Buyers leverage distributors’ services to compete

James Carbone, contributing editor

OEMs and EMS providers, big and small, are increasingly turning to distributors for support in new product introduction, production, inventory management and product obsolescence By James Carbone.

More electronics purchasers are leveraging the capabilities of distributors, using them not just as a source for components, but for value-added, supply-chain and design services to reduce cost, improve time to market and enhance profitability.

While buyers have long taken advantage of distributor- provided supply chain and value-added programs, demand for such services is rising as supply chains become more complicated and customers need to boost productivity and operate leaner.

“Today, more than 50 per cent of TTI’s component sales involve some sort of value-add service,” said Michael Knight, senior vice president, Americas for TTI. Such services range from supply chain solutions to custom connector configuration to integration of components into a sub-assembly for the customer.

Small OEMs and electronics manufacturing services (EMS) providers have long been primary customers for distributors, but it isn’t just small companies that are looking to leverage distributors services and other capabilities.

“Very large OEMs that were once exclusively direct customers for component manufacturers are almost all hybrids today, buying both direct and from distribution,” said Knight. Large companies are buying from distributors because there are benefits including “assured supply, logistics services, extended payment terms, product return privileges, guaranteed pricing, and reduced MOQ (minimum order quantity) requirements among them, said Knight. “All of which help them with their total cost of ownership.”

Component manufacturers also benefit when large companies purchase from distributors to leverage their capabilities. A distributor can greatly reduce a component manufacturer’s total cost to service large OEMs.

“Today, more than 50 per cent of TTI’s component sales involve some sort of value-add service,” said Michael Knight, senior vice president, Americas

“Distributors pay faster, smooth the inconsistencies in an OEM’s material planning, provide in-person, local support wherever the OEM needs it, including at the EMS providers they may use,” said Knight.

While OEMs may benefit from buying from both component manufacturers and distributors, such hybrid relationships can be challenging for distributors. An OEM may negotiate a direct cost with a component manufacturer and then buy from distribution “at the lowest possible mark-up they can find over the direct cost,” said Knight.

“Often the OEM expects a price from distribution that has no mark-up on it, or worse, a price from distribution lower than the price that has been quoted on a direct basis,” he said.  The OEMs are trying to gain the services that a distributor provides, which the component manufacturer can’t or won’t, “at a direct cost effectively valuing the distributor’s services at zero,” said Knight.

Wanted: More services
One distributor that has seen an increase in demand for services is Arrow Electronics. “The number of customers that are using us for value-added services is growing dramatically,” said Alan Bird, president Americas for Arrow. Demand for such services is not just coming from startups and the maker movement. “The traditional distribution customer base is also tapping into the services and capabilities that we have in design and supply chain,” said Bird.

Such services include traditional value-added services such as IC programming, kitting, cable assembly, parts labeling, inventory management and other supply-chain and design services. He said Arrow provides customers with a solution from new product introduction to production to aftermarket.

“We leverage our engineering infrastructure and use our supply chain or set up a supply chain to help customers get their product to market,” said Bird.   He said customers are leveraging distributors’ capabilities to improve time the market, to operate lean and reduce cost. Customers are under “incredible pressure to get products to market fast,” said Bird. New product development from concept to production may have been 18 months, two years or 36 months in the past.

“Now we have customers that want to go from idea to production in six months,” said Bird. At the same time, customers ranging from startups to established OEMs are “being challenged to do more with less” and need help from distribution, he said.

Customers are focusing on their own core competencies, which traditionally have been design and marketing and looking for help from distributors for the rest. “We are helping them with engineering, supply chain, and production, or helping them through end of life,” said Bird.

The need for speed and inventory
One distributor capability that buyers value is inventory. Dave Doherty, president and chief operating officer at Digi-Key Electronics, said that many customers do business with Digi-Key because of its large inventory and its ability to ship parts the same day that they are ordered.

“Customers of all sizes typically have a long tail of products on their bills of material,” he said.  Digi-Key is often ‘the preferred franchised source” for a wide range of required products that don’t fall into the manufacturer’s or broad line distributor’s “A & B classifications.”

“Where customer volumes are large with key designs and a clean supply chain, suppliers deal directly with customers in many cases,” said Rich Davis, president WPG Americas

He said a growing segment of North American and European customers have a business model around “speed and not low cost. Whether it’s the OEM trying to quickly build prototypes of their new concept directly or through a quick turn EMS provider, it creates the need for a responsive partner with available inventory and reliable service level to meet their aggressive timelines,” he said.

Doherty said more customers require just in time solutions. “This is our core competency and we are seeing our customers coming to us more and more for high mix/low volume production requirements,” he said.

He added the design community uses Digi-Key to have access to the latest technology. “We provide awareness and access to all new devices which is valued within the community and aids the design roadmap processes for both our customers and suppliers.” said Doherty.

Some customers use Digi-Key because of cost of ownership concerns.” Customers producing a wider range of varied products with unique component requirements do not want to sit on excess quantities of products with infrequent use,” he said. “Buying the exact quantity in the packaging form they require in their manufacturing process is important.”

Because Digi-Key carries a large amount of inventory, many customers come to Digi-Key during times of shortages. “At any given time, there is almost always an un-forecasted shortage of something,” said Doherty. “Shortages cause huge potential financial disruptions for customers, and providing solutions to the same core elements of availability and service is highly sought,” said Doherty.

The impact of lean
Rich Davis, president, WPG Americas said about 35 per cent of WPG Americas’ customers look to the distributor for supply chain services as more companies are operating leaner and have “fewer people than they did years ago.”  Startups also operate lean and leverage distribution “because they are small and don’t have the ability to buy direct and need distribution’s support services,” he said.

Many component manufacturers are looking to service fewer OEMs and EMS providers directly because of the support that is required to do so. “Where customer volumes are large with key designs and a clean supply chain, suppliers deal directly with customers in many cases,” said Davis. However, even with customers that have large volumes, “we have seen an uptick in opportunities because suppliers have cut back their own support of those models,” he said.

One distributor capability that OEMs and EMS providers appreciate is assistance with component obsolescence. “This has become an expectation from the customer base,” said Davis. “We do have a process to advise our customers of EOL parts as well as part changes,” he said.  “We provide services for the customer to mitigate EOL’s in their supply chain while they upgrade their existing projects,” said Davis.

“We leverage our engineering infrastructure and use our supply chain or set up a supply chain to help customers get their product to market,” said Alan Bird, president Americas for Arrow Electronics

Besides help with obsolescence, more OEMs and distributors are also looking to distributors for assistance with other issues such as import-export compliance, conflict minerals and environmental regulations.

“The administrative costs associated with things like date codes, export compliance and conflict mineral reporting are a challenge, especially as that service is expected to be complimentary in exchange for the parts order,” said Knight.  This has become a pressing issue in the supply chain,” said Knight.

He said distribution in general is struggling to keep pace with the growing administrative and data demands. “Where the data comes from, how it is presented and delivered, and how each customer wants it served up varies greatly and is very inefficient, adding to the strain,” said Knight.

“Competing on the basis of the quality of your information is becoming as critical as having the product itself,” said Doherty.  Export and import logistics expertise has become a requirement because customers “judge your ultimate lead time from your shipping dock to their receiving dock.”  He said customers want a single source to find the answers to compliance questions placed on them around environmental regulations or a growing number of political and legislative restrictions such as conflict minerals.