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Focus: Distribution/Materials Handling

Feature Article from Our Distribution and Materials Handling Subject Area - See All

From SCDigest's On-Target E-Magazine

Aug. 8 , 2011

Logistics News: Factors to Consider when Choosing Between Manufacturers and Systems Integrators for Conveyor System Projects

Cost Dynamics Change Depending on the Size of the Project; Specific Expertise, Local Presence can be Factors in SI's Favor in Larger Deals


SCDigest Editorial Staff

Last week, SCDigest took a look at sales channels for conveyor and sortation systems in distribution applications, describing the breakdown of how products and systems get to market, and the dynamics between conveyor manufacturers/OEMS and their various channel partners. Those channels range from pure distributors through the relatively new model of consultant systems integrators, which in design-build approaches to automated systems will design and implement the system but bid out the hardware portions of the system to different manufacturers.

As promised last week (see Understanding the Conveyor Industry's Sales Channels Ecosystem and its Impact on Vendor Selection), in part 2 of this series we are going to explore in more detail the advantages and disadvantages of using a systems integrator versus going direct to a conveyor manufacturer to implement a system in the DC. Below are some of the key variables to consider in making this decision.

SCDigest Says:


Some systems integrators earn a substantial part of their business from one or two sectors, and so develop special knowledge in system design and implementation in those areas.

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System Size

The pure dollar value of the system has an impact on which type of system provider makes sense. Conveyor manufacturers are rarely interest in systems below $1 million in value, and will usually pass opportunities they find in that range off to one of their channel partners.

A system has to really get over about $1.5 million in value before a manufacturer is interested, and they may pass on to one of their integrators systems even up to about $2 million in value, depending on how busy the OEM's pipeline is and/or its need "feed" the channel and thus keep their resellers healthy, especially if a given partner is "slow" at the moment.

One exception to this general rule has to do with the size of the company looking for a sytem. If WalMart or similarly large retailer or distributor approaches a manufacturer for a smaller system, the OEM would likely be happy to take that business in order to develop a relationship and tap into the longer term potential of the account.

On the other side, it is rare for an SI to handle a deal above $10 million, and in practical terms most integrators max out at systems much above $5-6 million. Part of the issue is that most SIs are relatively small firms and could be consumed by deals much above those ranges, both operationally and financially, though as we noted last week, the OEMs will often provide financial assistance to their channel partner for such large deals. The OEMs may also explicitly "stand behind" their partner with the customer, meaning they are in effect making a promise that they will come in and bail out the SI if significant problems occur with the implementation.

There is a bit of an odd pricing dynamic in the industry, as in deals worth low single digit millions, the generally higher overhead structure of the OEMs may make their total pricing higher than you can get from an SI. However, as the deal size grows into the mid-single digits and above, the advantage the OEM has in terms of needing only one mark-up on costs for the equipment, versus two mark-ups when using the SI, starts to take hold and gives the OEM the total price advantage.

Key Takeaway: It is good to have some reasonable range in mind for potential system costs early in the game for a new project. That can come from the actual budget number approved for the system, benchmarking with others for what they paid for systems of similar scale and hardware utilization, or getting back of envelop estimates from consultants or providers, but be aware those ranges will usually be very broad.

Industry Sector

Most carton-oriented material handling automation systems are fairly generic in scope. For example, a conveyor sortation system going to most consumer goods manufacturers or wholesale distributors will not present any special handling or design requirements for which special expertise is required.

That may not always be the situation, however. Systems for such sectors as wine/spirits and retail as can benefit from special expertise a given OEM or SI has developed in that market, and is a key reason why some companies will go with an SI even for a larger project.

Given their size and history, most OEMs will have had at least some experience with similar problems/projects to one a given company may have; however, that does not necessarily mean the experience still resides in the OEM, or that those with the experience will be assigned to your project. Some systems integrators, on the other hand, earn a substantial part of their business from one or two sectors, and so develop special knowledge in system design and implementation in those areas (e.g., W&H Systems in spirits and wine distribution, where systems design and controls experience can be key to successfully handling expensive cartons of delicate product).

Key Takeway: Some sectors have special needs that may be best met by an SI or OEM that has developed specific and leverage-able knowledge, and it is often worth paying somewhat more for this expertise. This is often how SIs wind up being hired for the larger systems ($6-10 million) that might normally be above their range. Ensure the actual engineers with the special experience will be deployed on your project, however, from either option. Companies often forget that point.


