These pressures have also created a certain tension in our supply chain, specifically regarding the nature of the relationship between the end user, valve manufacturer, and distributor.
Traditionally, the hypothetical has been: (1) manufacturer gives wholesale price to distributor; and (2) distributor gives price to end user and provides material handling and technical support. But today the model is moving toward a more collaborative, rather than segmented, set of relationships.
VM: What are some factors that end users, distributors, and manufacturers are challenged with today as they work together more closely?
Ittner: It's hard for a distributor to perform well unless we have "velocity" in our inventory. The economics of distribution require velocity, but that can be difficult if we have to maintain a dedicated inventory for a particular end user. We try all the time to educate end users on the complications of this model.
But we can't turn back the clock on globalization, and we can't remove the cost-reduction pressures that end users face today. So I think all the parties-end users, distributors, and manufacturers-can still win if we all work together.
Today, a world-class supply chain is more complex, but also more powerful, than the traditional relationship. The valve manufacturer and distributor can collaborate on demand planning, order aggregation, and the selling of products and features. The manufacturer and end user can collaborate on engineering, innovation, and product features. And the distributor and end user can collaborate on inventory management, logistics, and product selection. Overall, the three parties all collaborate on the end user's goal of quality, low-cost operations.
To make this relationship work, however, each player has some significant challenges. Manufacturers must improve core competencies in manufacturing, services, and solution-selling; improve their key processes, such as with raw materials, production, and subcontractors; and then develop means to measure the value they offer over the lifecycle of a product.
Distributors need to improve their core competencies, such as in logistics and systems; add more value through solution-selling, information flow, and other means; deliver cost savings to the end user throughout the supply chain; and improve performance measures.
Finally, as end users consolidate their spending with a smaller base of suppliers, they need to seek a balance between technical needs and commercial pressures, and then execute on opportunities to leverage their buying power.
VM: Can product costs continue to be reduced without compromising quality?
Ittner: The proliferation of nontraditional valve manufacturers and their acceptance by end users has become a hot topic in the valve industry, and one that presents challenges throughout the supply chain. Three factors are driving this. First, there's been a shift in decision-making from engineering to purchasing, so that today's emphasis is on the upfront cost of a product. Second, these cost-reduction pressures lead to a broader range of what product quality is considered sufficient and acceptable.
But third, I have to say that quality differences between traditional and nontraditional source countries have narrowed substantially. Every time that manufacturing has shifted to a lower-cost country, the country's manufacturing expertise has grown over time. When valve manufacturing shift-ed to Japan, or then to Korea, each time they eventually learned to make good products. That makes me believe today's low-cost manufacturing countries will also come through.
VM: Supply relationships have already gone through much change. How will they continue to evolve in the future?
Ittner: As I look to the future, I predict the current focus on "first cost" will move toward a realization of a "total cost" over a product's lifecycle. That depends, however, on elevating our ability as distributors and manufacturers to differentiate product performance and services in measurable ways.
Nevertheless, I believe end users could be willing to sacrifice some quality in order to reduce their costs. That means two things. End users will continue to push the envelope as they explore supply chains outside traditional models. And distributors and manufactures must shoulder responsibility for achieving hard-cost savings.