Pros & Cons of the Digital Supply Chain
“The death of bricks and mortar has been greatly exaggerated.”
The construction industry could conceivably have used this disclaimer when e-tailer Amazon.com built its first physical warehouse. Virtual facilities – once thought to be inevitable with the rise of e-commerce – haven’t become in norm in many market segments. In fact, in the electronics industry, distributors have been improving or replacing their existing fulfillment centers at a steady clip since the dotcom boom/bust of the late 1990s.
Still, e-commerce has been a significant disruptor in the electronics supply chain. Now that buyers and sellers can transact business online it takes minimal effort to drop-ship products from one site to another. Distribution, in theory, can be bypassed. For a variety of reasons this threat has never materialized in the electronics supply chain. In some ways distribution has become more valuable to the industry because of e-commerce.
Pros and cons of the digital market
The digital transformation has improved many functions in the supply chain such as information-sharing, transaction speed, order fulfillment and inventory management. But it has also complicated some processes that used to be fairly straightforward. Below, VericalConnect takes a look at some of the developments in the digital market and how they positively—or negatively—impacted various members of the electronics supply chain.
Visibility
Pros: One of the advantages of the digital market is that buyers can see online what products are available, where they are located and at what price. Buyers can comparison shop at multiple sites and then place an order or configure a BOM without a single phone call.
Cons: Competitors can see pricing information too. Buyers and competitors can use that information to undercut prices. Price visibility also allows buyers to play one supplier (or distributor) off another. At the onset of the digital revolution, online auction sites sprang up in the electronics market where buyers could bid for components, driving prices down even further.
Buying supplier-direct
Pros: Prior to the industry’s digital transformation, engineers browsed for components through paper catalogs compiled by distributors. Because distributors represented multiple component manufacturers they were the best source of this information. These thousand-page tomes were eventually replaced by CDs and ultimately by online spec sheets. Finding a component is now as easy as a parametric search and information is available everywhere.
Cons: Although buyers can place orders directly to suppliers, suppliers don’t really want to be in the fulfillment business. Customers want to order in non-standard volumes; they want orders broken up and shipped to various destinations; they want components modified in some way; and they want to pay for them in 30, 60 or 90 days. Distributors are still best at managing these activities.
Value-added services
Pro: Distributors have long developed their own in-house inventory management tools to track components, sales and other critical data. As outsourcing and offshoring became more common, distributor A had to make sure an order it received in the Americas wasn’t fulfilled by distributor B in Asia. Digital technology made tracking these transactions easier.
Con: Suppliers and customers were having similar problems with tracking orders. Distributors began to “unbundle” their inventory management tools from components; offered the tools online; and charged a fee for their use. Fee-for-service never caught on in distribution, but inventory management tools are now widely sold by third-party vendors.
Privacy protection
Pro: Suppliers and distributors often provide preferred pricing to customers that buy in large volumes or are long-time valued business partners. This information is kept private for a number of competitive reasons. Anonymity is maintained online by identifying suppliers or customers by account numbers, user names or other confidential identifiers.
Con: Anonymity was taken advantage of by sellers that wanted to post inventory online. Fly-by-night operators could post inventory for sale; collect payment; and then just disappear. Others sold damaged or counterfeit goods that weren’t discovered until a customer tried to use them. “Buyer beware” became the mantra for many companies conducting e-commerce.
Globalization
Pros: Before e-commerce, companies that wanted to sell in a foreign region maintained facilities in that region to fulfill an order or sale. E-commerce and overnight shipping enabled orders placed anywhere in the world to be fulfilled within a few days.
Cons: Component prices vary from region-to-region and tend to be lower in the Far East. Americas customers could view foreign pricing online and wanted to source from those regions even if the same parts were available domestically. Suppliers and distributors feared they’d have to reduce their prices to the lowest common denominator.
Leading-edge distributors have met these challenges without compromising customer requirements. E-commerce leader Verical.com is a division of authorized global electronics distributor Arrow Electronics Inc. Verical.com uses Arrow’s extensive database to trace the components it sells back to the original component manufacturer (OCM). Even if the devices listed for sale reside at a non-Arrow facility, Verical.com verifies components are authentic before shipping them anywhere in the world.
Some companies that post authorized inventory for sale prefer to remain private for competitive reasons. Verical.com vets suppliers and their inventory to reduce the risk that substandard or counterfeit parts have entered the authorized supply chain. Buyers are at a very low risk of procuring sub-par components.
Verical.com also works with component sellers to set prices for their inventory. Prices are posted online and are non-negotiable. Only inventory that is available for immediate shipment is posted, and orders of any size can be transacted through Verical.com.
And, as it turns out, warehouses haven’t gone away. But the impact of e-commerce has had a different impact on retail (b2c) and industrial (b2b) distributors. In 2001, the National Association of Wholesalers published a report called Facing the Forces of Change: Future Scenarios for Wholesale Distribution. NOW asked distributors in the retail, contracting, industrial, MRO and OEM markets if they thought an online company with its own physical distribution capabilities would pose a major threat to wholesaler/ distributors by 2006. Only a small portion of retailers – 35 percent—felt threatened by online companies. A larger portion – 45 percent – of OEM distributors felt threatened. Amazon.com, however, has had a significant impact on retail stores while many electronics distributors remain largely intact.
Category: News Analysis
