In 1983, James Warren, who would go on to become president and CEO of Cameron & Barkley Co., attended a meeting at DuPont's regional office in Charlotte.

“They had heard about ... a relationship we had with another account and the things that we were doing with them,” Warren recalled in a 2003 interview with Michael Marks of Indian River Consulting, three years after C&B was sold to Hagemeyer. “They announced they were going to consolidate their purchases and really require distributors to do different things for them. They were going to put in an integrated supply program.”

It was the first time a name was applied to a new business model, in which a distributor buys and manages the on-site inventory for a manufacturing plant.

“It was quite a challenge because we had to figure out how to get paid for all the things they wanted us to do that were extra things that we typically didn't do for an account,” Warren told Marks in an interview for the National Assn. of Wholesaler-Distributors. “They actually wanted to reduce the cost they were paying for the part. That was the first time where we really got into a room with our customer and sat down and talked about how we do business, how they did business and what costs could we actually look at taking out of the process, so that in the end … the functions we provided would become a valuable part of their business.”

A quarter century later, integrated supply is still going strong. Roughly 40 percent of distributors polled for Industrial Distribution's 61st Annual Survey of Distributor Operations last year reported having integrated supply contracts with their customers, attributing nearly 20 percent of total 2006 revenues to those agreements.

Bob Ashby, industrial practice leader for Frank Lynn & Associates, a Chicago marketing and channel strategy consulting firm, notes that his research indicates that about $14 billion of the roughly $125 billion annual MRO spend by manufacturers is made through integrated supply contracts.

But the traditional model for integrated supply—in which end-users of MRO materials outsource the procurement, logistics, inventory and on-site management of these products to a single outside provider—is expanding.

Developments in information technology and the constant demand to take costs out of the supply chain have taken integrated supply from the larger manufacturers with the multi-million dollar budget to justify it and made the practice viable for smaller, mid-market players.

Ashby surveyed more than 200 sales, purchasing, product and marketing managers and business owners for a report on integrated supply. His research shows that traditional contracts account for roughly half of the $14 billion spent annually on integrated supply business. Limited on-site contracts account for about $3 billion of the total, with the remainder, about $4 billion, going to third-party logistics and other outsourcing providers.

The market for these newer, hybrid models is made up of those mid-market manufacturers and their smaller MRO spends.

“Originally, to do a full storeroom management [contract], you typically had to be buying in excess of $1 million, probably closer to $2 million than $1 million, to be able to justify the cost associated with it,” notes Charles Lingenfelter, president and CEO of Industrial Distribution Group (IDG). “New technology available at a lower cost today has allowed distributors and integrators to come up with programs to take the cost out of the procurement and fulfillment process and deliver that down to customers that buy less than $100,000 a year.”

At IDG, that means offering an array of options to customers, ranging from procurement outsourcing that standardizes purchasing procedures but doesn't provide product, to third-party logistics services that streamline product distribution but don't manage on-site inventory, to pure integrated supply operations.

“The pressure on manufacturers to take cost out of their processes has made them more willing to accept and look at solutions other than their traditional approach to business over the last decade. Now they're saying, 'Let's streamline this,'” Lingenfelter says.

To take advantage of the trend, the company's Flexible Procurement Systems division will create a customized option for each customer depending on their needs and the size of their MRO budget.

“We offer many different solutions to the customer and we design the solutions that we mutually agree will deliver the greatest value, everything from full storeroom management to an e-commerce solution,” he explains. “We are not a third-party-logistics company, but we have many of those [services]. We call them our mid-market solutions.”

It's a similar tale at Precision Industries, according to president and COO Chris Circo. One example is the company's contract with the Coca Cola Co., in which Precision manages the soft drink maker's entire vending and fountain machine repair parts business in the United States.

“That was a very unique, service-based model for us,” Circo notes. “We actually provide tactical procurement services, inventory management services and they have utilized our own internal IT [platform]. … Five years later we have a relationship where we provide about $15 million worth of product to them. It's integrated supply combined with third-party logistics-type systems, but it really started just as a services agreement.”

Catering to smaller manufacturers—or even large manufacturers with smaller, far-flung plants—is part of the strategy behind such a hybrid model, he adds.

“All of our major customers have small plants and we have to have some sort of model for those plants, whether it's centralized procurement or hub-and-spoke delivery,” Circo says. “There's no plant that's too small for an overriding integrated supply contract using an off-site or centralized model or [some type of] commodity management program.”

That said, the amount spent annuallyis an important consideration in determining the scope of an integrated supply arrangement, whether it's the traditional on-site storeroom management model or a less traditional option.

“Site size and spend is very relevant when you start talking about the services customers want to implement. If a customer has a site that spends around $500,000 a year and they want to put 24/7 coverage in place, you start to get to a point where the business case doesn't work unless you start looking beyond our industry's traditional value drivers,” Circo says.

In the end it goes back to Cameron & Barkley CEO James Warren's observation that integrated supply contracts require distributors to figure out how to get paid for providing services, not products.

“Figure out what it is that you're doing that's adding value. You can't get paid on piece price reductions anymore,” Ashby advises. “It used to be that integrators would come in and say, 'Hey, we're going to reduce you year by year by squeezing the suppliers.' That's not a long-term business strategy. [Integrators need to] manage inventory, make sure there are no stock outs, manage [material safety data sheets], get into process management, applications management. That way they get into being more of a service provider.”