by Richard Vurva

In a perfect world, customers, distributors and MRO product manufacturers would be inextricably linked so that any product use by the end-user would be almost instantly communicated to the manufacturer. The flow of products, funds and information between the trading partners would occur without duplication in effort or redundant investments in inventory, warehouses or production capability.

Have most industrial customers and their trading partners achieved this pinnacle of efficiency? Not yet.

But integrated supply, vendor reduction, single sourcing, the use of procurement cards and other MRO re-engineering techniques are forms of supply chain management (SCM), which is an effort to reduce the costs of acquiring and using MRO products.

Dr. Stephen Pearce, president of Advance Channel Procurement, Bryan, Texas, says the goal of SCM is to help companies manage cost out of the MRO products supply chain.

Pearce was one of the leaders of an MRO supply chain management seminar held last fall in Louisville, Ky., conducted in conjunction with the Industrial Distribution Program at the University of Alabama at Birmingham.

Pearce calls supply chain management the continuous process of synchronizing producers, intermediaries, customers and their processes with a focus on maximizing supply chain value. The concept originated in the early 1990s and has continued to pick up steam.

The heart of the seminar was a six-phase program model designed as a how-to guide to assist companies that want to improve the MRO supply chain. The phases are:

   Concept development
   Model design (front-end analysis)
   Model design (detail)
   Contract negotiation
   Operations implementation
   Performance evaluation and improvement

The model serves as a blueprint to help companies manage their indirect materials supply chain. Companies can avoid costly missteps by following the model, Pearce says.

“When people have a plan to remove costs in the supply chain before they enter the process, they tend to be more successful,” he says.

This article focuses on the early phases of the SCM model. The topic will be explored in greater detail in future issues of Progressive Distributor.

Understanding customer needs
“Customers often don’t know what they need but they know when they don’t have it,” says Dr. Bill McCleave, president of the distribution consulting firm W. R. McCleave & Associates, Cornelius, N.C., another presenter at the MRO supply chain seminar.

According to McCleave, one way to understand distribution’s role in the supply chain is to think of distributors as “gap fillers.” Distribution’s role can best be illustrated by the graph that appears below.

The triangle on the left represents product manufacturers. The triangle on the right represents the end-user customer. The dotted line in each of the two triangles separates the core activities from the non-core activities that each of those channel members performs.

For example, a manufacturer’s core activity might include research and development and production expertise. Packaging, inventory management and logistics might be considered a non-core activity.

A customer might have similar core strengths in the products and markets it serves and consider training, problem-solving and maintenance to be non-core activities.

“Manufacturers and end-users have struggled with identifying the core activities they must perform and the non-core activities that they can outsource,” says McCleave.

Distributors can benefit the supply chain by “filling the gap” and performing the non-core activities for manufacturers and customers.

The key for distribution is learning which activities it can perform more effectively than the other members in the supply chain.

“If you can’t identify the gap, you can’t fill it,” McCleave says.

One of the ways to learn what’s important to customers is to ask them to complete a “sample needs prioritization matrix.” The matrix (graphic below) is a simple form that asks customers or prospects to prioritize a list of strategic or tactical requirements.

For example, you might ask a customer to rank a list of functions from 1 to 6. A 1 ranking means the function would offer the greatest opportunity for cost savings, a 2 ranking would offer the next greatest, and so on.

Another way to use the matrix would be to ask a customer to rank core functions by the greatest opportunity for productivity gains.

The matrix might also ask to assign a weight between zero and 100 to each need, for a total of 100.

Called a “multi-attribute decision analysis,” the matrix helps members of the supply chain set priorities and define supply chain improvement initiatives

.

Hierarchy of needs
The supply chain model begins and ends with the customer. It begins with the question, “How can members in the supply chain come together to eliminate waste and non-value activities, increase productivity and reduce costs, while keeping our customers and member stakeholders happy?”

As a key link in the supply chain, how can distributors begin to gain a better understanding of the specific needs of customers? Here are a few specific steps:

Find the decision-makers. “As suppliers, we often don’t plug into the right need,” McCleave says. “If your contact is only with the maintenance manager, you won’t see the big picture.”

Be sure that what you sell matches the needs of the person you’re selling to. You probably don’t want to sell SCM to a plant purchasing agent. Such an arrangement may do away with that position and a purchasing agent may not be authorized to make the kinds of decisions SCM requires.

Understand strategic objectives and concerns. Every company wants to cut costs and improve productivity. Understand how that fits into the company’s overall business strategy. The low-cost producer will have a culture that more actively supports cost cutting and productivity improvement than the producer known for high quality.

Understand the customer’s business processes and costs. By understanding and clarifying your customer’s current processes, you can reveal improvement opportunities. “Thinking about these issues up front can make evolution go more smoothly,” says Pearce.

Evaluate tactical requirements. This is where you start to get down to the nitty gritty. What are the customer’s specific tactical requirements? Same-day delivery? Storeroom management? The critical step is to stimulate your customer to reveal the desired results of each process. It’s from these tactical requirements that product and service features will emerge.

Prioritize improvement initiatives. As you learn customer needs, you must prioritize them. Some needs are more acute than others. Some will provide greater opportunities for cost savings. Some may be important, but may be complex and costly to put into place. Be aware of what Pearce calls “scope creep.”

“You think parameters have been defined, then the customer adds something else,” he says.

Obtain customer buy-in. This is critical. You can only implement the right supply chain relationship if appropriate people at your customer’s place of business have bought into the concept.

Barriers to success
Many roadblocks threaten a shift from a transaction-based relationship between distributors and customers to the supply chain management model. Being aware of potential barriers to success can help avoid them.

Here are two such barriers and suggestions on avoiding them:

Misread customer cues and objectives. A distributor with no previous experience with integrated supply or supply chain management may approach SCM with the same mind-set as its traditional distribution business. A customer unfamiliar with the concept may not give adequate thought to the program’s objectives. This combination can result in misunderstandings, asking wrong questions, assuming wrong directions and a general waste of time.

The best solution is to realize that open and regular communication between channel partners is crucial to success.

Underestimated project scope and task. End-users and suppliers often make the mistake of underestimating the complexity, required time, resource commitment and breadth of implementation activities necessary with SCM. For example, customer requirements such as 24-hour stock availability, on-site distributor personnel, multi-plant delivery and support are often beyond the existing capabilities of many suppliers. From the customer’s side, procurement delays, personnel availability problems and crises unrelated to SCM may also make it difficult to adhere to an implementation schedule.

The primary solution to overly optimistic project estimates is a solid understanding of the project requirements, sound pre-implementation planning, experienced leadership and a thorough training plan for weak areas and personnel.

“Supply chain management is a journey one starts upon,” says Pearce. “There are many twists and turns in the road to cost savings and many techniques available. The MRO supply chain management seminar and guidebook were developed to help channel members understand how to implement relationships that remove costs from the MRO supply chain.”

Some of the material in this article was adapted from the MRO Supply Chain Management Guidebook, published by Advance Channel Procurement.

This article originally appeared in the January/February '99 issue of Progressive Distributor. Copyright 1999.

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