into that category. With 25 years of experience
in this arena, the company is aware of these factors, says vice president
of strategic operations and planning Don Baird. "We certainly see the value proposition getting
stronger, not weaker, particularly for larger customers with complex needs
at multiple sites," says Baird. "There is increased pressure
for cost reduction and the downturn has amplified the challenges to streamline
processes and find new ways to reduce costs and increase profits." He sees outsourcing as a major strategy for attaining these goals. Integrated supply is a way to outsource procurement and efficiently deliver services. "We have the broadest horizontal model with up to
100 percent fulfillment," says Baird. "Combined with our tools,
services and technology, including a suite of procurement and materials
management software that enables Bruckner to be an application service
provider, we can provide a customized solution to take out process costs." It's also important to be substantially different in
structure than traditional distributors, he emphasizes. It is necessary
to develop the processes, systems, relationships and personnel to be successful. It also involves significant changes in culture, within
the distributor and the customer's business. The distributor and the customer
both. need to devote the resources and personnel to manage the change
and make the relationship successful. Accommodating smaller players According to INDUSTRIAL DISTRIBUTION'S 56th Annual Survey
of Distributor Operations, 27 percent of distributors have integrated
supply contracts with customers. More than half of these have only one
or two contracts of this kind. These smaller players seem to be finding
profitable business because 89 percent expect to maintain or increase
the number of integrated supply contracts during the next three years. While some smaller distributors may be able to service
one or two integrated supply accounts, nearly one-third of all distributors
are involved in integrated supply as second-tier providers or subcontractors.
This opens opportunities for small niche, specialty distributors to also
profit from integrated supply. Second-tier distributors perform three major functions
in the integrated supply chain. Integrators will rely on these distributors
for technical support, to purchase parts from those vendors that won't
sell directly to integrated suppliers and to source odd-ball items and
replacement parts. "Sourcing spare parts remains an ongoing problem
for integrators because it is hard to locate non-standard items,"
says Lynn. "The time pressure is often critical in getting machines
up and running, so at that point, cost of spare parts is of little concern." Ideal candidates for integrated supply have been larger
plants--those with upwards of 1,000 employees and an MRO spend of $3 million,
says Lynn. New technologies and software now allow mid-sized markets to
be served by integrated supply. These smaller plants can't necessarily
support in-plant staff from the distributor, but there are now effective
means to remotely manage inventory. One company that is concentrating on bringing integrated
supply to mid-market customers is IDG, says Vice President of Flexible
Procurement Solutions[TM] Dick Decker. FPS is IDG's brand of integrated
supply offering that is customized to individual customer requirements. Decker had a hand in the development of IDG's integrated
supply program and its storeroom management system[TM] software from its
beginning. FPS now accounts for nearly half of IDG's sales. "Our FPS program, like our software, is customized to the end-user's needs," says Decker. "We have a round peg, round hole customization approach, which is supported by a set of proven processes that are consistent across all customer sites. The customization comes from customer input. The high degree of consistency ensures quality control." IDG differentiates its services through technical expertise
within the company and within its supplier-partners. Decker says expertise
is where IDG really saves customers money. Decker has a strong background in quality improvement
processes. Therefore, documentation is a major part of the EPS program. "We were pulled into lean and quality processes
by our customers," says Decker. "But it is the best thing that
ever happened to us. If you meet all of the customer's metrics, they won't
think about firing you." When IDG unbundled its services, it started making integrated
supply a profitable venture. Decker says the company shares with its customers
how it plans to make a profit while providing savings. Traditionally, many integrated supply contracts were
renegotiated with new integrators as soon as their term was up. The most
common problem was that integrators over-committed and under-performed.
IDG has nearly 98 percent retention of integrated supply contracts, says
Decker. "It is important to demonstrate that the model provides
a stable relationship that is fair to both parties," says Decker.
"It is essential to do what you commit to, and then strive to over-perform." Providing solutions designed to reduce the total cost
of doing business is essential to keeping American manufacturing businesses
competitive, says Decker. Integrated supply can free resources from MRO
purchasing and allow the customer to concentrate on its core. "Small and mid-size distributors will need to find
their place in integrated supply and continually move their organizations
forward," says Decker. "It is more important than ever to remove
costs from the supply chain." When companies find the proper fit, integrated supply
can offer necessary services and products while reducing costs for manufacturers,
distributors and end-users. Distributors must have a strategy to face
or embrace integrated supply, because it's not going away. The top players in integrated
supply
Source: Frank Lynn & Assoc., Inc. COPYRIGHT 2002 Reed Business Information in association with The Gale Group and LookSmart.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
Home | Contact | |
|
© Copyright Richard Trombly 2003
|
||