Expansion plans

Opportunities abound for companies prepared to provide the expanding service requirements today's manufacturers require from their integrated supply partners.

by Rich Vurva

Signs indicate integrated supply may grow dramatically in the next few years. One indicator is the unusually high number of inquiries integrators are receiving from potential customers. Another is a soon-to-be-released trends study from Texas A&M University for the Industrial Distribution Association and the Industrial Supply Manufacturers Association, in which 59 percent of distributors said the scope of integrated supply is increasing.

“Interest is very active,” says Chris Circo, president of Precision Supply Chain Services Group, the integrated supply arm of Precision Industries in Omaha, Neb. “Customers are calling us who aren’t happy with their current integrators. Frankly, we’re turning business away at this stage.”

Frank Lynn & Associates, the Chicago-based management consulting firm that has studied integrated supply for several years, believes integrators will continue to make big inroads into the $40 billion MRO market segment comprised primarily of large plants with 1,000 employees or more.

“We believe integrated supply has about a 20 to 25 percent market penetration and will probably double that market share over the next five years,” says Frank Lynn.

Integrated supply has been most successful among companies with multi-plant locations and large facilities. One reason it hasn’t been as successful outside of large plants is because it’s difficult to justify the expense of placing onsite storeroom managers in smaller facilities. As integrators develop solutions for those small to medium-sized plants — making better use of e-commerce and other technologies for example — Lynn says they’ll command even more buying power in the channel.

Growth drivers
What’s driving the interest in integrated supply? Global competition and a desire by manufacturers to gain more control over their indirect materials costs are primary reasons, say integrators and traditional distributors with integrated supply contracts.

“Integrated supply brings corporate procurement in control of the buying process,” says Lynn. “In the past, plants fended off any attempts to let corporate dictate how they buy and from whom they buy. So, beneath the surface, integrated supply is a fight for control of MRO procurement between corporate and local plants.”

Lynn says there is growing frustration among some companies over inconsistent pricing across multiple plant locations. Buyers expect to pay the same price for a product used in Plant A as they pay at Plant B. That’s not always possible, however, because individual plants sometimes require unique services that raise costs.

“Auditors want to know on a quarterly basis if they’re getting the best price. So, they check prices and invariably find someone with a cheaper price because there are other distributors trying to get the business. They don’t consider the cost of all the services,” says Steve Luteran, industrial marketing manager for Trumbull Industries in Warren, Ohio.

The dilemma illustrates the importance for integrators to develop a clear set of metrics so customers know how much they’re being charged and why.

“We have enterprise-wide inventory visibility that enables us to provide reports to clients to show what they’re buying across all of their plants. That enables us to normalize pricing to the greatest extent possible,” says Circo.

Don Woodring, president and CEO of Strategic Distribution Inc. (SDI) in Bensalem, Pa., says SDI provides an enterprise-wide solution designed to support a customer’s total corporate needs, regardless of the size of the customer’s plant or the location.

“It’s a very flexible approach that can provide people onsite, or provide the same solution without people onsite and still provide data standardization. It delivers a customized catalog by plant and a customized catalog for the customer across their entire enterprise so it can drive them to a lowest-cost denominator. Where they’re paying five different prices for the same item across five different plants, it performs an analysis to identify those savings opportunities,” he says.

Integrators say it’s often a delicate balancing act to satisfy the needs of the local plant vs. corporate purchasing.

“Our job at the plant level is to keep the plant running, keep enough product on hand and provide it to them at the lowest possible cost at that point in time,” says Luteran. He offers the following hypothetical situation to demonstrate his point: Suppose a part failure causes a manufacturing line to shut down. Normally, the cost of the spare part might be just a few dollars, but in order to fly in a replacement part on an emergency basis, the plant may have to pay $100 for the part.

“In that case, that’s the best price at that point in time, and the plant manager is willing to pay the higher price to minimize downtime. When corporate purchasing sees the price, however, they think they were charged too much,” Luteran says.

The example demonstrates the difficulty integrators have working with different levels of corporate management.

“It can be a struggle to develop a relationship with all of the people you must please,” says Luteran. “The best results come when you can develop a trusting relationship. If the customer understands that, as the integrator, you really have nothing to gain in terms of business and everything to lose, that puts them more at ease.”

