Distributors Partner with OEMs and EMS Providers to Reduce Cost

By forging alliances with distributors, some electronic manufacturers reduce their inventory levels, get engineering support and favourable payment terms By James Carbone.


It’s common for many large global electronics OEMs to forge close alliances with key semiconductor and other component suppliers to guarantee continuity of supply, gain early access to the newest technology, and receive best-in-class pricing for critical components.

However, smaller OEMs and contract manufacturers also form partnerships with suppliers, although not with global semiconductor companies, but with distributors. For certain customers, distributors help them design new products, reduce cost through bonded inventory and other supply chain programs, and help them manage cash flow through extended payment terms and preferential prices.

Distributors have thousands of customers and, of course, cannot partner with all of them. In fact, many small OEM or contract manufacturing customers don’t want or need to form alliances with distributors. But distributors say a growing portion of their customer base want to form strategic relationships with distributors to help reduce costs, improve time-to-market and generally be more competitive. For such customers, distributors will tailor a program that addresses the customers’ needs.

Karim Yasmine, corporate vice president of Future Electronics, said the Montreal-based distributor offers “differentiating value” to the customers it partners with. The value can vary depending on what the customers’ needs are, but can include offering the customer extended time for payment or keeping six months of inventory for them, providing testing, transportation and other services.

“It always comes back to the nature of the company,” said Yasmine. “For some customers, their priority is to reduce inventory levels. If that’s the case we can look at a bonded inventory program specifically for that customer where we will bond the product,” he said.

Many of Future’s customers are electronics manufacturing services (EMS) providers and the distributor has strategic relationships with some of them that are looking for “differentiated value.”

“They look for a distributor that can offer them financial terms because they are purchasing based on purchase price variance so pricing is a differentiated value,” said Yasmine.

In addition EMS providers look for “inventory commitment” from their distributor partners as EMS providers can lose an OEM’s business if they don’t have the parts on-time or if they have excess inventory, he said.

“So when they do business with us, the basis of our supply chain programs is to provide continuity of supply and on-time delivery and flexibility,” said Yasmine. “We make sure that the buyers we are dealing with at the EMS company are getting their products on time,” he said.

More partnership engagements

Tom Vanderheyden, TTI vice president, Americas sales, said that TTI’s partnership engagements are “certainly growing, both in terms of new engagements as well as the broadening of existing partnerships.  Continuity and assured supply from a trusted source is at the heart of what drives customers to TTI,” he said.

Many of TTI’s customers want to partner with the distributor
because TTI is the “largest, global IP&E specialist with an unparalleled commitment to carrying inventory,” he said.  TTI is a “recognized leader in supply chain management” and the majority of TTI’s North American sales are defined by various supply chain management engagements, said Vanderheyden.

Such engagements range from bonded inventory/MRP to sophisticated on-site, VMI managed programs. TTI also provides a suite of on-line tools for quoting, procurement, backlog visibility and billing, Vanderheyden noted.

He said rather that providing “cookie-
cutter” solutions, TTI tailors programs to fit the customer’s needs.  To assist in evaluation and implementation, TTI employs lean Six-Sigma green belt certified supply chain managers who are regionally positioned across North America and in all global regions.

Many of TTI’s customers want to reduce their total cost.  “Over the years customers have embraced TTI’s unique ability to provide solutions that drive a leadership position in total acquisition cost or cost of ownership thereby reducing or eliminating ‘soft costs.’” Vanderheyden said.

TTI is an IP&E and discretes specialist and customers value TTI’s supplier partnerships that “fuel TTI’s unparalleled broad and deep inventory, providing more than 70 per cent of inventory available-to-sell (ATS), more than any other source,” he said.

Vanderheyden said many customers view TTI as strategic because it has local resources for engineering support, supply chain management expertise and financial services.

“Unlike many competitors, TTI views inventory as an asset and not a liability,” he said. For the majority of TTI’s supplier partners, the company is the number one or two distributor and, in many cases, the suppliers’ largest customer, according to Vanderheyden.

Many customers that partner with TTI “realize and appreciate TTI’s unique leadership position” concerning IP&E inventory, product knowledge, supply chain expertise, he said. As a result many such customers will consolidate their spends for parts with TTI.

“In most cases for supply chain engagements, TTI manages the majority of the passives spend and a significant portion of interconnect/electro-mechanical,” said Vanderheyden. “TTI partners with many customers who have the capability to aggregate global requirements to address volume pricing requirements,” he said.

Another distributor that partners with some electronics manufacturers is Digi-Key, based in Thief River Falls, Minn. While Digi-Key provides small volumes of components to engineers designing new products, it also sells components for low and medium-volume manufacturing, often to contract manufacturers.

Removing inefficiencies

But even before supplying parts for production, some of Digi-Key’s EMS provider customers look for help from the distributor. EMS providers want Digi-Key to assist them on manufacturing issues “to take out inefficiencies,” said Chris Beeson, executive vice President, sales & supplier management, Digi-Key Electronics.

“What they appreciate is at the front end of the design we can scrub the bill of materials to make sure the correct part numbers, data sheets and documentation are all there,” he said.

“They then know from a manufacturability standpoint that these parts are suitable for production,” said Beeson. The contract manufacturer doesn’t “have to do all that due diligence so it really is a win-win for everyone,” he said.

Dan Hill, business president of sales and marketing for North America for Newark element14, said the distributor’s “largest customer partners are looking for value beyond having the right products on the shelf.” Such products include components, test equipment automation and control products, tools and MRO products.

He said Newark assists its customer partners throughout their value chains helping them improve their processes, providing services such as design, kitting, customized product manufacturing, stockroom management and expediting services.

He said the number of Newark’s strategic customers is growing because it is an “authorized distributor for some of the best brands in the world.”

Partnering with startups

While many established OEM and EMS providers have forged close relationships with distributors, some startups are also partnering with distributors. Hill noted there has been an “an explosion of innovation coming from companies borne in the past 10-15 years like FitBit, Tesla, Nest and GoPro.”

A startup may have a great idea for a product, but will need help developing the product. Many distributors often can provide technical expertise about parts and design services as well as supply parts for prototypes and for production.

While startups represent growth potential for distributors, there are other advantages for distributors in partnering with them.

One advantage is that young engineers get exposed to the distribution business model and become aware that distribution could be a career option for them.

Yasmine said a challenge for distribution is bringing new talent into the industry. “A lot of kids graduate college and they want to work at Google or Amazon, or FaceBook. New engineering graduates often want to work at “trendy software companies,”
he said.

But distribution is a “dynamic industry and there are a lot of things going on” that may interest young engineers, he said. “By helping startups we are helping talent come into the industry and show them the industry is an exciting place to be,” he said.

Whether it is with startups or well-established OEMs,  partnering with certain customers “truly helps drive innovation on both sides,” said Hill.

For instance by working closely with some customers, Newark can “prove out” a value-add service that looks good on paper. For instance, when Newark rolled out its kitting service, “we worked closely with one of our top customers to measure the benefits on both sides before it was clear that it would be profitable,” he said.