A shift in strategy
As the Big Three embrace integrated supply and outsource more assembly, distributors align themselves with key suppliers
By Ken Brack -- Industrial Distribution, 5/1/1999
East of Toronto, General Motors' Oshawa plant churns out Buick Regals, Monte Carlos, Impalas and extended cab trucks. For more than three years Ontario fluid power distributor Wainbee Ltd. has been a single-point source for hydraulic and pneumatic components used in several of those product lines.John Bachmann, corporate sales and marketing manager at the $50-plus million [Canadian] distributorship, says the contract with GM has gone well so far. But he views the commodity management deal -- and others like it -- as the customer's stepping stone to using full-fledged integrated supply programs. For now, Wainbee handles fluid power products that customers like GM once purchased from a dozen or more suppliers, and he sees OEMs adding on other "buckets," or commodity groups, for trial runs.
Other executives agree that mammoth changes in the automotive market are underway as the Big Three continue to aggressively reduce vendors and cut costs.
GM, for one, has already achieved huge savings with an integrated supply contract with Bruckner Supply Co. to manage all indirect materials at its Arlington, Texas plant. At press time, GM was also finalizing negotiations with Ferguson Enterprises, Inc. to manage MRO supplies at plants in Bedford, Ind. and Defiance, Ohio. According to some distributors, the automaker also has a moratorium on commodity management deals and plans to move its power train division to integrated supply by 2001.
GM purchasing spokesman Dan Jankowski says integrated supply operations, global purchasing and outsourcing more module assembly are key ways to cut costs. He would not comment on details of existing integrated supply contracts or the number of pending bid awards at its plants.
"Integrated supply is only one element in an overwhelmingly large strategy," he says. "With supplier integration we bring responsibility for the design, development and validation [of savings] to the supplier. In some cases, it's a method, but it's not something that just can be broadly accomplished with ease."
Ray Blashill, executive vice president of J.H. Bennett Co., Inc. in Novi, Mich., says the overall trend is obvious: automakers have determined that distributors do many procurement and assembly functions more efficiently. He says the Big Three are closer than some may think to becoming virtual manufacturers, and integrated supply will play a big part in that. Blashill first heard the "virtual" concept, in which automakers will chiefly design and market products while handing off assembly, at a GM seminar eight years ago.
"Given the choice, they look at activity costs and determined there are other companies that do it more effectively than they do," says Blashill.
In addition to integrated supply deals for MRO supplies, another growing trend is for parts makers to design and assemble complete modules for the automakers.
Suppliers of systems like chassis, body and power train do a lot of the buying that automakers once did, and in some cases second and third level suppliers help develop new products.
Some examples of suppliers assembly programs are Dana Corp.'s rolling chassis operation for Dodge Dakota pickups in Brazil and Magna International's Symatec group, which engineers and assembles components in what it calls a "Tier .5" supplier solution.
Ford Motor Co.'s move to require parts makers to buy their own machine tooling beginning with model year 2003 is a related outsourcing move. Ford will remove the costs of expensive tooling from its books and believes parts suppliers will do a better job buying the equipment.
Ripe opportunities
As the automakers shift the channel for their production material flows, distributors are changing with it. Blashill, for one, says the opportunities are huge for independent distributors to work with larger integrators or build systems themselves.
"I think the business is going to have to be spread out among the top integrated suppliers," he says. "I look at just the scope of capitalization costs" for distributors to handle that inventory, which run into the tens of millions of dollars for various auto plants.
"As a distributor, we don't see any loss of business," adds Blashill. "But our ultimate customer may change somewhat as we deal more with a tier-one [supplier] than with the current end user. In our case, we're going to concentrate time and energy to work with integrators, rather than end users. We view the integrator as being able to perform the logistics very efficiently, but we offer them cost savings from enhancements on the manufacturing floor."
Bachmann sees a different shift, where parts suppliers to the automakers want more systems, rather than commodities, from their distributors for automated assembly operations. Wainbee, for example, uses its expertise to "tie together" components like gear actuators, sensors and controllers in systems for parts suppliers.
"I see it as just opportunity, opportunity, opportunity," says Bachmann. "We know that long term, our future depends on being a value-added business -- there's far more emphasis on stepping back from the product and looking at what the customer's doing -- look to reduce cycle times, look at how many parts are getting out."
He also sees less of a rush toward integrated supply contracts than does Blashill and some others.
"We're seeing a steady but slow progress," says Bachmann. "A lot more people are investigating commodity management and integrated supply options. People are not stampeding into this. I think a lot of people in automotive are looking at testing it for commodity management, rather than testing all buckets."
Robert Bloch, president of PMC Machinery Inc., in Plymouth Township, Mich., says continued outsourcing also heaps more financial pressure on distributorships. Many of his customers -- many parts makers -- demand extended payment terms, and banks won't finance all of the inventory. The result is a burden on cash flow, a search for alternative financing, and pressure to continue becoming smarter.
"I don't think there will ever be an end in sight to that," he says. "We will just have to keep doing what we do better."
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