Streamlining Distribution

Distributors, manufacturers and resellers use supply chain
management to deliver more efficient service and price benefits

The federal IT market faces increasingly complex products and systems, shortening product life cycles and ongoing pressures to cut costs. Over the past two to three years, procurement reform has given federal officials more flexibility to deal with IT requirements in a more efficient manner. And in the marketplace, manufacturers, distributors and resellers have enhanced their ability to efficiently deliver the products needed, when they are needed.

A major reason for this is found in the adoption of a supply chain management philosophy: a holistic look at the delivery of products to customers that addresses production, inventorying and custom configuration, as well as the ultimate shipment and deployment at the end-user's site.

The idea is to streamline the entire channel of distribution so that each link in the chain holds a minimum amount of inventory, while simultaneously accelerating delivery of products to the ultimate consumer by harnessing information technology and sharing market intelligence throughout the channel.

As a result of the refinement and offering of these types of integrated supply services over the past two to three years, government users are getting the products they need more quickly, and often at lower cost.
According to Gary Newgaard, vice president of Compaq Federal, a pronounced trend toward supply chain management in the federal sector began as procurement reform was rolled out in 1994. "You've seen a rapid climb by [General Services Administra-tion] schedule business, as opposed to the [indefinite-delivery, indefinite-quantity] business. With GSA business, there's much less likelihood of manufacturers or integrators being sole-sourced on a contract ? that makes it harder and more expensive for them to manage and pay for inventory and delivery of technology to the customer."

Adds Jay Lambke, vice president of the government and education division of Ingram Micro, Santa Ana, Calif., "In the last two or three years, all of the distributors have become more focused [on government customers] as the market has become much more commercial-like."

The commercial market has been quicker than the federal sector to adopt supply chain management approaches that can take time and cost out of the procurement process. Explains Matt Millen, director of government sales for Clearwater, Fla.-based distributor Tech Data Corp., "In the traditional distribution model, the manufacturer would typically hold between 45 and 75 days of supply, and the government integrator might keep 30 to 40 days of inventory on hand," he says.

Millen says, when you add up the days of inventory in the channel, this system tends to be inefficient and costly. With supply chain management approaches, distributors and their manufacturing and reseller/integrator partners are working to take "time and touch [handling]" out of the procurement and delivery cycle, he says.

"Everyone is under pressure to get costs out of the channel and sell the product [less expensively]," says Donald Bell, chairman of Bell Micro-
products, a major IT distributor based in San Jose, Calif.

Others agree.

"People are looking at new ways to deliver the product. No one can afford the excess overhead and fat in business organizations ? everyone is running as lean as possible," says Tim Collins, vice president of sales for Gates/Arrow Distributing, Greenville, S.C. "This creates the opportunity for each link of the supply chain to depend on the other links," he says.

Another factor driving supply chain management is the shorter life cycle of products, which puts pressure on manufacturers, distributors and resellers to keep inventories lean. And supply chain management efforts are bearing fruit: "Realistically, we've seen three to 10 days taken out of the [ordering and shipping] cycle," says Rick Stephens, senior vice president of North American operations at El Segundo, Calif.-based distributor Merisel Inc.

Government IT managers are beginning to learn about the new service and pricing options that supply chain management approaches can offer.

"More and more of the government procurement managers and senior procurement officials are getting an education on what the supply chain brings to them," says Curt Cornell, director of the government and education division at Merisel. To further that education, Merisel staff have been meeting with resellers and holding executive roundtables. "We're doing everything we can to increase the awareness," he says.
For resellers and end customers, the benefits of supply chain management are "timely and accurate delivery and reduction in cost," says Compaq's Newgaard. This ultimately delivers a lower cost to the federal government. For resellers, integrators and their customers, the big benefit of a larger role for distributors in a supply chain management model is that it lets the resellers and integrators focus on what they do best: providing solutions, says Gates/Arrow's Collins. "They don't have to concentrate on the supply chain aspect" of fulfilling customer assignments.

Monte Coleman, vice president of marketing with Ashburn, Va.-based Decision Support Systems, adds that the shift to supply chain management is putting increasing pressure on build-to-order systems to operate more efficiently.

"In fact," he says, "we see supply chain management driving a new level of granularity in how government agencies order technology. We believe that procurement officers will demand adherence to precise specifications, which is giving rise to a build-to-spec requirement."

A larger role for distributors in supply chain management also benefits manufacturers. Says Ingram Micro's Lambke, "Manufacturers in droves have seen that they need to get back to their core business: research and development, and marketing, and let the distributors get the products to
customers."

