Integrated supply begins at home
Lowering the total cost of doing business includes refining your own processes
By Todd Loftis -- Industrial Distribution, 11/1/1999
EVERY DAY A SUPPLIER TOUTS THEIR VERSION of integrated supply as the best. I don't think anyone has seen the best. In fact, in many cases I think we have wrapped ourselves in buzzwords and forgotten the goal.The goal of integrated supply must always be lowering the total cost of doing business. I don't mean lowering the customer's cost of doing business, but all costs in the supply chain. A limited review of cost may destine that integrated supply contract for failure.
Most integrated supply contracts experience immediate savings in processing costs at the customer level. Those costs are moved to the supplier who generally absorbs them, thinking the increased business will offset the increase in overhead.
Let's stop right here. Our first problem is we're shifting work, rather than eliminating or refining a process. Without process refinement by the supplier, process cost savings disappear after a short transition period.
Many manufacturers take the position that integrated supply is a distribution issue. Surprise -- where do you think the second year integrated supply savings are going to come from? The distributor, in an effort to show continued cost savings, starts knocking on the manufacturer's door for price reductions. The manufacturer will usually give up some margin thinking this will guarantee a large chunk of business for an extended time period. Wrong again: year three changes that.
Year three is the year to go beat on the supplier a little harder, which results in the supplier finally pushing back and saying, 'No more.' Now comes the substitute product part of the cycle. The supplier, in an effort to show continued savings, starts searching for new, less expensive sources. Yes, we all know the manufacturer should be bringing in items that increase productivity and make the unit price of an item a non-issue. In most instances however, the manufacturer and distributor representatives lack the proper training needed to communicate productivity savings to the customer, leaving unit price as the only cost driver.
Now we hit year four, the first year of no significant savings. No savings in year four usually results in an unpleasant customer/supplier relationship for year five, often the contract term. The customer, in spite of the success of years one through three, now thinks their favorite contract supplier has become lazy and complacent. The distributor, in a desperate move to avoid a re-bid, usually cuts their gross margin.
Does this sound familiar to anyone? Now for the missing piece: most big name suppliers in integrated supply have gross sales per employee of industry average (a popular statistic for measuring productivity in distribution). Do I have your attention now? Most suppliers selling integrated supply and all of its benefits have average productivity. Think about what that means.
At some point our customers will wake up and say, "If you're so good at refining my processes and making me more productive, how come you're just average?"
The way to ensure the long-term success of integrated supply is to review your processes internally and begin refinement immediately. This should be done with manufacturer involvement and a review of their processes. Are you practicing the concepts of integrated supply at home? If not, maybe it's time you practiced the concepts you're selling; it could make or break that integrated supply contract in the long run.
Todd Loftis is president of Tools & Metals, Inc., of Fort Worth, Texas.
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