As reshoring gains momentum, there is a rising need for factory automation. This, along with the increasing acceptance of Industry 4.0 and stricter regulatory standards, has resulted in more manufacturers seeking the services of integration companies to implement automation solutions. The demand for industrial system integrators, Machine Builders, and OEMs is projected to continue to increase in the upcoming years.
A system designer could be a System Integrator or Machine Builder, also called an Original Equipment Manufacturer (OEM). Their responsibilities encompass designing, integrating, and maintaining complex industrial automation and control systems. Their clients are manufacturing companies (i.e., the end users) in various sectors that require optimizing production processes, improving product quality, and enhancing operational efficiency. System designers select the necessary hardware and software components, oversee equipment installation, conduct thorough testing and validation, and provide ongoing maintenance and support.
A Win-Win Procurement Strategy
An integration company’s procurement strategy is interconnected with its supply chain management. Supply chain management oversees the entire lifecycle of a system, from project planning and component sourcing to system delivery. Procurement involves acquiring the necessary components and key technology for a system’s operations. A well-planned procurement strategy can help system designers reduce delivery time, future-proof the system, and lower maintenance costs, ultimately benefiting the end user, i.e., manufacturers.
This article explores the various procurement channels available to integration companies and OEMs and how they can use this knowledge to develop a mutually beneficial procurement strategy.
Procurement Channels for Industrial Equipment Sourcing
Procurement is the process of sourcing components from buyers. On the other hand, component manufacturers can select different go-to-market (GTM) strategies based on their product positioning, market segmentation, and operational strengths. All three factors determine whether a company uses indirect, direct sales channels, or both.
- Indirect Sales Channel
This is where the company sells its products through third-party distributors or resellers. It can be a good option for component manufacturers that want to reach a wider audience or lack the resources to sell directly to their customers. Choosing the right distributors is essential, as they can greatly impact a company’s brand image and sales. - Direct Sales Channel
This is where the company sells its products directly to System Integrators and Machine Builders (or OEMs). The process will involve interacting with a sales representative from the equipment manufacturer and signing or approving a formal quotation based on the quantities. This method is more personal, and companies that manufacture specialized equipment or technology typically choose this GTM channel.
Understanding Product Positioning and Marketing Segmentation
A company’s product positioning and market segmentation help determine the channels to reach potential customers. Product positioning is an internal process where a technology provider (component or equipment manufacturer) decides on (positions) its product’s unique features and benefits to solve potential customers’ problems. A well-executed product positioning strategy can successfully define and identify a segment(s) in the market that will benefit from the product offering.
The more standardized an industrial component is (e.g., cables), the more likely the maker will take an indirect GTM strategy. Such a strategy may include independent distributors or authorized distributors, where authorized distributors may have access to exclusive product lines and offer technical support from the component manufacturer. Generally, these components do not require special knowledge and are ubiquitous with a lower price point.
Specialized industrial equipment, such as machine vision scanners, typically requires a direct GTM strategy due to its proprietary technology. This type of equipment often requires a solid engineering background or training. As a result, equipment manufacturers usually employ a team of trained professionals to help system designers evaluate application needs and product match. They may also offer value-added services like training programs. Unlike standardized components, specialized equipment has a higher price point and is often the key technology behind the finished system or machinery.
Benefits of Indirect and Direct Sales Channels
Automation projects are often complex and can sometimes involve sourcing hundreds or even thousands of components. In reality, System Integrators, Machine Builders, and OEM companies source their components via a mix of indirect and direct sales channels. System designers should devise a good procurement plan with a long-term vendor management strategy to ensure continuous product support or upgrades.
When to Procure Through an Indirect Sales Channel
The most notable benefit of using a distributor is the convenience of a one-stop shop for a wide range of items. With the advance of e-commerce, many modern distributors offer online shopping with transparent pricing, real-time stock levels, and short delivery dates. These distributors tend to carry more than one brand of the same item, allowing buyers to compare prices or substitute out-of-stock products. Procurement is made easier by not having to search multiple sites for different items. Additionally, many distributors offer integration services or consultations available upon talking to a representative.
