Integrated Supply Basics
Today's environment of competitive business strategies requires all aspects of an organization to improve efficiencies, validate costs, and optimize the supply chain. The purchasing and supply function is no exception. In their role of managing suppliers and the goods and services necessary to meet organization objectives, purchasing and supply managers must strive to establish a working model with suppliers that makes the most of that relationship. Integrated supply strategies are coming into play as a means to add value.
Integration, in terms of purchasing organizations and suppliers, has taken the form of various models, and can range from blanket system contracts to outsourcing entire functions. But, no matter the size or orientation of the organization, all integrated supply strategies involve shifting some of the responsibilities normally held by the purchasing organization to the supplier.
The aspects that a supplier can direct include:
Physically warehousing inventory at the purchaser's site or nearby
Carrying costs of inventory
Forecasting material levels and requirements
Ordering goods to meet requirements
Servicing internal customers directly
Working directly with multiple suppliers to service a single purchasing organization
The possibilities associated with integrated supply are broad, so it is difficult to determine general trends that encompass all aspects. However, certain elements and their frequencies have been documented. For example, a 1997 study by the Manufacturers Alliance defines "insourcing" as transferring work done in-house to a supplier who performs the work at your location. This method of integrated supply is on the rise, according to the study, "Outsourcing + lnsourcing = Best Sourcing." Eighty-five percent of participants responding as buyers indicated that the dollar value of their organizations' insourcing was higher than it was five years ago. Of the suppliers in the same survey, 87 percent reported the same increase.
“All integrated supply strategies involve shifting some of the responsibilities normally held by the purchasing organization to the supplier.”
Products and services that are non-value added or have a low strategic value, are prime candidates for integrated supply relationships. When the low-value added functions are handled by a third party, purchasing and supply professionals can devote their time to more strategic activities. In the recent study, "The Future of Purchasing and Supply: A Five and Ten-Year Forecast," completed by NAPM and the Center for Advanced Purchasing Studies (CAPS), A.T Kearney, Arizona State University, and Michigan State University, several findings point to opportunities for integrated supply.
- The study reports that tactical purchasing will become more automated and consortia and third-party purchasing will become more prevalent.
- Third-party purchasing of non-strategic items will increase, but will still be heavily managed by purchasing and supply professionals.
- Strategic sourcing will require that the purchasing and supply function be tightly integrated with its suppliers. For those situations where integrated suppliers handle nonstrategic goods and services, the management of the supplier can be considered strategic sourcing, even if the actual transactions are not considered as such.
INTEGRATED SUPPLY DEFINED
A special type of partnering arrangement usually developed between a purchaser and a distributor on an intermediate to long-term basis. The objective of an integrated supply relationship is to optimize, for both buyer and supplier, the labor and expense involved in the acquisition and possession of MRO products - items that are repetitive, generic, high-transaction cost, and have a low unit cost.
Source: Glossary of Key Purchasing Terms, Second EditionThis definition can be expanded beyond MRO purchases to include the application of other supplies and services. Today's integrated supply agreements are much broader and cover the likes of long term relations with original equipment manufacturers (OEM) suppliers and service suppliers, such as temporary labor agencies, printing and mailroom suppliers, and other service representatives.
