As the economy has slowed and more businesses are looking to save time and money, integrated supply has once again become a hot topic. A meeting of a distributor management team to discuss integrated supply might go something like this:

President: "Our customers are clamoring to reduce the number of suppliers they've got. Let's contract with our best customers to buy all their supplies from us. So, what's the problem?"

Sales manager: "Well, we'll have to drop prices. We price some of our lines too high right now."

Operations manager: "Actually, the cost of buying and stocking will be the real problem. We have to have a better margin."

Personnel manager: "The biggest cost we'll have is finding people to man the tool cribs and make extra deliveries."

The battle between price and margin, and the struggle to hire and keep qualified employees, seems endless. Salespeople want to be most competitive on price; operations needs a healthy margin to survive and continue to purchase products; management wants competent, trustworthy workers in all locations.

All these problems must be addressed when considering an integrated supply situation, which will, according to a Frank Lynn & Associates report, grow by 27 percent annually. INDUSTRIAL DISTRIBUTIONS 55 th Annual Survey of Distributor Operations reports that 60 percent of distributors with over $15 million gross revenue have integrated supply contracts.

Developing a contract that works for the distributor and his customer in the most efficient way is an art and a science, according to a study done by David P. Woodrow of professional services firm Arthur Andersen. In the study, done in 1999 for the National Assn. of Wholesaler-distributors, Woodrow says that whether distributors use complicated analysis or less formal forecasting methods, a detailed sales forecast "helps the distributor-wholesaler actively mold the future."

That is, after all, part of the goal of integrated supply: to have on hand what the customer needs before he needs it. If he thinks he needs something else, part of the job is to show him you have the product he actually needs ready for him.

Answers to the questions about best pricing and just-in-time inventory are critical to the success of an integrated supply contract. Distributors need first-hand knowledge of the customer's manufacturing and purchasing operations.

Above all, expert opinions about best practices in contracting integrated supply agreements all stress one thing — communication between customer and distributor.

"Sales forecasting may be only one piece of the operations puzzle, but it is a process with far reaching implications," Woodrow says in a report for the National Assn. of Wholesaler-Distributors. "You purchase the right amount of product at the right time, keeping inventories moving and avoiding losses associated with overstocked inventories. You fortify your relationships with customers because their confidence in your consistent ability to meet their product supply needs grows," he added.

So, the first piece toward solving the integrated supply puzzle is forecasting, and it involves more than the amount of goods and services the customer will need in a given period. For the distributor to finalize a contract beneficial to both parties, a clear, precise and complete forecast is vital.

"Sales forecasting helps the wholesaler-distributor actively mold the future, not just passively predict it," Woodrow says. "As such, forecasting is not an end in itself. It's never finished and it should predict delays in product launches, the impact of new products on existing products (cannibalism) and sales that may occur in the coming year but were worked in the current year (rollover)."

"The potential for an integrated supply relationship to create customer value varies based on the nature of the customer's MRO requirements," says Dr. Adam Fein of Pembroke Consulting, a distribution-management consulting firm.

Value for the customer comes in the form of simplified operations, reduced costs due mainly to personnel reduction and better stockroom performance. However, the distributor must complete a list of his own needs to determine if he can make a profit.

"Value for the distributor must come from acceptable profit margins on products and/or services," Fein says.

Closely scrutinize the number and type of emergencies the customer has called about. What were the results? Can you balance the costs of such incidents with the profit the overall contract will produce? Forecasters must determine the most likely type of problem that occurs, on average, and what it costs the distributor.

Integrated supply greatly reduces or eliminates the need for many different suppliers. Payables and purchasing departments save money when they minimize the number of vendors.

Cameron & Barkley in Charleston, S.C., is a distributor with many years of experience in costing integrated supply contracts. According to Joel Bateman, executive vice president of marketing and global business development for Hagemeyer North America, experience with all the cost factors involved in an integrated supply contract and knowing a customer's needs intimately are the two main factors that help create a successful venture.

One of the biggest hurdles in negotiating a contract is the level of communication between customer and distributor. "As we begin the discussions with the customer and establish what the customer needs may look like, we rely on our expertise in the business," Bateman says.

"The most likely reason for missing costs is underestimating the scope and complexity of handling integrated supply business. It is easy [for distributors] to jump in and think they can somehow make money and optimistically bid at levels that will not allow for a reasonable profit," he says.

At Cameron & Barkley all costs, whether fixed or variable, are considered when developing a proposal. Those costs are determined by detailed discussions with the customer. Perhaps most importantly, the customer and distributor should be flexible with each other.

"We offer the customer a picture of what we can do, have done and think may be appropriate in their specific case ... Our experience is that nothing is for the life of the contract. We will always be fine tuning agreements to meet the customer's changing needs at any given point in time," Bateman says.

Some of Bateman's other observations:

• The wider the breadth of a contract, the better. "Our best offering comes when we can furnish the customer our broadest package of goods and services," he says.
• What customers don't want can be important. "We may write a contract that allows for storeroom management at some sites where it is applicable and not at others where it is not applicable for various reasons," he says.

Some reasons for failure:

• Not enough initial effort is put into the program
• Unrealistic expectations (by distributor or customer) are common about the ease of developing an integrated supply program
• Changes in program management on either side creates problems
• Failure of either party to continue to work the program over time.

It is important that you realistically assess your own capabilities in all aspects of what will be a complicated design and implementation process, Fein says.

Some important considerations that may be overlooked when considering integrated supply are included in a survey questionnaire by Precision Industries, an integrator based in Omaha, Neb. Dennis P. Circo, CEO & board chairman, advises that if you are considering becoming an integrator:

• Do you have a wide product offering of "mission critical" parts?
• Do you have the ability to buy critical parts directly from the manufacturer?
• Do you have direct communication, including computer-to-computer, with key manufacturers?
• Do you have direct access to engineering expertise, in your workforce and through manufacturers?
• Do you have logistics routing software to save freight costs?
• Do you have custom software to integrate and modify information systems with customers?
• Do you have adequate backup inventories to guarantee immediate delivery?
• Do you have a plan to guarantee uptime for computer systems?
• Can you supply on-site product specialists for mission-critical parts?

Richard Decker, director of integrated supply for Industrial Distribution Group, has been creating integrated supply contracts since 1981. The earliest version was simply storeroom management, he says. Today, the main problem that arises, after the fact, is that the distributor over-commits and under-performs, he says.

"[IDG] looks for fit first. Our core competency is cutting tools, abrasives, hand and power tools, and general MROP, so I'm looking for guys who remove metal, and assembly and utility customers as the most likely integrated candidate," Decker says. "By concentrating on getting these disciplines, instead of food processing customers, for instance, IDG brings its core competencies to the table up front. We have been successful in integrated supply in all industries, but perform our best in those three areas."

"Many distributors are offering contracts with items that they fulfill but bring in very little added value. It makes no sense if the distributor isn't making money and the customer isn't saving costs. Both of those have to happen," he says.

When the contract is done correctly, all factors are included, measured and monitored. Emergencies, variable costs, fixed costs and pricing are all calculated.

"That's the main thing [distributors] don't do — get all the costs that touch the project. The other thing that a distributor must have is the willingness of the customer to truly partner using open data analysis and honest communication. The distributor needs to make money and demonstrate how they make money, and the customer needs to know that," he says.