The partnership of distributors, resellers and integrators in a supply chain management model for the federal marketplace is most pronounced in the Washington area, but it also is leading to improved sourcing and product delivery outside of the Washington market, says Gates/Arrow's Collins.

"Resellers, say in Ohio or California, can propose a product, and ? if they have the right relationships with the right distributors ? know that they've got the ability to deliver," he says.

Gates/Arrow is paying value-added resellers and resellers an agent fee in these types of transactions, he adds.

Not surprisingly, the Internet has been one of the enablers of today's supply chain management approaches. Electronic commerce and its technology have forged electronic links in the supply channel, underscores Compaq's Newgaard. These links, including online ordering systems at the customer or reseller/integrator levels, have made a tremendous difference ? adding speed and convenience. It also reduces transaction errors that are inherently an unwanted byproduct of paper-driven systems.

As an example of the move to Web-based procurement, by early July, distributor Comstor will go online through e-commerce site Fed Center at www.fedcenter.com. Through this site, operated by Reston, Va.-based Digital Commerce Corp., government buyers or "procurement shops" will be able to electronically buy products on Comstor.Net's GSA schedule.
Another enabler of supply chain management has been cooperation between manufacturers, distributors and resellers to produce a seamless ordering and delivery system.

Supply chain management creates a closer link between distributors and manufacturers. The two are linked electronically to process as well as forecast transactions. And some distributors, such as Merisel and Tech Data, have placed warehouses essentially at the end of major PC/server manufacturers' production lines ? freeing manufacturers of the need to inventory products, and getting products into the distributors' inventory as soon as possible.

According to Tech Data's Millen, this step alone has taken a 21-day process and reduced it down to three days.

Besides placing warehouses adjacent to manufacturers, distributors are increasing the number of warehouses they operate around the country. Bell Microproducts, for example, now has two warehouses in San Jose, Calif., along with others in Marlboro, Mass., Minneapolis and Toronto. It's acquiring a company in Delaware that also has a warehouse in the Miami area. The goal, according to Chairman Donald Bell, is to have overnight shipment capability to anywhere in the country.

Distributors' emphasis on supply chain management also has included increased support for resellers. Gates/Arrow, for instance, recently added three business development managers in the Washington area who work with Compaq/Digital, Hewlett-Packard and IBM, respectively, to support resellers' transactions with these manufacturers. At its headquarters office, Gates/Arrow has created a Bid Desk, that supports resellers in preparing bids for the federal market. This includes supporting resellers in dealing with the manufacturers that can provide products.

Ingram Micro also has put in place similar support for integrators. "Four to five years ago, we waited for resellers to win the contracts, and then we would provide them with the product on an as-needed basis," explains Lambke. "Today, we have a suite of bid and proposal services, including RFP and pre-RFP services," he adds. The support also includes about 150 sales persons specifically dedicated to support resellers.

Networking products distributor Comstor also offers a range of services to its reseller "agents," says Chantilly, Va.-based Greg Hott, director of government programs. For example, as the holder of a GSA schedule, Comstor has a direct contract with the federal government for the products on the schedule. Both products and pricing on the schedule are updated continuously. On behalf of federal customers, resellers (Comstor's "authorized agents") can order from the schedule, but all product fulfillment, order processing, collection of payment and related back office work is handled by Comstor.Net, which forwards sales commissions to agents. This frees reseller and integrators from time-consuming administrative activities.

Tech Data also provides online ordering services, explains Millen. "We have a Web customization tool kit that allows the reseller to offer Tech Data products online and provide online ordering to their customers."

Similarly, Bell Microproducts has put its catalog on its customers' computers, and updates the information each day, letting customers purchase and configure products online.

"They can execute a [purchase order] or configure a PC over the Web," says Bell Microprod-ucts' Bell. Orders print out in the company's Marlboro, Mass., or Minneapolis warehouses, from which products can be configured and shipped. This example underscores a new reality: Configuring PC and networking hardware has become a major responsibility for IT distributors. Explains Tech Data's Millen, "We either receive base units or components. Then we assemble, based on demand ? thus negating an enormous amount of inventory." This creates a more nimble distribution channel, he says, and lets agency demand drive the final product.
To make supply chain management work, distributors and manufacturers are investing in expensive ordering, tracking and forecasting software. Bell Microproducts, for example, just approved an additional $4 million investment in this type of software. "At least three of our major suppliers" are now implementing sophisticated forecasting/resource planning software, says Bell. As a result, says Bell, forecasts can be initiated by activity at the customer level, "through the distributor, all the way back to the supplier." For distributors like Bell Microproducts, being tied to integrators and manufacturers through such electronic transactional systems means the company can "have the right product in the right warehouse, exactly when the customer wants to have it on his dock the next day," says Bell.

