Intermediary integration

Introduction

Relevance

Using this Toolkit module

2.1 Determine the value of incorporating an intermediary in the supply chain

2.2 Core principles/cultural requirements for partnering

2.3 Planning stage (detailed review of operational changes needed to achieve this state)

2.4 Selecting intermediary partners

2.5 Address relational/process interface issues

2.6 Agreeing measurable objectives (determination of Key Performance Indicators)

2.7 Management and communications throughout the supply chain

2.8 Product co-development and innovation

2.9 Collaborative marketing

2.10 Refine, improve and develop

Workbook 2

Introduction

According to some estimates, building materials distributed through intermediaries equate to approximately 65% of all materials sold into the construction industry and it could be argued that this statistic alone justifies involving intermediaries in all supply chain integration considerations. With their influence and control in the market it is clear that intermediaries are in a position to generate or stimulate substantial efficiency and value improvements when fully integrated into the construction supply chain and few doubt that they have a crucial role to play in the supply chains of tomorrow. While the employment of intermediaries has traditionally been for many organisations more of a tactical rather than a strategic move, the advent of fully integrated supply chains will make their inclusion (or not) one of the core strategic decisions. This module provides guidance on the benefits available from using intermediaries and how they might be achieved and improved in practice. Note that, for the purpose of this module an ‘intermediary’ may be a merchant, a stockist or a distributor.

This workbook explains the added-value that can accrue from the inclusion of intermediaries as part of fully integrated supply chains and focuses on both ‘upstream’ supply chain relationships between intermediaries and manufacturers and ‘downstream’ relationships between Intermediaries and construction procurement teams. It is acknowledged that intermediaries by definition are already integrated to some extent in the construction supply chain and that most enjoy long-term relationships with suppliers and customers. However, this module gives guidance on how these relationships can be taken forward to a strategic level and how, within the context of more integrated supply chains, these relationships can be redefined, strengthened and maintained to the benefit of all concerned.

The benefits

1. To manufacturers

Manufacturers may find that the optimum route to market is via some form of intermediary stockist for the following reasons:

• Improved logistics. Manufacturers can leave physical distribution to the experts and focus on production, their core business.
• Superior product availability – nationally, regionally and locally.
• The breaking of bulk and its repackaging into manageable units.
• Reduced credit risk to the manufacturer.
• Improved market access (especially for SMEs) – intermediaries can provide cost-efficient national distribution.
• Market knowledge. The intermediary is likely to have a good general understanding of the market, coupled with local knowledge.
• Administrative benefits. The use of intermediaries will almost certainly reduce the number of transactions. Other administrative benefits might include the provision of electronic trading options and the realisation of collaborative promotional campaigns, etc.
• Access to the intermediary’s often closer relationship with contractors and subcontractors and their local knowledge of construction projects/personnel. Note that, in a properly constituted supply chain, manufacturers will be able to use intermediaries without losing touch with the market. It can make it easier for contractors to obtain the goods (intermediaries may have longer trading hours and open weekends).
• In a properly constituted supply chain, manufacturers can use intermediaries without losing touch with the market.

2. To construction procurement teams/end users/designers

The construction procurement teams of contractors and subcontractors might employ intermediaries because it:

• facilitates quick and easy procurement, perhaps with no minimum order size. Buyers will often have established accounts with Intermediaries
• provides a one-stop-shop for buying disparate requirements and reduces administration. Single source procurement can have substantial advantages in the maintenance/FM sector where frequent, small, and disparate orders may be the norm
• reduces the number of suppliers and can provide improved terms
• can provide SMEs with a means of indirect access to the technical and other resources of major manufacturers. In a properly constituted supply chain, purchasers should be able to use intermediaries without losing support from manufacturers
• can be the most cost-effective procurement solution. Intermediaries can have enormous buying power and this can lead to additional benefits that are passed to the customer, such as volume rebates, special delivery arrangements etc
• suits different purchasing modes (cash/credit card/credit account)
• eases the implementation of just-in-time deliveries for improved site productivity, better security and greater safety
• offers a high standard of service such as the provision of special service arrangements on certain projects. For instance, an intermediary may be prepared to set up a temporary branch on a large site or set up an outlet to supply an individual customer

Relevance

1. Intermediaries (merchants, stockists, distributors, etc) seeking to develop strategic relationships within integrated supply chains.
2. Manufacturers that are seeking to incorporate intermediaries in their strategic supply arrangements.
3. ‘New generation’ construction procurement teams (including contractors, clients, facilities managers, etc) that might benefit from the value-adding combination of logistical, procurement and supply chain management expertise that is available from progressive intermediaries.

Using this Toolkit workbook

The guidance shown in the table appears in approximate chronological order. However, users must adopt a pragmatic approach to its application with respect to their particular organisation. It should also considered that the time required to enact the activities and processes shown will vary from organisation to organisation and must be left to the judgement of the user. Note also that some of the guidance offered applies to the intermediary itself, some to its suppliers/customers and some to both.

