By Jamie Furness, General Manager, UK, Ireland and South Africa, TTI Inc.
The global nature of business these days is both a great opportunity and a huge challenge. Markets and products that were inaccessible or uneconomic even 20 years ago are now available for anyone with an internet connection or telephone. However, the challenges we face were never more brutally demonstrated than last year, first by the devastating and tragic earthquake and tsunami in Japan and then the terrible flooding in Thailand.
Rightly, our immediate focus when crises like these occur is on the human cost and efforts to help rescue, support and rebuild, but as things return to normal it is insightful to note that the World Bank estimates both these events to be in the top four most costly disasters. Over and above the cost of rebuilding, damaging economic effects are felt all around the world as disruptions to manufacturing supply chains cause global shortages which in some cases can last longer than a year.
The electronic components industry is dependent on manufacturing centres around the world that have been seriously affected by the aforementioned and other environmental tragedies. Therefore it is vital that customers should choose distributors that can mitigate this risk and help secure their supply chain so that their production lines keep running.
Leaving aside natural disasters there are other reasons why prudent companies will seek to strengthen and secure their supply chain. A variety of other factors also adversely affect product availability: lack of raw materials (tantalums capacitors); cost of precious metals (connectors, relays); high demand in developing nations such as China and India; and capacity reduction due to the economic slowdown.
Distribution is a vital part of the supply chain, especially in the UK manufacturing sector which is dominated by Tier 2 and Tier 3 SMEs. Distributors should promote their franchises to a wide range of customers, helping with design-in, introducing new parts which provide a competitive advantage and also act as a one-stop-shop, thereby reducing the cost of acquisition. But the number one function that customers expect from distribution is to have stock. This may sound very simple, but distributors – like direct consumers – are affected by shortages too, and stock is expensive to hold so in tough economic times that is often one of the first things to be cut.
On the face of it, TTI may appear quite similar to many other global broadline distributors. One big difference is that we only focus on passives, connectors, discretes and relays & switches rather than semiconductors. However, there are other major differences. While it is normal for somedistributors to strive for stock turns of over six times a year, TTI looks to achieve three to four, but is more interested in the right profile to support future demand for its customers needs. (As a comparison, the ‘Big Four’ catalogue houses have a turns ratio of 1.5x – which is necessary to support a very different business model.)
What this means is that the other broadliners are holding reduced inventories to keep their costs down, whereas TTI is prepared to invest, stocking wide and deep across its franchise portfolio. Therefore, the company always has good sample and production stocks available to sell.
Returning for one moment to the specific theme of shortages caused by natural disasters, in these circumstances, TTI is also very careful about who it sells to and how much. TTI never sells allocated parts to resellers who often benefit from allocation issues forcing prices to sometimes crazy levels. Specifically, during the Thai floods, TTI would not allow any non-customer to buy more than 25% of the stock it was holding on any particular line item which helped reduce panic buying and kept allocation at bay.
Highly efficient and effective inventory management procedures underpin TTI’s availability to hold freely-available-to-buy stock and to weather shortages - whether natural or man-made. The company bases its buying patterns on complex algorithms based around the type of product, how fast it moves and the frequency of use as well as manufacturing lead times.
Another factor in the equation is the close nature of the relationships TTI develops with its customer base. Through AIRS – which stands for Advanced Inventory Reservation System – customers share their production forecasts with TTI; the distributor then creates a specific stock ordering profile to match the projected demand, based on the customer’s forecast, product lead times and its own view of how individual suppliers are performing. Simplifying, TTI will look to hold a buffer inventory to cover 50% of the leadtime - so if the leadtime is 16 weeks, TTI will order 24 weeks’ worth of that particular item.
Based on AIRS, TTI is just introducing a new service called Frame-Tool. This is similar to a bonded stock agreement, except that with bonded stocks – and most people don’t understand this – once the agreed stock is used up, there is no more that is guaranteed to be available. With the Framework stocking agreement, TTI will keep the stock levels ‘topped’ up according to customer forecast. Effectively it is a Just-In-Time program run according to TTI’s buying algorithms.
Using a variety of these processes, TTI is able to work closely with its supplier and customer base to understand production, usage and requirement. TTI is also able to offer alternative manufacturers or replacement technologies from within its franchise base so that the Supply Chain runs smoothly. The one thing we will never do is to supply from the grey market, out of franchise, since that exposes our customers to the greatest risk of all – component failure due to the use of counterfeit parts.