Managing The Supply Chain: The MRO Distributors' Role In Removing Redundancies
Author(s):
Tom C. Reid
Tom C. Reid, Vice President/General Manager, Industrial Supply Division, Briggs-Weaver, Inc., Dallas, TX 75235, 214/631-3600.
79th Annual International Conference Proceedings - 1994 - Atlanta, GA
And Reducing Costs
BACKGROUND
Recent changes in the industries that industrial distribution serves
have expanded the conventional role of the distributor. Buying, inventorying,
and selling will no longer meet the requirements of many customers.
As customers focus on the main functions of their companies and reduce
expenses and employees, the opportunity for distribution to expand its role
has never been greater.
In the past, many customers have built and supported elaborate
procurement and internal distribution systems for MRO supplies. The number of
transactions in this area coupled with elaborate systems have utilized
resources at ratios greater than their value. 80% of procurement activity and
cost, versus 20% of the value of all procurements is not unusual.
Not only has the ratio been unfavorable, but the cost of procuring MRO
supplies has continued to increase.
THE OPPORTUNITY
The Supply Chain from manufacturer through distribution to the customer
and ultimately to the end user (requisitioner) is changing. The shift that is
occurring can transfer more responsibility to the distributor. The thrust of
this shift is determined by the channels perception of the most efficient
productive method of moving material through the channel -- The determination
of what is required by the end user and the elimination of duplicity and
redundancies will yield cost savings and increased potential for continuous
cost improvements.
Customers realizing the true cost of materials management for MRO
supplies have elevated cost savings in this area to a top priority. By
focusing on developing techniques, significant costs can be realized.
Through a sluggish economy, vendor reduction and ongoing margin squeeze,
the distribution industry is consolidating. Distributors involved in
partnering alliances and other forms of integrated supply are gaining market
share and relationships that support future growth. These distributors must
be prepared to take a leadership role, make significant investments and change
methods currently accepted and expected in the distribution of MRO supplies.
Customers and distributors who accept the task of managing the supply
chain rather than just working the existing system have the opportunity to
realize productivity and savings that the present system cannot achieve.
FROM THE CUSTOMERS' PERSPECTIVE
In considering the supply chain, it is obvious that costs include much
more than just acquisition costs that are developed in the Purchasing
Department. Transportation, storage, handling, packaging, ordering,
invoicing, paying and inventory ownership and other operational and
administrative functions contribute costs.
When many suppliers are involved in the chain, these costs are paid by
every participant and added to the price of the products. This realization
and the emphasis that the Quality Process has provided on reducing variability
in processes has lead to the current effort to reduce vendors. As customers
prepare to place more business with the chosen distributors, they expect the
distributor's role to change. The distributor must be prepared to take on new
and expanded responsibilities in inventory ownership, material handling,
paperless methods and in-plant deliveries.
To continue to improve, the customer expects the distributor to take the
role of a consultant in cost savings. The typical adversarial role caused by
the conservative bid buy method must be replaced with a joint management of
the channel focused on reducing total costs.
CUSTOMER CONSIDERATIONS
There are many areas that must be considered to improve the efficiencies
and reduce costs associated with managing the supply channel. Purchasing,
store rooms, inventories, delivery, communications, products, pricing --- are
some items that are usually significant.
Purchasing Departments are associated with the management of the supply
chain and often don't have the authority to control many of the aspects that
cause the costs. In future relationships, the management of this channel has
the opportunity to change the MRO buyer from a clerk to a manager and expand
the authority by being the key customer contact for the supplier. The two
areas that Purchasing must consider are how will the needs of the end users be
communicated and the resulting service monitored. Prices for products and
services will be an integral part of Purchasing's value/cost analysis.
Inventory reduction and services provided the end users will be key indicators
to the productivity and quality of the channel management.
Store rooms and inventories must be reviewed. if the distributor can own
the merchandise and furnish employees to operate these areas, costs may be
reduced or eliminated. Often inventories can be kept at the distributor's
location freeing up space when timely and consistent deliveries to the end
user are established.
Deliveries to the end user by the distributor, bypassing Receiving and
store rooms, not only saves customers' employees effort, but in many cases
results in more timely service.
Communications from end user to distributor via EDI through third party
or from computer to computer removes many steps in the ordering functions.