Each key step in the development of a formal partnering relationship between the various supply chain parties is identified in the ‘Process’ column. The ‘Culture and Activities’ column then provides a summary of the necessary ethos and actions required for their implementation. The adjacent ‘Tools and Techniques’ column provides recommendations, Toolkit cross-references and links to external supporting information.

Note: Users of this Toolkit workbook are encouraged to explore the other sections of this Toolkit to determine their position in the overall construction supply spectrum, to better understand the benefits and workings of the integration concept and to gain an appreciation of the need for collective supply chain focus to ensure a satisfactory end result.

Step

Process

Culture and activities

Tools and techniques

Material suppliers and customers must determine:

• Is this form of partnering/integration appropriate? (it does not have to be your only route to market)
• Is it a good fit with your corporate strategy?
• Will it provide your company with a competitive advantage?
• For which of your products/services/systems is it appropriate?
• The medium-long-term implications of entering strategic partnering relationships with intermediaries

Intermediaries must determine:

Whether they are prepared to make the cultural, operational and financial commitment to working in close interaction with suppliers and customers as part of integrated supply chains. This will necessitate creating the necessary trust with partners and might, for example, involve:

i. entering new areas of service

ii. developing expertise in specialist fields of relevance such as common quality standards and communication systems

iii. taking a more pro-active involvement in product design and specification.

Manufacturers

As a manufacturer, an intermediary is worth considering when you have a standard (non-customised) product but lack:

• sales channels/outlets
• marketing skills
• logistic resources.

i. Determine your market share and research the potential for growth. If you have a high and profitable market share without using an intermediary you probably do not need one.

ii. Conduct cost/risk/benefit analyses to determine whether an Intermediary can add value to your business and to the rest of the supply chain.

iii. Review your organisational structure

Where a manufacturer adds an intermediary into the supply chain, it will often call for an organisational and structural review of the manufacturer’s business.

Construction procurement teams/professionals

Contractors, subcontractors, designers and end-users have traditionally made extensive use of intermediaries since they offer the only realistic method of sourcing a wide variety of products in the volumes/timescales that are required. In the emerging construction landscape, however, intermediaries will have the potential to play a much more pivotal supply chain co-ordination role. Construction procurement teams must therefore consider the usage of intermediaries when developing their procurement strategy and, where appropriate, seek to integrate them as early as possible.

Conduct cost/risk/benefit analyses to determine whether an intermediary might add tactical and strategic value to the procurement and supply chain process.

 Construction procurement team

Most contractors and subcontractors use intermediaries, but few realise the potential capabilities of the intermediary as part of an integrated procurement chain. This partly due to the fact that true supply chain integration is still in its infancy and partly because, historically, the relationship has tended to be governed by price rather than value.

It is imperative the construction procurement team not only demands ‘best value’ from their intermediary partners, but also insists on engaging only with intermediaries that can demonstrate their commitment to true supply chain integration and the principles that underlie it. Only by doing so can the collaborative benefits outlined in this Toolkit be realised.

Manufacturer

It is important the company personnel pull together to achieve the partnering objectives. Change management will be necessary if the manufacturer has not used an intermediary network before and must not be underestimated. Failure to deal with this aspect may have negative repercussions on the business.

In all cases, to ensure the full benefits from integration are realised, a clearly defined strategy must be established that sets out the aims, objectives and long-term goals of the relationship and generates:

• constructive communications between all parties
• an environment of continuous learning and improvement
• mutual trust amongst all participants
• genuine commitment from top management of the partnering organisations
• a partnering vision throughout the supply chain
• understanding and commitment to integrated working throughout the supply chain, providing benefits to all parties.

Back to ‘At a glance’

• identify the products/systems covered by the arrangements
• consider any re-organisation necessary to facilitate and progress partnering principles
• examine the marketing implications – cost, competitor reaction, customer perceptions
• review the implications and determine strategy for the target market and project type:

(i) Public and Private sector/utility construction and term maintenance/Facility Management, etc.

(ii) New Build /Refurbishment/ re-active maintenance.

(iii) PFI/PPP/Design and Build/traditional tendered contracts

Review the number of intermediaries required:

(i) Do you want a choice?

(ii) Can the intermediary offer the required service?

(iii) Will an exclusive Intermediary offer advantages or disadvantages?

(iv) Flexibility to expand or reduce the number of intermediaries.

Define the desired functional characteristics of the ideal intermediary partner:

e.g.

• technical/service attributes
• management strength
• cultural ‘fit’
• operational efficiency
• strategic sourcing expertise and supplier contacts
• transportation/storage facilities
• inventory management competence
• IT capabilities
• customer focus
• staff quality including training and development
• receptivity to innovation and ideas
• long-term planning perspective
• flexibility and focus
• market penetration/strengths
• value-added services (e.g. hire services, processing, fabrication, etc.)
• financial strength
• marketing resources and expertise

Manufacturers

As a manufacturer seeking to establish a partnering relationship with an Intermediary you need all available marketing analysis information to hand & should complete a SWOT analysis covering the following issues.

