Integrated Supply: Myths and Reality
Joel L. Thomas
Joel L. Thomas, Consultant, Monsanto, St. Louis, MO 63167, 314-694-1065
81st Annual International Conference Proceedings - 1996 - Chicago, IL
Foreword: Additional material will be presented at the conference. Bill Derville, President of Industrial Distribution Association, will join me in discussing this fast changing business of having an integrator handle your MRO needs, and most often, your storeroom.
Exactly what is integrated supply? Is it a new value-added service that a distributor performs? Or is it a new way of outsourcing? How does it differ from systems contracting? Could it be a new business, or perhaps a new channel for distribution products?
Integrated supply encompasses perhaps all of the above, depending upon the source. It can be just a systems contract, or can be a complete outsourcing of MRO storeroom operations and sourcing/supply of all (stock and non-stock) MRO items. Integrated supply has grown from humble beginnings to a 1.5 billion dollar market in 1995 and, according to some sources, is expected to be a 5-7 billion dollar market by the year 2000. Integrated Supply is like a baby, it's growing fast and nobody knows exactly what it will be when it grows up.
Definitions. Listed below are a few:
Integrated Supply - (Union Carbide) A business strategy utilizing purchasing and materials management expertise from key suppliers to selectively replace those functions currently performed by the customer, resulting in lower MRO inventory and overhead cost.
Integrated Supply - (DREF/NAW, 1995) A special type of partnering arrangement usually developed between a purchaser and a distributor on an intermediate to long-term basis. The objective of an integrated supply relationship is to minimize, for both buyer and supplier, the labor and expense involved in the acquisition and possession of MRO products, items that are repetitive, generic high-transaction, and have a low unit cost.
Integrated Supply - (Frank Lynn & Associates) A new channel of distribution emerging to meet new needs of business.
Why Integrated Supply? Purchasing's Perspective. When one looks at what purchasing buys, raw materials to produce end products usually dominate the dollars spent, while dollars for maintenance, repair, and operating supplies (MRO) items is low. In this instance (chart 1.0), according to a CAPS report, 60 percent is raw material, and 7% normal MRO. The MRO percent varies by industry, but is typically below 20 percent. Of course, when one uses MRO items (bearings for example) in the finished product it is considered raw material. (charts 1.0 and 2.0 are not available in this text-only version)
MRO purchases may account for fewer dollars, but most of purchasing's transactions are for MRO. Indeed, the 80/20 rule is often used to describe MRO purchases, 80 percent of the effort for less than 20 percent of the dollars.
We can take a look at how Purchasing does spend it effort. Chart 2.0 shows that purchasing is spending the majority of their efforts in purchasing operations (expediting, order processing, resolving discrepancies, etc.). The remaining effort is primarily a strategic one (negotiating , bidding, contracting, etc.). I call these two roles Purchasing Operations and Managing the Supply Base.
These two charts (1 & 2) illustrate the reason for much of the rhetoric surrounding Purchasing Today. Indeed, I feel that most of the reengineering effort is directed toward improving those previously mentioned two parts of purchasing, the operating side and the managing supply base side. The use of an Integrator to simplify purchasing operations is a key part of that reengineering.
Integrated Supply is directed primarily at MRO items, the nuts and bolts, screws and valves, pipe and fittings, soap and rope (chart 3.0). Purchasing has asked Integrators to not only expand their product lines, but to increase geographically as well. Particularly the larger, multi-site firms. (chart 3.0 is not available in this text-only version)
For purchasing, the use of integrated supply comes down to refocusing on the important things, managing the supply base, and saving money at the same time.
Benefits & Objectives-Purchasing
- Reduce MRO inventory-The integrator buys it and manages it.
- Reduce warehouse cost-The integrator manages it, better.
- Eliminate duplication of effort. Currently we buy, they buy, we receive, they receive, we stock, they stock, etc., etc.! One of us may not be needed.
- Integrated supply reduces purchasing effort. The integrator replenishes his own stock, and often orders the same line of goods for non-stock. Why have the integrator buying bearings for replenishment of inventory, but you buying, from the same suppliers, for all other purposes?
- Integrated supply reduces your accounts payable effort. The integrator buys and receives, and pays for their own goods. The integrator issues goods to you (no invoice issue by issue). Consolidated billing is possible, as well as pay-on-receipt.
Why Integrated Supply? Integrated Supply Distributors Perspective. Faced with a ton of challenges (chart 4.0), Integrated Supply is good business! Purchasing is looking for someone to help them run the MRO business, the distributor knows how, and this integrated supply market is much more long-term than what currently is out there. Faced with an over-capacity business, one where distributorships are bought, sold, closed, consolidated, etc. everyday, Integrated Supply looks better and better. And it is a good way to expand existing business. Perhaps the best way. The 1995 DREF/NAW (Distribution Research and Education Foundation) report published survey results that indicate 20 percent of wholesaler-distributor sales will be from Integrated Supply arrangements by the year 2000, versus 5 percent today--fourfold in about 5 years. (chart 4.0 is not available in this text-only version)
Benefits & Objectives-Integrated Supply Distributor
- The customer's focus becomes one of cost rather than just price. This has long been a dilemma for a value-added distributor.
- A more secure business, along with greater possibilities for growth. Economies of scale.
- A closer relationship with the customer, along with better information about the customer's real needs, volumes, problems, etc.--and this can create opportunities for both integrator and customer.
- A change in the relationship, in which the distributor becomes more of a provider, fulfilling requirements with less focus on sell, sell, sell.
What to Look For-Recommendations. Choosing the right Integrated Supply distributor is a big deal. First, it costs both you and the chosen supplier a good deal of money to implement. And a good deal of time. Second, you want to achieve your goals of lowering cost, getting out of the inventory business, freeing up capital, and saving purchasing, receiving, accounting, and the end-user time.
Chart 5.0 lists some of the criteria one should look at when making up the list of possible Integrated Supply contractors.
Outsource MRO & Stores
- EDI Capable
- Direct to user delivery
- Enter own receipts
- Maintain area stores
- coordinate/manage other suppliers
- buy back inventory (existing)
- continuous improvement
It is recommended that the evaluation also include the candidate's financial situation, their experience in Integrated Supply, and how deep a product line is provided by each.