Thanks to things like twix machines, and then fax machines, and more recently, the Internet, e-mail and excel spreadsheets, the component distribution business certainly has changed a lot over the years. What hasn’t changed is a component distributor’s fundamental value proposition. Not only has this held up well, it is even more valuable and relevant in today’s market environment.
The component distribution business is all about being the middleman between a component manufacturer and the buyer of those components. Like all middlemen, the distributor exists because they are able to provide value to both parties in the transaction. As much as all customers would like factory direct pricing, and as much as the factories would like to hang on to the middleman’s mark-up, authorized distributors not only exist but in fact are thriving because their link in the supply chain addresses the real needs of both parties.
The component distributor’s core value proposition centers around three things:
- Understanding and aggregating a broad group of end customers’ component requirements and translating that into an inventory stocking position that makes a given component manufacturer’s lead times transparent to the end customer. Simply put, good distributors maintain a pipeline of inventory to support their customers, and they buy enough extra to both cover unexpected spikes in demand and attract new customers.
This is also of benefit to the component manufacturer in that this aggregating of demand, and sensitizing it to the factory’s production cycle, makes for a much more manageable and efficient incoming order flow for the factory.
- Providing expanded customer reach and more comprehensive customer touch than a component manufacturer can. The sales and service resources that a distribution network can provide a manufacturer enable them to engage with more customers in more locations and of a greater range in size than the manufacturer’s direct sales force can accomplish.
And for the end customer, the multiple, synergistic suppliers that a distributor carries allow the customer to leverage their time and more efficiently procure goods and services from multiple manufacturers in just one transaction.
- Offering short- term financing to an end customer and minimizing bad debt exposure for the component manufacturer. Distributors almost always pay their suppliers faster than the end customers pay the distributor. It is not unusual for the gap in time between these two events to exceed 100%.
As it relates to value proposition number two, the distributor’s relationship with many customers is often much closer and informed than what a component manufacturer’s resource can accomplish. That relationship is what enables a distributor to make good risk judgements to facilitate the extension of credit terms to end customers of all sizes and stages of business development.
In the current market environment, all three of these elements of the distributor value proposition are even more essential to the health and operation of the greater electronic components supply chain.
The broad view of the electronics industry is that the technology recession of 2001 was in large part caused by a disconnected supply chain and massive inventory build-ups in 1999 and 2000. Between then and the start of the most recent tech recession, all companies in the chain have spent much more time watching, managing, and ultimately, reducing the inventory they hold.
When market growth is steady and predictable, the wiser, leaner, more cautious supply chain stays in balance and generally runs pretty efficiently. And when the market contracts, even rapidly as was the case in late 2008 and early 2009, the supply chain has been able to react in such a way to keep inventories at or below end market demand, keeping balance sheets healthy and cash available for weathering the storm.
But when the market revs up, either due to rapid increases in real end market demand, or because inventories have been run too far beneath what the end market demand is (a combination of which seems to be the case today), raw material suppliers, the first link in the chain, and then component manufacturers do not respond as well. This immediately drives lead times out which in turn revs up demand even more.
The global electronics market is in the throes of this right now. Distributors executing well on the inventory component of the value proposition take up the slack, keep the components flowing, and by extension, help keep the early pressures of a recover from creating another downturn.
Another side effect of the two recent electronic industry recessions has been a deliberate scale back by many component manufacturers of their direct selling organizations in favor of the more variable cost models offered by authorized distributors and independent professional third party sales organizations. This makes the dream of a factory direct relationship for most customers even more impractical. The distributor sales and service resources mentioned in value proposition number two fill that gap.
The third value proposition of distribution has, overtime, become the most underrated and discounted of all. During the worst of last year’s credit crisis, electronics companies of all sizes and vintages had a very difficult time getting business financing from traditional sources. Credit terms from distributors remained widely available and helped keep up the flow of components from manufacturers to customers. Imagine what would have happened if component distributors had reacted like the banks and just stopped lending money (in this case, in the form of carrying account receivables) to their customers?
These tried and true functions and services that distributors perform, coupled with sophisticated vendor managed inventory and logistics program, extensive web-based product support tools and other e-commerce capabilities, make component distributors a vital and growing part of the component supply chain.
By all accounts, after the crisis of 2009, the electronics industry will experience a respectable recovery in 2010. The distribution segment of the industry will continue to play a vital role in the recovery and, as a result, this segment is very likely to be one of the stronger performers in the overall industry.