Electronic component distributors are a key node in the hi-tech value chain, as an increasing percentage of component supplier's revenue continues to be generated through this channel. This industry, which started off by trading surplus radio parts during the mid-20th century, is now a thriving and sophisticated business that supports the growth in the hi-tech industry largely by collaborating effectively with their value chain partners.
Innovation and short product lifecycles typically drive the hi-tech industry, so a quick and easy reach to diverse markets is critical. Component suppliers, as well as original equipment manufacturers (OEMs), depend on the distributor product lines, market reach and specialized services to accelerate time to market and improve efficiencies in their own supply chains. It is in this area of specialized services that distributors have enhanced their value proposition in the hi-tech industry. By partnering with suppliers and customers and understanding their constraints and limitations, component distributors have expanded their basic role, pro-actively structuring collaborative processes to bridge gaps across the value chain.
Traditionally, component suppliers supported their large customers directly and let the distributors handle the balance of their business. However, globalization pressures over the last few decades have placed design and production burden on OEMs that have responded by shifting production to EMS companies. Over the years, EMS players have, in turn, moved production overseas. This trend continues to grow, and component suppliers are increasingly taking the cost effective route of the distributor channel to keep up with their important customers across diverse markets. The consolidation of fragmented distributors into a few major players over the last decade and the capability to service the requirements of a number of small customers have contributed significantly toward their increased importance in the hi-tech value chain.
Handling this increase in volume by providing fulfillment and other basic distributor services is only one part of the supply equation. However as design and innovation are driving up the mix and complexity of products, many suppliers do not have the resources to directly support the technical demand chain requirements of a number of tier-two and tier-three customers. These requirements can include engineering and design-support, channel identification for product designs, and field technical support. Distributors, for their part, have continued to collaborate in order to represent their suppliers to a wider range of customers, and to support customer-specific requirements as well. This is also helping them to further establish their presence in the hi-tech value chain.
Design Win Process
If a supplier part is included in an OEM design project, it is referred to as a design win. Progressive distributors, backed by the huge investments in technical staff, collaborate with suppliers from the early stages of component design, eventually influencing customers to select components in their equipment design projects. For example, PC OEMs like Dell or Toshiba could use a different semiconductor chip in their design. Distributors then obtain approval and register the design with the supplier, which is referred to as design win registration. This allows them to claim incentives from the supplier whenever a part on their design registration is ordered and shipped to a customer. Component suppliers have come to depend on major distributors to track and increase design-win opportunities, and distributors with a good understanding of product functionalities across diverse markets and access to a wide range of customers are well suited to quickly recommend right parts to a variety of design requirements.
Innovation and Marketing Alliance
As an extension to the design win process, a two way dynamic collaboration provides the best route to successful innovation and implementation. Many companies reduced research and development (R&D) investments as part of the cost-cutting frenzy during the last recessionary period, but now are forced to re-focus on innovation, which is more of a requirement for survival today.
R&D alliances are linked to exploration in search of new opportunities. Marketing alliances, however, are linked to exploitation, refinement and selection of potential innovation themes from a market perspective. Marketing alliances are critical to re-using technological knowledge and exploring new application areas, i.e. cross-application of knowledge to create and shape demand. For successful market-led innovation initiatives, hi-tech OEMs need to bring the innovation wave down to the realm of component suppliers. The latter can then constructively influence the innovation strategies of the OEMs.
Component distributors, by virtue of their technical expertise and crucial positioning between OEMs and/or EMS players and component suppliers, can bring together virtual marketing alliances among the OEMs and/or EMS players to create market-led innovation instances by the component suppliers. The fundamental difference from the design win process would be that the marketing alliance enables cross application of a novel idea across segments that has been tried somewhere else in the value chain. For example, a PC OEM launches a novel feature that was supported by a couple of new components. The component distributor can collaborate with its potential customers in an altogether different segment, say, in the video business, to find cross application of this knowledge within the ethical framework. It would thus create new opportunities/applications of an existing piece of knowledge.
The reverse flow — passing the need for specific innovations from an OEM or EMS player to the potential suppliers — also takes place. Thus the distributor acts as an innovation channel, creating win-win situations for its customers and suppliers. A significant value-add in this scenario would be to recognize and pass on the trends to the partners about any "disruptive innovation" — something that can eventually overturn an existing dominant technology.
Ship and Debit Process
Component suppliers regularly publish a "recommended price list" for their parts and suggest that distributors use this as a guideline. However, distributors will often have to deal with the following situations:
- Special price requests from customers based on competitor quotes or volume buys
- Stock on hand that is significantly overvalued during a falling market price scenario
Distributors have worked with suppliers to structure price protection and ship and debit clauses to cover their stocks as well as to service customers at special pricing. During the above situations, the suppliers that have entered into ship and debit clauses issue a lower price list and credit the distributor with the difference between the old and the new price for stock on shelf. For customer orders with special price requests, the distributor obtains permission from the supplier to sell it at a lower cost, ships the stock first and then a debit claim is made on the supplier's account to recover the difference. Some component suppliers keep the recommended price list a little higher and push for a number of ship and debit transactions, as this implies the distributor is financing over-valued inventories for a period. This is an important collaborative mechanism because it helps suppliers to track market pricing and demands more closely, and distributors to win more customer orders and to better service price sensitive customers.
Dealing with Industry Regulations
The electronics component distributors need to collaborate with the OEMs and the suppliers in a way that the products handled by them in the supply chain are compliant with such regulations as Reduction of Hazardous Substance (RoHS) and Waste Electrical and Electronic Equipment (WEEE). The role of the distributor is particularly critical in disseminating RoHS-compliant component information, the absence of which has the potential to disrupt the complete supply chain, particularly in the European Union where the regulations went into effect on July 1, 2006.
The challenges faced by the distributors in handling this are many, considering the numerous ways that suppliers may give this information to the distributors on one side, and on the other side the queries that distributors need to handle from their customers in order to understand the hazardous substances carried by the components. Therefore, distributors are now focusing on providing the following critical information and services:
- Possible effects of lead-free parts on end product reliability
- Advice on how to handle lead-free soldering and related technical information
- Inventory control mechanisms to expedite and consume non-compliant parts on time
- Standardized way to communicate RoHS-compliant information
- Participate in the "Design for Environment" process early in the product development lifecycle
Due to the perennial cost and inventory pressures on electronics manufacturers, just-in-time supply of the right parts directly to production lines is a requirement. Large distributors provide the required logistical support to achieve this by maintaining in-plant stores in a vendor-managed inventory program, generally with preferred customers. The in-plant store allows the manufacturer to reach out to the inventory easily on-site, but at the same time not have it reflect on their balance sheet. A more collaborative case may be when personnel from the distributor run the in-plant store, thus being more in control and more responsive to the inventory requirements.
The term "component distributor" in the hi-tech value chain may have become more of a misnomer as such companies have come a long way from just distributing parts and providing logistics/material management support to being valuable partners in the industry. This was possible initially due to the dispersion of certain business functions by suppliers and customers, and more recently due to the pro-active approach of distributors in understanding the needs of an evolving industry and structuring effective collaborative mechanisms to tightly integrate all the nodes in the hi-tech supply network. Demand for top-end services like design support have prompted distributors to contend that these are in line with their core competencies, and in the times to come, they are expected to play a much greater role in managing industry critical issues like regulation and globalization, and continue to drive the hi-tech industry into higher levels of maturity.
About the Authors: Subramanyam Venkataraman, Venugopal G. and Balaji N. are senior consultants with Infosys, a global end to end Business solutions and IT services provider.