Have it your way

Lewis Supply understands the importance of matching the appropriate integrated supply model to the individual customer’s needs.

by Rich Vurva

Ask Lewis Supply president Ed Van Dyke if he prefers using a fee-based or margin-based payment structure with the company’s integrated supply customers and he’ll answer, “Yes.”

He believes it’s possible to develop a successful integrated supply relationship with either approach. The key is to understand what the customer hopes to accomplish from the business relationship and to continually communicate to make sure the customer’s goals are being met.

“Both systems can and do work very well. We have no cookbook method that says to customers, ‘This is our approach.’ We sit down with the customer to determine his needs, then design a model that will best address that customer’s situation,” he says.

One reason relationships between integrators and customers sometimes go sour, Van Dyke says, is because the companies tried to apply an inappropriate business model. That’s why Lewis Supply strives to devote appropriate time during the negotiation process to clearly identify the customer’s expectations.

He recalls one situation where a manufacturer prospect asked Lewis Supply to assess its MRO purchasing process. The company had done a relatively good job of streamlining its system, so Van Dyke told them to expect only marginal cost improvements. Then another integrator entered the picture and promised the prospect 50 percent cost savings and won the business.

About four months later, after the other integrator failed to restructure the operation and deliver the promised savings, the manufacturer asked Lewis Supply to pick up the pieces. The company remains a Lewis Supply customer today.

“Falsely building the customer’s expectations can be a dangerous thing,” Van Dyke says.

Two approaches, same result
In a pure fee-based integrated supply model, the customer pays no markup on the price of products it buys. Instead, it may pay a management fee, a staffing fee to cover labor costs for employees to run the tool crib, and perhaps other fees for paper and other office supplies and to cover inventory-carrying costs. In a pure margin-based model, both parties agree on all of the services required and negotiate an acceptable product price markup to cover their costs.

“You have to pay for the services one way or the other. It’s either going to be a margin or a fee. The secret to making it work is knowing your cost to provide each of the service elements,” Van Dyke says.

Distributors that don’t understand their service costs can lose money by either charging too little in management fees or by not putting large enough markups on product prices.

“Many distributors look at integration as a way to protect their turf. They think of it as selling something rather than providing a service. We view it as providing a service. We’re interested in what we can do to help the customer use less, not sell them more,” Van Dyke says.

Some purchasing agents who are steeped in the traditional buyer-seller mindset are hesitant to accept a fee-based approach. That’s why most of Lewis Supply’s contracts now include a combination of fee-based and margin-based payment plans. Several customers started using the margin-based model and migrated to a fee-based model.

“Our model is very flexible. Out of all of our contracts, only three are identical,” says Herb McMillan, vice president of operations.

Although no two integrated supply relationships look alike, they’re remarkably similar when it comes to the subject of communication. Open communication is crucial.

Open-book management
The negotiation process with integrated supply customers tends to be more open than it is in a traditional buyer-seller relationship, says McMillan.

“We always open up our books for audit and have no problem sharing our costs with our customer. That’s part of the process,” he says.

The open-book approach doesn’t stop at the conclusion of the negotiation process. Lewis prefers to hold quarterly management review sessions with customers to report ongoing progress, discuss concerns and problems and prioritize future goals. The meetings typically involve McMillan and the Lewis Supply site manager, plus the customer’s top purchasing representative, plant manager, maintenance manager and other key management representatives. If needed, Lewis Supply IT representatives or product specialists participate in the meetings to explain productivity improvements.

“For example, we have a tooling specialist who can come in and review the type of tooling a customer is using. If we can help a customer realize fewer changeovers and improve feeds and speeds, they can realize tremendous improvements,” McMillan says.

In some cases, the specialist might recommend switching to a higher-priced cutting tool that can boost productivity, which lowers the customer’s total cost. 

“In a traditional buyer-seller relationship where the customer is looking only at the cost of the item, cost savings of this nature would fall by the wayside,” Van Dyke says. “We read and hear a lot about how to make supply chains more effective. Integrated supply does that. It eliminates what, quite often, can be an adversarial relationship between buyer and supplier. We’ve found that we work much closer with the customer on cost savings when we’re integrated.”

In addition to holding regular meetings with customers, Lewis requires all of its onsite managers to travel to Memphis four times a year to participate in meetings with their peers. The onsite managers share what’s happening in their local marketplace, review goals and objectives and discuss solutions to common problems they may face. The sessions help build camaraderie, making site managers more willing to phone or e-mail each other throughout the year to share ideas.

“We don’t allow our site managers to miss these quarterly meetings. Big benefits come from exchanging information between site managers,” Van Dyke says.

Success story
One of Lewis Supply’s most successful integrated relationships is with Smith & Nephew, a producer of joint replacement systems for knees, hips and shoulders, trauma products to help repair broken bones, and a range of other medical devices. Lewis has supplied the company’s Memphis production facility with production tooling and supplies for more than 20 years and has served as its integrated supplier for the past 8 years. Eight full-time Lewis Supply employees operate onsite at Smith & Nephew’s sprawling Memphis site.

It manages more than 8,000 SKUs stored in the main tool crib and in 19 satellite point-of-use locations, and handles more than 7,000 transactions each month.

In addition to the quarterly review meetings, Smith & Nephew senior purchasing agent Harry Moore values the management reports his team receives from Lewis Supply. The reports summarize each department’s total spend, stock and non-stock purchases made during the period and other pertinent information.

“They supply teams within our organization a weekly usage report of what they’ve used that week. That helps those people manage their budgets,” he says.

Lewis also provides Web-based access for Smith & Nephew employees to check on-hand inventory balances and product location.

Establishing point-of-use inventory storage throughout the plant reduced the amount of time employees need to spend away from their workstations. Since the plant occupies multiple buildings stretching across several blocks, the point-of-use cabinets and dispensing systems eliminate lengthy trips to pick up supplies and long waits at the tool crib.

“Our shop rate is about $60 an hour. For every minute those guys stay at a machine, that’s $1 not wasted. A trip to the tool crib from across the street would be a minimum of 15 minutes and could be as long as 30 minutes,” Moore says.

Less sophisticated buyers might not recognize cost avoidance savings, but Moore appreciates them nearly as much as hard cost savings. He asks Lewis Supply to include a cost avoidance line item on the management reports provided to him. He also willingly agreed to split hard dollar cost savings with Lewis Supply.

“If they save us money, we split the savings for a year and after a year we get all the savings ourselves,” Moore says.

This article originally appeared in the May/June 2005 issue of Progressive Distributor. Copyright 2005.

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