Distribution: It’s a risky business

James Carbone, contributing editor

Distributors must manage risks that impact their own businesses, but also help customers identify, avoid and mitigate risk in the supply chain By James Carbone.

The role of electronics distributors has changed over the last 25 years. Back in the day, distributors basically had to stock parts from component manufacturers and sell them to OEMs and contract manufacturers.

But times have changed and the role of distributors has evolved. Of course, selling parts to customers too small to do business directly with component manufacturers is still core to the distribution model. But distributors are also expected to provide value-added and supply-chain services to help customers reduce cost and supply chain risk.

Distributors hold inventory for OEMs and component manufacturers, provide customers with extended payment terms, keep customers apprised of new technology and components and provide timely information about long lead-time and obsolete parts and alternative solutions.

Despite the added cost and risk to their own businesses, distributors have not only accepted the new role, but have embraced it. Many distributors say that helping customers manage risk may be a challenge, but it is also an opportunity. They know that by assisting OEMs and electronics manufacturing services providers (EMS) reduce inventory, manage component obsolescence, manage cash flow, distribution’s role in the supply chain is enhanced and becomes more valuable to OEM and EMS customers as well as the component manufacturers.

Distributors help customers reduce risk in different ways. One way is by holding inventory. Most companies regard inventory as a necessary evil and want to have as less inventory as possible. But inventory is part of a distribution’s value proposition to customers.

“When you think of risk, the risk that comes to mind is inventory,” said Dave Doherty, president and chief operating officer for Digi-Key. “Do we have the right inventory? The wrong inventory is a liability. The right inventory is an asset,” he said.

He said to mitigate its own risk concerning inventory it’s necessary to have a large customer base. It’s the ultimate diversified portfolio.

He said some distributors focus on the “A and B runners”, parts that are in high demand. “That helps to mitigate risk for some distributors,” said Doherty.

“The other way is to go in the other direction to widen your customer base and you can only do that by having a wider selection parts. It’s a contrarian approach,” said Doherty.

“We send out not-recommended-for-new designs emails to customers that have bought the part over the last 12 months,” said Kevin Hess, senior vice president of marketing for Mouser Electronics

“We grow our customer base between 5-10 per cent every year. It’s up over 500,000 now. But at the same time, we turn about half of that.” That means to grow the customer base it’s necessary to continuously find new customers.

Managing EOL risk
Besides inventory, distributors often help customers reduce risk by helping them manage component obsolescence, which impacts buyers in all industries, but especially in industries that build electronics equipment with long product life cycles such as defense and aerospace and communications.

“As soon as we get notification from the manufacturer that a part is going obsolete we update our database, post it on the website and send out end-of-life changes,” said Kevin Hess senior vice president of marketing for Mouser Electronics. “We send out not-recommended-for-new designs emails to customers that have bought the part over the last 12 months,” said Hess.

He added Mouser also directs customers to a webpage that recommends drop-in replacements for obsolete parts. “Our responsibility is to relay the information from manufacturers on risk,” said Hess.

Mouser also has a BOM tool that will analyze a bill of materials and inform a buyer or engineer if there are components on the BOM that are not recommended for new designs. The tool also suggests alternative parts.

“If you bought a part and it has become obsolete, we proactively send you an email that there is risk with a part and you may want to consider other parts,” said Hess. If a buyer or an engineer is in the “quoting or buying process we let you know if there is a risk” with a part, he said.

Easy payments
In some cases, distributors reduce financial risk by offering extended payment terms. More customers are looking to pay for products beyond 30 days.

A payment term that used to be “30 days is now 60 days,” said Matt Waite, president of Dove Electronic Components, a crystal and oscillator specialist distributor, based in East Setauket, N.Y. “What used to be 60 days is now 90,” he said.

“We have taken on more risk jointly in the intellectual-property area of the equation,” said Ralf Buehler, chief sales and marketing officer for Premier Farnell

Obviously, there is financial risk to distributors offering extended payment terms to the customers.

Some risks are due to technology changes. “With cellular and Internet of Things, wireless technologies are changing all the time,” said Wing. Because of rapid changes, customers may change their minds concerning which technologies they should use, said Wing. As a result, “it’s kind of risky to go down the road with a customer the way you used to,” said Scott Wing, president of Symmetry Electronics.

In the past, we would “pitch technologies and pitch a product to a customer and get some parts designed into a product which would then go through to production. Now with wireless, cellular and the whole IoT play, it is very, very dynamic. Customers are changing their mind more than they used to,” said Wing.

That can create risk for a distributor because the distributor could carry inventory of product for a customer, but the customer could decide to use parts based on a different technology and the distributor is stuck with the inventory.

Consolidation risk
Wing said, however, the biggest “unique risk is consolidation of suppliers.” There have been many mergers and acquisitions in the semiconductor industry and some distributors have lost lines due to consolidation. However, in some cases distributors have picked up lines because of consolidation.

“We have been fortunate. We had a great line called Silicon Image,” which produce chips for wireless video applications. They got bought by Lattice. Symmetry was not a big enough distributor, for Lattice but once Lattice purchased Silicon Image, Symmetry got to carry Lattice products as well.

Some risk involved intellectual property for distributors that help to develop products.

“We have taken on more risk jointly in the intellectual-property area of the equation,” said Ralf Buehler, chief sales and marketing officer for Premier Farnell. He said an OEM may outsource design and manufacturing and we may “become part of that value chain.”

For example, “we develop boards for customers. We have had conversations today, do we guarantee we protect IP on these? Are we making sure that the board doesn’t conflict with any existing IP out there,” he said.

If Premier Farnell develops a board, “we obviously do as much work as we can to make sure that we are not infringing any IP,” said Buehler

The risk of differentiation
Buehler added that product risk has increased because customers are looking for differentiated products and distributors may have to stock more variations of products.

“With cellular and Internet of Things, wireless technologies are changing all the time. It is very, very dynamic,” said Scott Wing, president of Symmetry Electronics

For instance, with microcontrollers, 10 years ago “you had five variants of a microcontroller,” said Buehler. “Today every supplier has thousands of variants of the same microcontroller” and there are thousands of customers using different variants, he said.

“That has become a real risk because a larger part of the inventory that distribution holds is almost customer specific,” said Buehler. He said there may be only one or two customers buying a product in large quantities.

One risk that some distributors have concerns about are noncancelable nonreturnable (NCNR) policies that some component manufacturers have.

Some OEMs and EMS providers will award business to a distributor based on parts being non-NCNR. To take such business, “is a risk play. Some of my competitors will opt to take that risk,” said Waite. And maybe sometimes I will. So that’s a new dimension to the industry.”