Potential Things to Keep in Mind When Procuring Through a Distributor
Component distributors typically offer a range of standard industrial products that provide plug-and-play capabilities and address common use cases. While some off-the-shelf products may require user configurations to fit specific application needs, customization of product features is often not possible through the distributor route.
Although online procurement offers convenience, some buyers still prefer distributors with a brick-and-mortar presence, particularly for last-minute or small purchases. Physical distribution centers provide the benefit of immediate availability (provided the item is in stock), unlike online orders that can take days to deliver. However, as with any physical business, there may be limitations on its geographical reach. Integration companies must assess the importance of quick access to a distribution center or plan for enough redundancies to compensate for longer delivery times.
Component manufacturers typically authorize distributors to sell their products in specific regions. In some cases, the full extent of the product warranty may be affected if used outside these authorized regions. Therefore, the procurement team must keep this in mind when planning for a global project and have contingency plans in place if the distributor does not offer the same product outside the home country.
Lastly, procuring industrial components from a distributor can potentially reduce the level of supplier relationships. Distributors act as intermediaries between the procurement party and the supplier and may have limited ability to provide full technical support and access to pricing flexibility for large orders.
Establishing a direct relationship with the manufacturer allows the procurement team to interact directly with its technical experts, engineers, and product development teams. This is advantageous for troubleshooting, customization, or addressing specific technical issues. Moreover, the manufacturer can benefit from usage feedback, which is invaluable in improving its products and forming a collaborative partnership with the integration company.
When to Procure Directly Through the Manufacturer
Procuring specialized industrial equipment is a more involved process, as the product tends to be the mission-critical component of a system. It may represent a significant investment and requires assessment and approvals from the end user. The procurement team typically comprises application engineers from the integration company who communicate their needs to the equipment manufacturer’s technical sales team. The sales team may provide presales activities such as application assessment, product demonstration, or evaluation units to illustrate the product’s value proposition. This route of equipment procurement is characterized by a long sales cycle, sometimes even taking up to years to complete. Direct sales teams are trained to manage these extended sales cycles effectively.
Benefits of Procuring Directly From the Equipment Manufacturer
Establishing a direct relationship with the equipment supplier allows the integration company to gain insights and visibility into the manufacturing process and its company culture. This helps the procurement team assess its counterpart’s quality control measures and production capabilities and allows both sides to evaluate whether their goals and values align. Forming a win-win long-term partnership with a reliable equipment supplier has many benefits:
- Direct communication and feedback channel
- Exclusive access
- Product customization (though minimum order quantity may apply)
- Product upgrade support
- Complete technical training and support
In today’s highly competitive market, System Integrators, Machine Builders, and OEMs are always on the lookout for cutting-edge technology that can give them an edge over their competitors. Simply choosing mission-critical components from standard product offerings available at a distribution site can be easily replicated by competitors. On the other hand, collaborating and directly acquiring key technology from a specialized equipment maker can provide a unique competitive advantage. Moreover, as the integration company becomes an expert user of the technology, it will be easy for its team to reconfigure and deploy new systems.
Potential Things to Consider When Procuring Through a Manufacturer
As a system designer, sometimes the initial learning curve of acquiring a new manufacturer’s technology can be steep. Additionally, proprietary accessories or software used by the equipment manufacturers may prolong the process of knowledge transfer. However, investing time and resources in the beginning can pay off with significant benefits in the long run. By doing so, companies can gain a unique advantage over their competitors that cannot be easily replicated.
When procuring specialized equipment, it is important to note that their production time is generally longer than that of mass-produced industrial components. Therefore, procurement teams should take the extended lead times into consideration and order sufficient redundancies in their inventory planning. Another factor to keep in mind is that some equipment manufacturers may offer sales activities only in limited regions. Procurement teams should allow ample time for shipping to regions where the equipment manufacturer does not have a local presence.
Conclusions
In today’s competitive global market, System Integrators, Machine Builders, and OEMs are in high demand. System designers should carefully plan their procurement strategy to reduce delivery time, future-proof the system, and lower future maintenance costs. Automation projects can be complex and may involve sourcing hundreds or even thousands of components. Integration companies should develop a solid procurement plan with a long-term vendor management strategy to ensure continuous product support or upgrades.