Controls on order size and supervisor approvals can be built in to control and
manage the process. Efficient management of these electronic systems can
result in paperless systems that include invoiceless electronic funds
transfer, etc.
Products that are involved can be cataloged and analyzed for
standardization and duplications. As brand names become less important and
quality is assured, the number of SKU's can be reduced.
Pricing distributor revenue is a major concern in the overall reduction
of total procurement costs. Expectations of lower prices can be met by many
of the techniques involved in the management process. Management fees for
value added services is a practical way to unbundle cost and analyze the value
of the services that generate the costs. Product prices and management fees
can be managed to form the basis of a risk and reward cost reduction process.
This process can be developed to identify the distributor to perform
continuous cost improvements in order to earn more. This approach moves the
distributor from the conventional how can we sell more at a higher price, to
how can we lower the customer's cost so that we can make a higher return.
This shared goal to lower the customers cost should be the essence of the
customer/ distributor's management approach in a true alliance.
THE DISTRIBUTORS PERSPECTIVE
In the future distributors that have an objective to grow must consider
the trend toward partnering alliances, integrated supply and similar
arrangements. In the past, most industries were growing and expanding and a
distributor could realize satisfactory growth by getting their share "of the
market served." This is not the case today. Many industries are downsizing
and consolidating. This, coupled with more productive products, has
effectively eliminated much of the growth as we have known it in the past.
The distributor that grows will approach the market with a strategy that
addresses distributor involvement in the management of the MRO supply channel.
DISTRIBUTOR CONSIDERATIONS
A distributor must be in a position to respond to new and innovative
approaches to:
- Inventory
- Personnel
- Computer Software Systems
- Delivery Systems
- Warehouse Resources
- Pricing Concepts
In many of these areas, the new approach will require significant
investments.
INVENTORIES
A closer relationship with the customer involving inventories will
generally require more investment, additional skills, new brands, and even the
addition of commodity groups. When the redundancies of inventory are
addressed, it is often necessary for the distributor to purchase the
customer's existing inventory. The distributor must have the resources
financially and the systems to manage the customer's inventory needs.
PERSONNEL
With the added responsibilities taken on by the distributor, it may be
necessary to add people for these new duties. These additional personnel will
often require skills not associated with usual distribution activities (i.e.
inspection, in-plant delivery, and consultive selling approach to identify
cost saving opportunities, etc.) Studies have shown that distributor personnel
usually can afford a savings in salaries of 15% to 20% compared to plant
personnel performing the same function when total salary and benefits are
considered.
COMPUTER SOFTWARE SYSTEM
The degree of management and control afforded through modern
distribution software is generally not available in customer systems. Order
processing and inventory optimization are the primary goals of distribution
software. When these features are incorporated through EDI or other
communication techniques, the customer benefits. The investment necessary to
develop these communication systems between customer and distributor can be
costly but the productivity gains in the future may easily justify the effort
and expense.
DELIVERY
Delivery costs can be transferred from the customers to the distributor
and the resulting increase in equipment and personnel can be included in the
cost of the product or as an additional fee.
WAREHOUSE
Warehouse space can be a significant savings for the customer and, in
many instances, not increase the space required by the distributor since many
of the items sold to the customer are already in stock at the distributor. In
the event that new and additional products increase the need for more
warehouse space, this can be justified through a comparison of the cost of
space between a distributor warehouse and manufacturing space dedicated to MRO
store rooms.
PRICING
Pricing concepts associated with these new relationships can be the most
innovative aspect of the agreement. To charge for services rather than just
product, forces the distributor to know what the internal costs are. This
information and an understanding of the customer's requirements can lead to
meaningful pricing concepts. To put part of the revenue available at risk
based on cost savings and/or performance is a challenge that is relatively new
in the distribution industry. Not all distributors are equipped to install
and manage this approach but those who expect to be involved in the management
of the supply channel must develop this approach. As the alliance matures and
extends into the future, customers will expect continuous improvement of the
cost reduction process. The distributor must be able to perform in these
areas through lower prices and increased productivity.
CONCLUSION
There is opportunity to change the paradigm and cultures associated with
the procurement and ownership of MRO Supplies. End users and distributors
alike are gaining knowledge on how these changes can be implemented. By
forming an alliance to jointly manage the supply chain the MRO Distributors
can be an important part of removing redundancy and reducing costs.
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