New customer requirements
Customers are continually redefining the services they expect from integrators, which provides both an opportunity and a challenge. Integrators that understand their cost structures can offer new services and charge sufficient fees to be profitable, yet still enable their customer to lower their supply chain costs. Sometimes, the new services take integrators and distributors into areas they couldn’t imagine at the start of the relationship.

“Customers are expanding the scope of products and services we handle. They’re expanding it from MRO and OEM production parts to indirect materials management, which encompasses other products and services,” says Circo. He says Precision recently agreed to provide distribution fulfillment, procurement and systems services on behalf of Coca-Cola for all fountain machines and vending machine repair parts in the U.S.

Circo says more companies are contemplating early in the negotiation process how to eventually expand beyond MRO and OEM storeroom inventory management processes.

“Customers are becoming more intelligent around supply chain support and services. You have a more educated buying group making decisions with more information and insight than in the past,” he says.

Jim McCullar, vice president of Integrated Supply Services for Motion Industries in Birmingham, Ala., says customers are more selective about the services they require today than in the past. Previously, most integrators assumed customers wanted their integrator to manage every step of the indirect materials procurement process, from restructuring the data, the vendor base and the procurement process, to providing onsite storeroom management.

“So, we offered customers the full package. We found that what they wanted in some situations was the system. We now offer a menu that gives the customer a selection of all or part of our program,” he says.

In plants where organized labor has a strong presence, it may not be possible to provide onsite storeroom managers. Integrators must be sensitive to the corporate culture at each location and be nimble enough to devise a workable solution or know when to walk away from a deal.

New trends emerging
A newer form of competition has begun to emerge from companies that offer outsourced procurement solutions. These companies take over the purchasing departments for customers but do not necessarily handle the inventory management responsibilities.

“Some companies can achieve the cost savings they are looking for by eliminating their purchasing departments and hiring a professional purchasing group to do the buying and leveraging their existing supplier contracts,” McCullar says. The firms charge a small percentage of the total spend to the vendors and a small percentage to the customer, which is lower than the fee an integrator would charge.

“It’s a new breed of competition at the mega-company level. In the small to medium-sized plants, the regional industrial distributors are still the standard integrated suppliers,” McCullar says.

Integrators believe an outsourced purchasing solution is not as effective as a model that also provides onsite inventory management.

“You must have outstanding inventory accuracy in the storeroom. If your inventory is inaccurate, it doesn’t matter if you have the greatest technology in the world. It’s not going to work properly,” Woodring says.

Quality improvement creates opportunities
The growth of manufacturing improvement initiatives such as Six Sigma and lean manufacturing may also create new opportunities for integrators. In a report called “Integrated Supply and Six Sigma,” Frank Lynn & Associates says process improvement efforts mirror the goals of integrated supply.

Corporations typically take pride in their Six Sigma and lean manufacturing efforts. Integrators that successfully position integrated supply as being complementary to such process improvement initiatives stand a greater chance of raising their stature within a client’s organization.

“If integrators can tuck under Six Sigma, it has higher visibility at the corporate level. Secondly, under Six Sigma programs, integrated supply would have an internal champion, which is something they don’t have at the plant level now,” Lynn says.

In some cases, integrators hire people with extensive Six Sigma training, known as black belts. Circo says Precision trained some of its own employees in Six Sigma and agrees that integrators can benefit by aligning themselves with a customer’s existing process improvement efforts. If not done carefully, however, he says integrators can run into conflict at the plant level.

“If you don’t align yourself with all of the black belts out in the field, you’re going to have redundant activity taking place and, at some point in time, you’re going to have conflict around who takes credit for cost savings, who delivers on cost savings, etc. That’s been a challenge for us in some cases,” he says.

Woodring says SDI also recently adopted Six Sigma because it aligned well with quality improvement efforts used by customers. He says having a recognized process improvement program can help integrators differentiate themselves, but only in the short term.

“In the early stages, it may become a differentiator among service providers. But in very short order, it will become a requirement to have something like that. Customers will expect it,” he says.

Global expansion
Customers are also asking integrators to expand their reach geographically. Strategic Distribution introduced its In-Plant Store program to Mexico in 1995 and may expand into other parts of the globe as customer demand requires.

“We absolutely think there will be a demand for our services on a global scale,” says Woodring. “Mexico is a growth market for us, as is all of North America, Europe and Asia.”

This article appeared in the May/June '04 issue of Progressive Distributor. Copyright 2004.

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