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Distributors Eye Competition in a Changing Landscape

| August 18, 2015 | 1 Comment
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barbjorgensenCapturing market share away from one’s known competitors is a time-honored growth strategy for most businesses, particularly when the market is flat. But if a company is too focused on defending its turf, executives say,  it runs the risk of not seeing new competitors coming.

Verical.com’s Chief Digital Officer and President Matt Anderson recently told Forbes magazine “… if you pay a lot of attention to the businesses in your space that your business unit presidents or geography presidents talk about a lot –and certainly you should do a little bit of this —you’ll miss your real threats which are new entrants that will come in and develop new capabilities, or new business models or build Internet audience and begin to steal brand share from your company online.”

Online isn’t the only source of competition, although the barrage of dot.coms in the early 2000s sought to unseat the traditional model of electronics distribution. Most recently Amazon.com unveiled its b2b marketplace, AmazonBusiness, which sells electronics components. The reaction within the distribution industry has been mixed. AmazonBusiness might be a price leader, but it may not trace the origin of components as thoroughly as top-tier distributors. Amazon.com has redefined the way retail shopping is conducted; the jury is still out on Amazon b2b.

The other source of competition in the electronics supply chain comes from companies that are also customers of distribution. Electronics manufacturing services providers (EMS) often source the components that their OEM customers spec on their bill of material (BOM). EMS companies can often combine OEM orders so they can procure common components—most often commodities—for a significant volume discount directly from suppliers. This helps offset the razor-thin margins – estimated at roughly 5 percent – EMS companies get for manufacturing services alone.

Distributors—which also fulfill BOM orders—provide services for suppliers. Distributors promote their suppliers’ products; may get a part designed-in by an OEM; and manage upside/downside forecasts that spare suppliers from holding inventory. But when it comes to pricing, distributors only have a certain amount of leeway to lower prices. Even if a supplier agrees to a lower price, distributors receive a credit toward their next purchase from that supplier. This practice, called ship-from-stock-and-debit is time consuming and unwieldy.

EMS companies increasingly have been trying to manage more of customers’ BOMs. As EMS companies are not constrained by supplier pricing policies they can conceivably undercut distribution prices. As a result DTAM—distribution’s total available market—shrinks and goes to EMS.

This is not a new phenomenon but one that becomes exacerbated during long periods of flat growth as suppliers, distributors and EMS scramble to increase sales. Because EMS companies buy such huge volumes of parts, component suppliers are reluctant to redirect EMS toward their distributors for fear of losing that sale. But EMS companies don’t provide any ancillary services to suppliers. If suppliers A and B make the same part, a distributor may promote supplier A because supplier A is on the distributor’s line card. At an EMS, supplier A and B have equal chances of securing an order.

EMS and online companies can now be counted among “known” competitors for distribution. This doesn’t make the channel’s job any easier, though. Distribution has to constantly prove its value to the supply chain to avoid getting displaced. There is one constant, though, that TTI Inc.’s Senior Vice President, Americas, Michael Knight recently discussed. Distribution, he said, is the only link in the supply chain that does not count inventory as a liability. Suppliers don’t want inventory on their books; customers certainly don’t; and EMS frequently buy more products than they consume. “Inventory is one of the reasons distribution exists,” Knight said. “The supply chain expects us to carry inventory and be a buffer to [customers’] inaccurate forecasts and materials planning systems. If an Amazon.com or an EMS is the only entity standing between suppliers and OEMs that don’t want to hold inventory and there’s a sudden uptick in demand there’s going to be a tipping point. In the current market environment, I’m not sure customers and suppliers think about that enough.”

By offering services to both suppliers and customers, distributors acknowledge that holding inventory isn’t their only value proposition. But it is one they provide whether the market is up, down or flat.

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Barbara Jorgensen is managing editor of Electronics Purchasing Strategies. She can be reached at barbara.jorgensen@epsnewsonline.com

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