Don’t diss the distributor

Panel discussion shows the benefits of working closely with your key MRO suppliers

MRO Today editor Paul V. Arnold recently chaired a panel discussion at the Institute for Supply Management’s annual MRO Group conference. The topic of the panel discussion centered on the changing relationship between manufacturers and the industrial distributors that supply products and services to their plants. Specifically, it sought to answer questions such as:
• How well do you really know your distributors and how well do you work with them?
• What's important in the relationship?
• And, have you evolved from a relationship based strictly on product cost to one of total cost and “win-win” solutions?

The panel consisted of two MRO procurement leaders from manufacturing companies and two executives from industrial distribution companies that do business with these MRO leaders.

The distribution executives, Tom Berger and Dale Boschke, represent firms that are members of the Industrial Distribution Association, a national trade organization for distributors of indirect materials. Berger is based in Omaha, Neb., and Boschke is based in Menomonee Falls, Wis.

The procurement leaders were:
• Terry McCormick, the manager of manufacturing engineering at Haldex Hydraulics in Rockford, Ill. One of his functions is overseeing MRO management for the company.
• Stan Mason, the senior manager of global purchasing for Avaya Communication in Omaha. Mason leads a staff that procures all materials and services required to support that manufacturing site.

What follows are some of the key items discussed during the question and answer period.

Paul Arnold: How has your relationship with your industrial distributors changed in the past few years? Are there still aspects of an adversarial relationship? Or, do you consider yourselves part of the same team?

Terry McCormick: From our perspective, the relationship has changed. It started off the traditional way. If we needed an item, we would send out for five quotes and take the cheapest bid. It was a basic “us vs. them” relationship. But one of the key roles that changed for us was understanding how we wanted to run and manage MRO. In the past, it was the second consideration compared to direct materials. It was always a less organized area with fewer controls. It wasn’t focused on as part of an integral business system. Change came after Haldex defined what we wanted the MRO side to accomplish and the supplier defined how they were going to meet our changing needs.

Stan Mason: Avaya’s relationship with its distributors was adversarial. We certainly played things close to the vest. Only enough information was given to get bids. Additional information was not shared. That thinking has done a 180. We now invite suppliers in. We are willing to share virtually all information related to a given project. We found there are good things that come from that. It not only allows the supplier to see what we are looking for, and who they are dealing with, but many times they’ll come back with an offer, a suggestion, that may dramatically change what we were looking to buy. We find that, most times, suppliers know more about our business than we do.

Tom Berger: I think that the relationship with our customer base has changed significantly. We are closer, as Stan said. But it’s also much more trusting, significantly more open, more creative and much more demanding. And that is a good thing. By demanding, I mean that the expectations on companies like ours are higher than ever. Customers expect performance. But the good thing is that we know what we are measured on, and how we are measured. The end result of that type of relationship is that you do things more closely, work toward common goals and come up with interesting ways to solve problems.

Arnold: How do Haldex and Avaya measure supplier performance? What are the key performance metrics?

Mason: We have a formal measurement program. It’s an evaluation that is shared with the supplier on a monthly basis. It measures strictly two things: delivery performance and quality. But if I were to stop there and tell you that is the extent of the measurement program, that wouldn’t be true at all. We have an internal program called Forum for Cost Improvement that asks suppliers to  develop cost-reduction ideas. We track those. They are completed, signed off on and tallied. At the end of the year, that is a major piece of the supplier evaluation. Suppliers that submit suggestions and help us implement the ideas rise to the top.

McCormick: Delivery, quality, value, improvement and support are tracked. We call it the Supplier Continuous Improvement Program. It’s the same program we use for direct materials suppliers. The focus is heavily weighted on service. In our facility, every once in a while you have a hiccup. Responsiveness in solving the problem on the plant floor is key. You can shut down a product line and fail to ship to a major OEM if a solution isn’t found quickly. Finding that solution is the name of the game.

Arnold: In your evaluation efforts, just how important is the concept of documented cost savings?

Mason: Most every contract we write has a clause that expects 5 percent improvement each year on the total spend. I don’t care if that 5 percent is price or cost reduction. If it’s price, the supplier probably struggled to get the 5 percent. If it’s cost reduction, it probably far exceeds the 5 percent.

McCormick: We are in a mature industry that’s highly competitive with foreign competition. So, I expect our suppliers to help us find ways to reduce cost, improve our systems and be more productive.

Arnold: You’ve mentioned cost reduction, quality and delivery. So, I’ve got to ask. Where on the list is product price? And, is it at the same importance level as it was three to four years ago?

McCormick: From a Haldex perspective, price is not a top-rated item. It’s obviously something we monitor. But more of it comes down to the process improvements and the value-added services that the supplier provides.

Dale Boschke: As a distributor to Haldex, we focus on reducing their costs from an administrative standpoint, a manufacturing standpoint and from a cost perspective. We like to get involved with our customers. The better we know our customers, the better we can get involved and entrenched in their manufacturing operations and be a part of their team. That’s where the relationship is won and lost.

Mason: Price is good and price is an advantage, but I’ll take it as cost reduction any day. That cost reduction may come from access to inventory. It may come from speed in delivery, or in finding the item that gets the machine back up and running.

Arnold: What are some of the creative ways that distributor and manufacturer come together to reduce costs and increase productivity on the factory floor?

Berger: One of our on-site people at Avaya noticed a bin full of gear pumps about to be scrapped. These were used on missile-critical machines that wind electric wire. With a little investigation, our guy found out that for each of these, the pump and the motor was OK. The problem was with the bearing. It would spin out and ruin the casing. We said, give us an opportunity to see what we can do about this.

Well, our guy contacted another customer that had equipment to bore out that housing. That way, a larger, stronger, longer-lasting bearing could be installed on the gear pump. We have repaired 20 of those pumps. The new ones, because they have larger bearings, don’t break. The pump repair costs Avaya $3,000 to $4,000 per unit as opposed to a replacement at $15,000.

McCormick: When we started the integrated supply agreement with our distributor about 3 1/2 years ago, one of the directives from our corporate office was to limit the expansion of new labor. We could not hire additional people. Well, with the integrated supply agreement, the distributor had two of their people work in our stockroom. That’s a huge cost savings for us.

In another instance, we started a new venture with a key customer where we developed a manufacturing process dedicated to them. From the beginning, the distributor brought suppliers to the table to solve the technical problems for the manufacturing process. That allowed us to start this product line in a relatively short amount of time.

Boschke: One of the people we put on site at Haldex began looking at cutting tools as they came in to the tool crib. He realized many of the tools were not reused or resharpened. He helped set up a retipping and resharpening program that saved Haldex $83,000 annually.

Conclusion
How does this article impact you? Get closer to your key industrial distributors (like the one listed on the front or back cover of this magazine) and talk frankly with that firm about ways you can partner for success.

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