Another look at integrated supply

A new study shows continued growth in integrated supply

By -- Industrial Distribution, 5/1/2000

Integrated supply continues to be one of the fastest growth segments of industrial distribution, according to Frank Lynn, a consultant who has closely followed its growth patterns the past few years. Lynn says that sales from integrated supply contracts are expected to reach $11 billion this year.

But beneath those figures an interesting phenomenon has occurred. Lynn notes that 20 percent of customers who signed integrated contracts a few years ago have changed their integrated suppliers or have taken their MRO buying back in house. Lynn points out that most of these contracts are negated in the third of fourth years of the integrated supply arrangement. Why the change?

In the first year of an integrated supply arrangement, it's basically a "piece of cake," in Lynn's words, to reduce costs. As distributors reduce their customers' inventory and implement new procedures, costs are reduced. The problem occurs in the third year when reducing costs becomes harder.

Buyers probably had unrealistic expectations when they decided to go to an integrated supply arrangement for their supplies. And distributors, wanting to get in on the ground floor of these agreements, thought the goals could be met. In many cases, they couldn't be and were unrealistic from the start.

At least three major companies and a few others groups involved in integrated supply may be getting out of that business, according to several sources. Frankly, they just can't make money since they signed those agreements.

Our own studies show that about 24 percent of distributors have integrated supply agreements in place. And most of these distributors say they will have more such agreements. However, companies not involved in integrated supply say they have no intention of doing so in the future.

There is little doubt that integrated supply will continue to be a powerful force. But a word of warning: if you are looking to establish an integrated supply arrangement, have a complete grasp of the costs involved. If you have to show a cost reduction in each year of the contract, document those cost savings. Don't give away your services without charging for them: maintenance seminars, training, 24-hour delivery are just some examples.

Integrated supply isn't a fad that will pass into the night. There's tremendous opportunity for buyers and sellers-but only if the goals for both parties are realistic and attainable.