Product analysis

• Product type sold.
• Market sector at which product is aimed.
• Product life cycle.
• Breath of product range.
• Product R&D.
• Competitor alternatives.
• Trends.
• Market share.
• Customer profile analysis.
• Size.
• Location.
• Order size (small orders are tailor made for intermediary).
• Service requirements.
• Number of customers.
• Market sector targeted by customer.
• Risk.

Competitor analysis

• What are they doing?
• Will using an intermediary give my business a competitive edge?

Construction procurement teams

As a contractor, subcontractor, designer or end-user you may already have experience of sourcing through Intermediary channels. However, if you are now setting up, or participating in, fully integrated supply chains you will need to satisfy yourself that your existing or prospective intermediary partners have the requisite skills, resources, cultural philosophy and commitment to meet the challenges presented.

Consider what contractual arrangements you will want to have in place with your intermediary partners. In many cases this will take the form of a partnering charter. Many partners find that the real value in drawing up this document rests in the process itself and that it forms a visible expression of mutual commitment to the aims and aspirations of the relationship. A ‘Service Level Agreement’ defining the expected standards of service may form part of, or run parallel, to the Charter document.

A typical partnering charter might include:

• mission statement
• objectives including target cost, time and quality criteria
• dispute resolution
• agreed procedures and processes
• agreed measures of progress
• structure for monitoring and review
• contractual arrangements.

Tip: If you are unfamiliar with intermediaries and intermediary distribution it might prove advantageous to invite prospective intermediary partners to introductory, no obligation seminars or one-to-one meetings to discuss the possibilities and gauge their abilities and commitment. Assess candidate using a rigorous quality-based selection system covering both quantitative and qualitative criteria.

Back to ‘At a glance’

• e-business
• consolidated invoicing
• on-line ordering
• paperless transactions
• supplier base reduction
• EDI invoicing/inventory management
• automatic stock replenishment
• consignment stocking deals.

Tip: The construction procurement team should ensure their intermediary offers them a personal contact (account manager), who works along with them to develop and monitor the Partnering and Service Level Agreements between the two parties.

• turnover
• stock Levels
• cost and profitability
• technical and quality
• commercial
• cultural
• service levels, response times and complaint handling
• waste reduction
• safety
• staff training goals
• reduced environmental impacts
• meeting of client objectives
• clear, measurable, value-for-money benefits for all parties

Intermediaries should be able to offer specific KPI data to their customers:

• deliveries supplied in full and on time
• credit note analysis
• response time for enquiries
• response time for answering telephones
• number of visits to site per month.

Tip: Hold regular operational-level workshops to review progress against KPI objectives and obtain feedback on lessons learned. In addition, ensure, through regular communications such as face-to-face meetings, conferences and newsletters, that everyone involved in the manufacturing organisation and its distribution network are fully aware of the KPIs and their significance.For information on generic construction KPIs see the KPI Zone website.

Back to ‘At a glance’

Risk management

Establishing partnering relationships is not about risk transferral; it is about risk management and removal. At this stage, the parties to the relationship should set out the basis for sharing risks. The correct management, monitoring and measurement systems will ensure that risk is identified, minimised and shared equitably.

Tip: Hold regular, at least annual, network conferences to foster team spirit and trust, share knowledge, exchange information, educate and motivate.

Tip: Encourage network social and team-building events.

Tip: Give consideration to an awards scheme to honour best performance; celebrate success and foster competition amongst the intermediary network.

Tip: Consider introducing a self-financing incentive scheme tied to:i. achievement of business targets, andii. exceeding KPI targets.

Continuously review and audit supply chain performance. Don’t compromise on quality or commitment. If an intermediary consistently fails to deliver against its agreed objectives then:

a. reconsider the objectives to determine their validity/attainability. Adjust if necessary.

b. discuss the requirements with the intermediary in question with a view to rectification

c. if all else fails, terminate the relationship in accordance with the termination terms contained within the contractual agreement or Partnering Charter.

Product development

There is a lot to be gained in terms of cost savings, speed to market, efficient resource allocation and effective risk sharing by pooling expertise in the generation of creative yet workable solutions. A mature supply chain will develop the trust, confidence, mutual respect and interdependence to allow collaborative improvements to processes as well as product development programmes, e.g:

• packaging
• storage requirements
• training
• market sector targeting
• value-added processing.

• literature
• trade shows
• exhibitions
• open days
• training events
• dedicated display zones
• product demonstrations and trials
• presentations
• incentive/loyalty schemes
• joint Sales calls
• mail shots
• trade Counter display
• trade Journals
• promotions
• cross reference between websites
• use of digital media for the dissemination of up-to-date information.

Back to ‘At a glance’