A key part of distributors' supply chain management services is taking on some of the ordering, fulfillment and inventory-carrying responsibilities that many integrators and resellers always had as part of their services.

"Over the course of the last two years, many of the traditional systems integrators that used to have their own integration facilities and maintain a pretty substantial warehouse of product ... [have begun] to rethink that position," explains Compaq's Newgaard. He believes two of the key drivers for that change are the pace of "technology churn" and price changes.

Bell Microproducts' Bell, agrees: "Things come down in price. If you're loaded up on inventory, you're mortgaging the future."

A supply chain management approach that relies on a larger role for distributors and at the same time tries to squeeze inventory out of the system is not a fail-safe method of improving product delivery and reducing cost. One consequence of the streamlined supply chain is that key components and products may be in short supply ? and should be ordered at the earliest possible date. Though he contends that his company carries higher inventory than some other distributors, Bell Microproducts' Bell advises customers and integrators to contact suppliers well in advance if they have a time-sensitive order ? especially if it's a large one. In some cases, on-hand inventories can be as low as two weeks for certain products and components, he points out.

Some resellers believe they can achieve some of the cost and time-saving benefits of supply chain management by working directly with manufacturers, rather than distributors. Depending on the circumstances, Federal Data Corp., a $550 million company, uses distributors or works with manufacturers to source products. "We believe both models can work," says Charles Mathews, senior vice president of systems and technology at the Bethesda, Md.-based firm.

"Our goal is to be able to provide excellent service to our customers and offer them the products and services that they need in a cost-effective manner ? whether that is buying direct or through distribution. We look to manufacturers to adjust their cost structure so it allows us to not pay a penalty, depending on which way we're going. [This way] we can offer the customer the best possible cost."

Mathews believes an approach to supply chain management that relies heavily on distributors does not work well for high-end, custom products, such as high-performance, specialized workstations and servers that it provides to many of its federal customers.

"[These] do not lend themselves to stocking through a distributor," he says.

Federal Data's size gives it leverage that other, smaller resellers may not have. "Because of the high volume that our organization does with our partners [such as Compaq, Cisco], we have enjoyed a high level of service and support from [them]," explains Mathews.
As procurement approaches continue to be refined, players in the federal IT market will find an ever-expanding menu of sourcing options from manufacturers and distributors as they pursue supply chain management approaches.

"Ultimately, Compaq is positioning with its partners [in supply chain management], to give the customer, the federal government, a superb return on investment in the technology infrastructure it takes to manage the federal government, and to reduce the cost of ownership of that infrastructure," says Newgaard.

And while some resellers and end users might think that working through a middle man ? the distributor ? could add inefficiencies and higher costs, distributors contend that the supply chain management solutions they offer should result in better service and lower costs. "They're not going to pay additional monies because of distribution," says Merisel's Cornell. "They are going to save money, and receive product more quickly. Product customization can be done [efficiently]."

Moreover, the traditional distributor now can offer a much wider array of services than simply supplying products and components, emphasizes Keith Wood, East Coast sales manager for Wyle Systems, based in Irvine, Calif. In addition to providing products and supporting bids, value-added distributors such as Wyle provide engineering and design services and even can act as contract manufacturers for custom products and systems, he says.

This article was prepared by the Washington News Bureau, an independent editorial firm based in Washington, D.C.Supply chain management services offered by distributors can take many inventory management and procurement worries off the hands of resellers. This includes ways to ensure availability of products when needed.

For example, for customers, resellers or integrators needing a guaranteed supply of certain key components or products, distributors such as Bell Microproducts offer a number of options. Among them is consignment of fixed amounts of inventory that a customer will need. Customers order the items ahead of time, but are not charged until items are withdrawn from the distributor's inventory. Customers also can request that distributors reserve a certain amount of an item that they know they will need. In this case, the distributor does not bring on the inventory specifically for the customer, but simply reserves a portion of the inventory that it normally keeps on hand.

Similarly, through their ordering and inventory management capabilities, distributors are able to procure all items needed for a large order, and schedule arrival at the reseller or end-customer location so that material arrives incrementally, at a rate that can be handled.

Distributors' support also includes services such as financing and governmental shipping, adds Kelly Ross, director of the government and education markets for Pinacor, a Tempe, Ariz.-based distributor. He points out that large distributors such as Pinacor can arrange for financing on six- or seven-figure dollar value shipments, something beyond the capability of most resellers. And specific to the federal government market, Pinacor can execute APO/FPO shipping, which provides for cost-effective delivery to overseas locations or many customers on military bases.