Integrated supply has become a major force in our industry. So much has been said about the cost savings and streamlining, but does integrated supply really provide all of these benefits without any downsides?

I would like to cite an incident in my market where I believe integrated supply has been a hindrance, rather than a benefit to everyone involved. A faithful end user had been using an abrasive product that one of my vendors supplied through the traditional STAFDA distribution channel for nearly 10 years. They were very satisfied with the performance and pricing of the product through the distributor. We continually upgraded the product, and always demonstrated the improvements to the end user. Then the end user decided to enter into an integrated supply contract with a local integrator. This is where the break down began, and where I believe the fundamental flaw of integrated supply can be found. The integrator obtained the list of current suppliers, and contacted my vendor about supplying the abrasive product that the end user was requesting. Unfortunately the vendor did not have a relationship with this integrator, and allowing them to supply this one product did not fit with their distribution model, so they declined to participate. The integrator then went to the original distributor to supply the product to them. The distributor was willing to participate, but only at pricing comparable to what they were selling the end user at, since they had invested a great deal of time and energy servicing the end user, and needed to recoup these costs. Since the end user was requesting this product, the integrator agreed, and added its standard mark up to the costs, thus raising the net cost to the end user above what they were paying before their integrated supply contract, which was supposed to lower their costs.

Eventually, the end user went in search of a lower cost replacement. Unfortunately, they were totally dependent on the integrator to solve the problem, as the competitive distributors in the market had long since stopped servicing the end user. This dramatically reduced the flow of new products and ideas to the end user, as the integrator was the only one with access to the end user, and many distributors are reluctant to bring their new ideas and products to a competitor.

The integrator is also in a difficult position, as they function on a very slim margin, and only have access to the suppliers that they have relationships with. This drastically limits the products and innovations made available to the end user. In this case, the integrator is providing a similar product that one of their current suppliers offers. The end user is not satisfied with the replacement, but cost became too great an issue.

So, now we have a manufacturer who lost a sizable end user, a distributor who lost a major account, an integrator working on a very slim margin, and an end user who is not satisfied with the product being supplied. So my question is: Is integrated supply really good for our industry?