Equipment Re-Use

While many new conveyor/sortation system projects are "green field" sites or are being deployed in facilities with little or no existing automation, many others are upgrades to sites that do have quite a bit of existing conveyors and other material handling equipment around. In other cases, a company may want to move existing equipment from a shuttered distribution center to a new facility.

(Distribution/Materials Handling Story Continues Below)


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This is an area where traditionally conveyor OEMs would not be too interested in pursuing the business. The work can be quite messy, and the OEMs are primarily interested in selling new equipment, not salvaging old stuff. While the post-sales groups in the OEMs will sometimes handle this type of work, if a lot of equipment is to be re-used for a given project, the advantage generally is to an SI.

Key Takeaway: If you plan on using a significant amount of existing equipment, it tends to favor use of an integrator rather than an OEM. Vet claims of how existing equipment will be used, especially if it is being moved, very closely, by vendors of any type. The end result can be different from the initial promises.

Local or Long Distance Relationship

Though it may be fading a bit as a factor, the proximity of a given provider to the buying company's staff/headquarters and/or end deployment location/facility can be a factor in deciding which channel to use.

The general sense often is that having the vendor "be down the street" will lead to a closer, better relationship, and fewer issues related to communications, lag time, and other potential problems from a more distant relationship. This can given local SIs an advantage on many projects.

"The customer often believes, and many times correctly, that a local relationship will lead to superior service and more rapid problem resolution," says Cliff Holste, SCDigest's material handling editor and 30+ year veteran of the materials handing industry. That can be true at any or all stages of the project cycle: design, implementation, and post-implementation support.

That said, technology advances - from remote system monitoring to video chat and other developments- are muting some of those local presence advantages in some cases.

Another factor is that an SI for a local system should be able to offer cost savings through reduced travel cost for design and implementation, which can be a big part of total project costs for some systems.

Key Takeway: Companies in the end often go with the vendor they feel most comfortable with, and a local SI can often find advantage for a project from a relationship perspective.

Long Term Needs

If a given project is for a single facility, the vendor decision can obviously be made on that basis alone. If, however, the first system will be one of several planned roll-outs over coming years across the country or even across the globe, then companies need to consider the capabilities of an SI to support those needs.

OEMs will generally have more national capabilities (noting, however, that most US conveyor manufacturers have modest support for global deployments), and are less subject to the risk that they will go out of business down the road, as the smaller SIs could (though many have been in business for decades).

Key Takeway: Companies need to understand how likely additional roll-outs will be for the rest of their network, and assess the capabilities of an SI to meet those future requirements versus an OEM. As noted last time, however, some SIs are indeed building national presences, changing the dynamics a bit.

Design Approach

If a company plans on using a consultant to help with system design, that can change the dynamics of the deal. Specifically, consultants much prefer to "bid" conveyor system projects direct to the manufacturers, rather than systems integrators.

This is true for many reasons: the perception that can get a low price from the OEM; long standing relationships with the OEMs on both a personal level with representatives of the OEMs and how the different OEMs operate (and lacking that knowledge with specific SIs); a "prestige" factor (wanting to show they are working direct with "the big boys;" and frankly a general reluctance to bring in another company in an SI that might be too pushy with regards to their own design ideas.

Worth noting is the fact that it is very rare indeed for an OEM and an SI representing that manufacturer to compete on the same deal. One or the other will usually bow out. So, for example, if an SI representing an OEM finds and develops an opportunity, the OEM is highly unlikely to pursue the business direct even if asked to bid by the company or its consultants.

Key Takeaway: Discuss this issue upfront with current/potential consulting partners. The goal should be to bring in the most qualified bidders, which in some cases may in fact be an SI, based on sector expertise or other factors.

Holste adds an important point to this discussiom, however, with regards to new technology.

"One point that should be made is that advances in system design, equipment, and technology application like automated case picking will, with few exceptions, first be developed, prototyped, and proven by the OEM," he says. "Once several deployments have be successfully completed by the OEM, only then will selected channel partners be permitted to have access to the “new” system solutions. The OEMs are generally the ones on the cutting/bleeding edge of state-of-the-art developments. It’s one reason their overhead costs are higher than the typical distributor or SI."

What would you add to our discussion about OEMs versus Systems Integrators for conveyor system/materials handling projects? Let us know your thoughts at the Feedback button below.

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