For more than a quarter of a century, MDM has covered the complex and changing landscape of integrated supply in distribution. This article, an update to the 2010 report, shows distributors the value of offering integrated supply while outlining the challenges they must overcome.
Just as it’s been for the past three decades, defining integrated supply is a challenge, with distributors calling it everything from supply chain services to integrated solutions to storeroom management. Distributors still display varying degrees of commitment, from dabblers to pure integrators such as WESCO International Inc. and Turtle & Hughes Integrated Supply. And the industry’s opinion of integrated supply remains mixed.
Half of respondents in a recent MDM-Baird survey said they don’t offer integrated supply to customers. Nine percent offer integrated supply at the basic level (one contract), 20 percent at the intermediate level (two to five contracts), 12 percent at the advanced level (five-plus contracts) and 7 percent have separate integrated supply divisions.
Despite some common threads linking today’s model to its origins, the integrated supply landscape has entered a new phase of maturity where technology advancements can increase the documented cost savings that benefit end-user customers.
“When it started, everybody thought it was a fad,” says Mort Harris, former president of industrial distributor Replenex Inc., Eden Prairie, MN, and author of My World of Integrated Supply and Alliances. “That fad has gone on for a third of a century. The fad is lasting and changing. And it’s better now than it was originally.”
Elements of integration
Though distributors have different names and approaches for integrated supply, every company that ventures down that path must implement certain criteria to become successful, according to Blair Crum, who was deeply involved with integrated supply efforts in various management positions at Norton Co. and later at Industrial Distribution Group, where he finished his career as director of innovation.
One, “you better have a lot of money or access to a lot of money,” says Crum, who now serves as an associate with Industrial Distribution Consulting LLC. “When you think about it, once you get a contract, the customer is anxious to see you ramp up and get started. Once the contract is signed, you need to hire people, make sure they’re trained and pay them. And you don’t make any money to speak of until all the old inventory is out of that operation, which can be six months or longer. In order to finance that, you better have a fair amount of money.”
Next, he says, an integrator must have “access to people.” That means keeping employees constantly in company training programs so that once a new customer comes on board, staffing a plant will be a quick process. The alternative, Crum says, is “if you take over a site and you don’t perform, you shut that plant down.”
The next requirement is a state-of-the-art computer system. “If you’re going to be a full integrator, you better have a model in place that you can integrate what you’re doing in that customer’s operation with your computer system,” Crum says. “Otherwise you can’t control the inventory, and you miss order point and order quantity.”
And the last ingredient for a distributor to enter the world of integrated supply is to “be in the quality process,” Crum says. “How in the world can you innovate in a customer’s location and help them streamline the process if you can’t do that within your own organization? An integrator’s ability to suggest ways for the customer to innovate inside the plant is the key to a long and mutually profitable relationship.”
A maturing model
Though the principles are roughly the same, starting with a foundation of trust and collaboration between distributor and customer, integrated supply is moving into the next phase of its life cycle because “there’s not a lot of low-hanging fruit to bring down,” says Mike Marks, partner, Indian River Consulting Group.
“Integrated supply got rid of bulked-up, atrophied procurement departments at these big companies where it would cost them $130 to cut a PO to buy a hammer,” he says. “Fundamentally, what happens today is
there are two things at the forefront of those who are doing it well. One, this idea of daily integration, where the distributor has very good data at point of consumption so they have an idea of where future demand is. Two, as soon as you get the integrated supply contract, they’re able to outsource a lot of purchasing.”
While the distribution model is based on a superior product at a better price, integrated supply is about selling the process and not the product, Harris says. “The most difficult thing was to convince the customer that there would be more money saved in the process than in the product,” he says. “They were also programmed as buyers, as purchasing agents, to buy something at the lowest price.”
Today’s low-inflation environment has made it more difficult to find cost savings – especially hard-cost savings – whereas “if you have high inflation, it’s easier to find stuff,” Marks says
“The people that do well in integrated supply fundamentally are doing something different than all the other traditional distributors,” he says. “The bar to get into the game, because the margins are thin and there’s a lot of transactional intensity, is to have robust processes.”
Those processes are like the three legs of a stool that keep it upright, says John Jeffery, senior vice president, supply chain services, marketing and information technology, DXP Enterprises Inc., Houston, TX.
First is operational excellence: A company must perform “superior customer service at the site level, including all the activity-based cost recording, performance reporting, all the KPIs that you typically have that is reported back to management,” Jeffery says. And providers must be able to answer a common customer question: “How have you proven that you’re saving me money over the length of the contract?”
