The tradeoff for providing more services is that manufacturers and the distributor become preferred suppliers, so that Chevron is in a position to substantially grow our business with them. But the trend is clearly that, as an end user, we need to rely more on our suppliers for technical support and for front-end engineering and design on our capital projects.
Our need for more technical support also includes product development for severe applications, because our production operations are moving toward higher-pressure applications, more handling of hazardous and corrosive materials, and more regulatory restrictions on fugitive emissions in our refining operations. Yet at the same time, we face a highly competitive global market where Chevron faces growing pressures to be a low-cost operator. So, again, we're looking for more alternatives to obtain lower-cost, high-quality material. The good news is that the quality gap between traditional manufacturing countries and low-cost countries is continuing to narrow.
VM: What does the future hold for relationships between end users and suppliers?
Anspach: I would say the overriding goal is to achieve low-cost, reliable operations. That being said, the keys to a successful supply chain can be broken down for each of the three parties.
Manufacturers must either differentiate themselves on reliability and quality-in a measurable way-or they must compete globally on price. Distributors must excel at optimizing the global supply chain and be able to deliver a broad range of reliable material and value-added services. And end users must be low-cost operators who excel at managing relationships with their national partners, suppliers, employees, and investors.
We have a desire to align with fewer suppliers, but to collaborate more closely with them.
So as the end user, we're making the call, rather than the manufacturer, on distributors who can provide the broad range of material needed for our operation. I think the industry will continue to see more consolidation, resulting in fewer but larger distributors and in more integration of the supply chain. But I believe this trend also means that end users, like Chevron, will have closer relationships and alignments with valve manufacturers.
Chevron describes our concept as a "four-plus-one" strategy. We believe that operational excellence, cost reduction, capital stewardship and profitable growth, together with organizational capability, equals superior performance and returns for all parties.
THE DISTRIBUTOR: Collaboration is Key
Gary Ittner is senior vice president of supply management for McJunkin Corporation of Charleston, WV, a provider of integrated supply services and industrial distributor of pipes, valves, and fittings.
VM: Why are supply relationships in the valve industry undergoing so much change today?
Ittner: To understand the evolving roles of the distributor and manufacturer, we need to first understand what is happening with the end user. As I see it, macro factors that are affecting end users are: consolidation in end user industries; the migration of purchasing function to corporate- centered purchasing; competitive environments or intense Wall Street pressure that is creating pressures to reduce costs; and the continued shift of end users' manufacturing operations to lower-cost locations.
With end users facing performance pressures from Wall Street, they've got to take costs out of the supply chain. So distributors at every level-large distributors, small distributors, manufacturer's reps-must show how they also add value. At McJunkin, we're focused on developing ways to measure the value of services we provide as a way of differentiating ourselves.
We're also encouraging and challenging the manufacturers we represent to come up with measurements to differentiate product performance. There really needs to be a methodology to measure lifecycle costs. But with the industry so focused now on first costs, we've got to find ways of getting end users' operations people more involved in measuring product performance.
As for end users, the increased pressure to reduce costs has caused them to react in several important ways. End users have reduced the amount of internal resources they devote to purchasing management and have instead leveraged their corporate buying power to consolidate their purchasing activities. They increasingly are considering materials from source countries that have not traditionally been accepted. And they are requesting additional services, including logistics and inventory management, from their suppliers.