All indications are that integrated supply and the signing of national contracts will increase in the next few years. One survey of end users involved in integrated supply indicates that 31 percent of purchases were made from such a contract. Within five years, they expect that amount to double. That means those customers will be buying over 60 percent of their MRO supplies in this framework.

The study, sponsored by the Industrial Distribution Assn. and Industrial Supply Manufacturers Assn., was conducted by the Thomas A. Read Center for Distribution Research and Education at Texas A&M University.

The survey also found that "the scope of the agreements is increasing ... and this suggests customers are asking distributors to provide more products and services than originally covered in the contract."

The trend toward national contracts is having the most profound effect on distributors with less than about $45 million in annual revenue, according to Frank Lynn, of Frank Lynn & Associates, an expert in the various business aspects of integrated supply.

"Likely left out of this supply loop is the medium-sized distributor who typically has three or four branches in a 200-mile radius and annual revenue from roughly $20 million to $45 million," Lynn says.

He says it's their size that puts them at a disadvantage. Large buyers view them as unable to supply needs outside a narrowly defined region.

"Those medium-sized guys ... aren't big enough to get big-plant contracts. The technology and sophistication needed to run multi-plant tool rooms are more important than the products. That's where the mid-sized distributor is squeezed out," Lynn says. "The plants are always looking for cost savings, and that is not found in the product's price anymore. It involves taking inventory levels down, running better information systems, taking people out of the operation, and some aggregate pricing. It involves, most of all, efficient storeroom management."

Lynn says mid-sized distributors face other integrated supply obstacles, as well. First, when they are playing on a national basis, who takes the fiscal responsibility?

"If things go wrong, and they often do, who is stuck for possibly huge costs involved? The mid-sized distributor is just not in a position to cover those losses," he says.

Who will manage the corporate side of the contract? While delivery of goods and services are made at the plant level, at some point distribution management must deal with its customer's corporate purchasing management, Lynn says.

Lastly, do mid-sized distributors have the information technology systems in place to handle the task? Many computer systems are still not compatible, Lynn says, and getting them to work together is a big job. Chances are, the customer will want the distributor to become compatible with his systems, not the other way around.

One of the ways regional distributors can take advantage of quantity purchasing and national account business is by joining a distributor group.

The buying group, or marketing consortium, involves distributors joining a central association whose management is charged with addressing the problems Lynn outlined. Management markets the distributor group to multi-location corporations on behalf of distributors.

In such a scenario, member distributors deliver products and services to customer locations in their region. They purchase goods through the buying group at competitive prices and may be required to stock fewer items. The distributor may not need to do as much application engineering as in the past for the customer. Often, that kind of legwork has been done in another region or plant and is shared throughout the group.

Just as important, group management is responsible for addressing legal issues, setting the content of contracts like pricing and brands, and making sure distributors are protected and can make a profit.

Ed Sullivan, president of IBC/Industrial Supply-Plus™, a buying and marketing organization for distributors based in Hartford, Conn., has signed over 50 distributors with 108 locations. One of the company's benefits is participation in national contract supply. IBC was launched in 1999.

"We expect that 100 percent of our members will be participating in national contracts in the next two years. It is one main reason they join a group like IBC," Sullivan says.

Local plants typically have little control over the signing of a national, or international, contract, Sullivan says.

"Even if a distributor knows that his customer's headquarters is planning to contract for goods and services, the chance for the independent distributor to participate as a stand-alone company is small," he adds. "The reason to join a buying group or marketing group like ours is to take advantage of the group's ability to attract national contracts."

The price has to be right because national contracts must benefit everyone involved. IBC has manufacturer partners who guarantee the right price and delivery to member distributors.

To illustrate the problems that regional distributors are having with multi-location customers, Sullivan described how two companies who joined IBC lost business this past year, prior to becoming members. In one case, the distributor had 25 percent of his business at one plant and despite the close relationships he had with local purchasing and the tool rooms, he found out too late that all MRO buying would go through a national contract signed in another state.

The distributor had a 35-year, multi-generational relationship with the customer, but that didn't help because all the decisions were made at the corporate level. That's why Sullivan says his group works from the top down in entering bids for contracts.

"If we hear of a bid going out, or rumors to that effect, we now contact the corporate purchasing executives to get the facts. We don't want members to find out about contract details when it is too late. We are trying to resurrect one of these situations where the distributor was left out," he says.

One particularly sore spot for independent distributors is that a consolidation buy-out can happen very quickly and without foreknowledge of the purchasing team at a particular location. That, says Sullivan, leaves the distributor out in the cold. In one case, he says, the contract was put through the entire bidding process before local plant management knew it must change suppliers.

The minimum requirements to join IBC include good credit and payment history, solid business practices, open-mindedness and a willingness to work with other distributors, Sullivan notes.

Not everyone will be convinced that they need to meet these requirements, or join a group. Distributors who remain steadfastly against national supply orientation might one day, according to Sullivan, find themselves losing valuable relationships and ultimately jeopardizing their businesses.

"No independent distributor can afford to be an island anymore," Sullivan says. "[National contract supply] is not just a fad. It's been slowly gaining momentum for over ten years."

In addition to the aggressive pricing programs that groups offer, customers can receive one-invoice billing and have national stocking capacity for emergencies while maintaining the service of their local distributor.

SupplyFORCE, an e-commerce based alliance of distributors, purchased the national contract business of the Affiliated Distributors network in November, 1999, when it was launched by AD as an "integrated supply and e-business solution." It is now wholly-owned by its 300 distributor members and focuses on national contract participation of its members as its driving force.

"We're a group of industrial distributors organized to service national accounts. Our structure is very formal," says Thomas Wright, director of national accounts at SupplyFORCE's headquarters in King of Prussia, Pa. "Distributors sign a 10-year agreement to supply goods and services to those accounts. We protect the business of local and regional distributors."

SupplyFORCE, Wright says, deals with corporate customers at the highest levels for members, and offers distributors a national focus, national pricing and a corporate profile. The distributor provides local fulfillment. SupplyFORCE also has a network of preferred suppliers.

"Our customers spend less because we provide one-point invoicing. We also offer cost reduction by addressing activity based costs, just-in-time inventory and training in the plant," Wright says.

SupplyFORCE is growing in scope and number as more distributors realize they are in jeopardy of losing larger accounts due to circumstances beyond their control, Wright says.

Each distributor must evaluate his unique business relationships. Will he possibly jeopardize those relationships in trying to manage more of the supply chain process than he has in the past? Wright believes he will.

One way that SupplyFORCE has attacked the problem of supplying all the needs of its corporate customers is to try to balance its membership over supply specialties, like abrasives, cutting tools, power transmission, etc.

"The requirements for membership are that they are a stocking distributorship with franchised lines; they have basic technical requirements; if they are a specialist, they have stock and expertise in that vein," Wright says.

Contracts come with risks. Both distributor and customer must have a greater amount of trust in each other. The experts agree that the resulting new relationship will depend on the comfort level each has with that fact.