Next is product scope and the expertise that goes along with it: “If we sell cutting tools or any MRO, we have experts in the manufacturers that support us at these sites, and that’s been a big deal,” Jeffery says. “Not only can we bring in a manufacturer’s rep, but we have our own experts that do that. We’re looking at the best fit, form and function for our customers to save money and improve productivity.”
Technology is the third and perhaps most important component, according to Jeffery, who says distributors must ask themselves: “How are we integrating technology with our customers and our vendors to lean out the supply chain? There’s extreme cost savings there if you do it right, anything from vending to barcode automation to RFID.”
The extreme cost savings in integrated supply contracts can be credited to improvements in technology, which help integrators pinpoint areas within a plant that can be more efficient. But how you are able to document those proposed efficiencies becomes the trick, says Jack Moore, senior vice president of sales, Hisco Inc., Houston, TX, whose integrated supply service is called Hisco Integrated Solutions.
Documented cost savings “is critical to our value proposition,” says Moore, whose company publicizes that on its website and even breaks down how Hisco saves customers money through manufacturing process improvements, downtime avoidance, supply chain savings and product design improvements.
“When you think about documented cost savings, there’s a lot of ways to get there,” Moore says. “Regardless of who you are, it’s a matter of, you’ve got to figure out what are you in business to do, what is your primary mission as a company. And you can select different documented cost savings initiatives that you can run based on what your business model is.”
Hiring an integrator benefits the end user with numerous, substantial savings, Crum says. Integrated supply reduces the cost of overhead. The end user doesn’t pay salaries or benefits for storeroom
employees. It reduces asset costs. Inventory they previously owned in the storeroom now belongs to the integrator, and they don’t pay for it unless they use it. And it creates cash flow.
“The bottom line is that savings of 25 percent in the first year is not out of the question,” Crum says. “And some integrators guarantee X amount of cost savings a year. But if you’re going to guarantee that cost savings, you need to have experts who can analyze the plant’s processes and identify cost savings at every stage of the production.”
Fail to plan; plan to fail
As Crum points out, a distributor can encounter pitfalls throughout the integrated supply process. Any failure at the financing, talent, technology or innovation level could sink a venture, but the companies that didn’t succeed with their integrated supply attempts faltered for one simple reason, according to Kevin Boyle, president, Industrial Distribution Consulting LLC.
“They failed because they tried to look at it from a typical distributor business, and you can’t,” he says. “It’s a completely different financial platform. It can be quite profitable for the distributors who look at it and keep it as a separate business.”
With incentives and rebates making up such a big part of distributor’s profitability picture, an integrated supply initiative – specifically the storeroom management side, which Boyle sees as a rapidly growing area for the industry – can boost a company’s bottom line.
“Even if storeroom management isn’t as profitable in the total business sense, it can add to the volume of the business that they are doing, which could make their incentives and rebates that much larger,” Boyle says.
In addition to top-notch technological capabilities, preventing failure hinges on attracting, training and retaining qualified employees. With talent being an area where distributors already struggle, DXP’s Jeffery ensures the company has plenty of management trainees in the pipeline whenever a new supply chain services contract is signed.
“I’m bringing them in and fast-tracking them because I need them,” he says. “That site manager, to me, is one of the most important people that we can have involved with that customer. That’s the line of sight, that’s the customer service level they feel, that’s executing the agreement correctly. I want highly qualified people that can run those storerooms because if you have a $15 million site, that’s a big business the storeroom manager is running. They have to understand distribution and supply chain.”
Distributors and consultants agree that integrated supply will continue to evolve, namely because technology will keep improving and businesses will always seek ways to decrease their expenses and grow their bottom lines.
“Someone might say, ‘How can you keep reducing costs inside a plant?’ There will never be elimination of product innovations or manufacturing techniques,” Crum says. “But there will always be the opportunities for refining a process, introducing a better tool.”
On Hisco’s website, the company lists the total amount of documented cost savings it has generated for customers in the past decade or so, rising from $10 million in 2002 to $110 million this year, just one example of how distributors that commit to integrated supply can see results for their customers and themselves.
It calls to mind something Crum heard years ago. Whenever he walked into a plant, he was told to imagine money – in varying denominations, from dollar bills to C notes – dangling from different parts of the facility, each ripe for the taking depending on where he, as the integrator, would focus his cost-saving efforts for that customer.
A savvy integrator could envision plucking those bills from the design area or the tool crib or the assembly line and passing that cost savings along to the customer.
“That has held true throughout my career and it’s still true,” Crum says. “The processes will keep on evolving and keep on improving. And integrated supply, even though there is a great increase in people offering those solutions, there will still be great growth in the end users who want integrated supply. Any plant can benefit from integrated supply. The bigger the plant the more opportunity there is.”