Distributors have to confront multiple issues: globalisation; growing product complexity; managing supply and demand effectively; and addressing issues like obsolescence or counterfeit components. The industry’s ‘in-tray’ is certainly full.
To find out how the industry is responding, New Electronics talked to five leading distributors about the challenges and how they are addressing a fast changing and demanding market.
Despite recent figures suggesting UK manufacturing is seeing its fastest growth in 16 months, worries remain over the global recovery. As a result, the UK market remains challenging.
“UK manufacturing certainly remains an issue, but the number of companies designing with electronic components continues to grow,” says John MacMichael, managing director of Solid States Supplies. James Bell, managing director of Rapid Electronics, says a key driver of that growth is the Internet of Things. “The sheer number and types of connected device coming onto the market means sales of components such as MCUs, connectivity products, connectors and antennas are surging.”
“The UK market remains stable,” according to Paul Bandy, head of product development at Aerco, who expects to see ‘continued moderate growth over the coming months’.
Andreas Mangler, director strategic marketing and communications for Rutronik, argues that while the UK market might not be as dynamic as others in Europe, ‘it is broadly diversified and this provides a degree of stability’. “There are many smaller, highly specific niche markets in the UK, creating real opportunities for continued growth.”
For Steve Rawlins, Anglia’s managing director, while the market is up by as much as 10% in volume, the pressure on average selling prices means revenue is flat or even declining. “Some customers are actively reducing their component stocks and there is a lot of inventory in the supply chain.”
Rawlins believes distributors can create additional growth by targeting customers who don’t currently buy from distribution. “For example, the LED lighting market is a great opportunity, as is the M2M wireless module market. Both represent a rich vein, allowing distributors to sell into the logistics, facilities management and other industries,” he says.
Customer relationships
While growing the market is crucial, so too is maintaining and developing relationships with existing customers.
“Experience has taught us that the truly valued services distributors provide are the ones that eliminate processes for the customer and allow them to take product directly to their production lines. These services, coupled with fast turnaround services, offer real value,” suggests MacMichael.
Real value is all about providing ‘product quality, backed by technical expertise, good customer service, market knowledge, complementary product lines and a willingness to comply with customers systems and processes’, argues Bandy.
“In a recent customer survey,” says Bell, “the top five valued services distributors provide were: next day delivery; competitive pricing; an efficient web search/online experience; high stock levels and high levels of customer service. We found that customers placed huge importance on distributors sourcing and quoting on unlisted products, as well as offering alternatives and providing technical support.”
“Product complexity is already high and will continue to rise,” says Mangler. “That’s because the level of integration is rising. As a result, this makes the advice provided by our field application engineers even more important and we need to cover multiple disciplines. “
According to Bell, Rapid’s survey found that customers appreciated up to date notification about product obsolescence and replacements and valued strict adherence to legislative changes and product traceability.
“Regulatory complexity and counterfeiting remain big issues,” says Rawlins. “Customers are concerned about counterfeiting as their potential liability increases. This plays into the hands of reputable franchised distributors, who can provide full traceability for the components they supply.”
Mangler agrees. “Fake products are barely an issue for us as a franchised distributor because we procure our goods exclusively from our suppliers’ official production facilities.”
Rawlins believes regulation is increasing across all aspects of distribution. “New rules are being put in place, often to protect the environment or to combat terrorist threats. The dual use regulations, for example, cover the supply of apparently innocuous components like MCUs or crystals that could be used in weapons production.”
He believes customers rely on distributors to address regulatory, counterfeiting and other issues, but notes they expect distributors to absorb the associated costs.
The main challenge for Aerco, an electrical components distributor working mainly in the defence, aerospace and transportation markets, is to provide greater supply chain transparency. Bandy believes this is driven by the fear of counterfeiting or the use of recovered and refurbished product. This leads to a focus on using franchised distributors as buyers are nervous of going outside the normal supply chains. “For smaller specialist distributors or brokers, the pressure to use only franchised suppliers makes it hard to compete,” Bandy believes.
Differentiation
Are we seeing a blurring between brokers and franchised distributors? Bandy says: “Yes, and the key change is that major broadline distributors are now willing to get involved in specialist design-in and will act as a broker.”
However, while brokers might like to see a blurring of the lines, MacMichael suggests the increasing threat of counterfeiting is causing more manufacturers to insist that product is only bought through franchised channels. “Customers need to avoid the grey channel and, if they can’t, then they should turn to a reputable franchised distributor to verify the product.”
“Customers often no longer have the option of buying from an unregulated source, even where there is no alternative,” believes Rawlins. “The risks are just too great in terms of potential liability and exposure to penalties. Pure grey market suppliers are in a tough place; some brokers have become franchised distributors in order to demonstrate the provenance of their components.”
Bell argues that, as a result, customer loyalty cannot be taken for granted. “They are shopping around for the best deal from order to order and prioritising on pricing, delivery, stock and lead times. We are even seeing manufacturers dealing more directly with customers and looking to bypass distributors.
“It is becoming more difficult to forecast sales and stock, while time to market, product innovation and research are all speeding up, causing quicker product obsolescence.”
So how can distributors differentiate their offer and compete with manufacturers who are now selling direct?
“Customers are increasingly interested in a more dynamic approach to vender managed inventory (VMI), with intelligent replenishment matching flexibility to demand,” suggests Rawlins. “VMI is typically only available to the larger customers; if it could be made easier to manage, it might offer benefits to medium or even smaller customers.”
Bandy agrees. “More customers rely on distributors to provide VMI services, vendor reduction programmes and keep safety stock. They also rely on distributors to offer solutions or alternatives when product is unavailable or on long delivery.”
“Customers would like their distributors to be a one-stop shop,” says Bell. “They should be able to take a BOM, quote on products they list, source products they don’t and hand it back to the customer ready for them to compare to other distributors. Being able to quote on half a BOM is no longer competitive.”
Declining margins
Declining margins and low cost Internet distributors are making it more challenging for distributors to provide free technical support and services such as first article programming without passing on the cost.
“Added value is increasingly the factor that allows a distributor to stand out from the competition,” says Mangler. “However, many services are not visible to the customer. This is causing some tension because, unlike the software market, for example, it is not possible to charge for these services. Costs are hidden in the product price and this is why it is important to raise awareness about the added value they are getting from what might be a slightly higher product price.”
“Shrewd suppliers, however, will try to support their distributors and reward them for work done on their behalf, whilst customers with more advanced supply chain processes are consistently placing more business with distributors that support their design teams,“ MacMichael believes.
Bell notes: “If Amazon is any guide, the B2C sector is moving away from offering free delivery. But the opposite is true in the electronics market – major players are offering free delivery with no MOV. It’s a move that will probably lead to an increase in prices, MOQ per line and/or a reduction on margins.”
If distributors are to succeed, they need to better understand their customers and their customers’ customers.
“The only way to grow faster than the market is to be smarter than the market,” argues Rawlins. “This means building your knowledge. An effective demand creation distributor not only needs to understand what the customer is looking for, but also what drives their customers. If you’re a demand creation, as opposed to a demand fulfilment, distributor, dialogue is essential. You need to understand fully the needs and the pain points at every step.”
However, not all markets operate in this way and distributors need to be certain they are not breaching confidentiality when they talk to any end customer, warns MacMichael.
“Of course this is useful,” says Bell, “but, in reality, is not always feasible. Where we have direct communication with the end customer, this has led to greater transparency and a significant improvement in the relationship between all parties. We can exchange ideas and create a better product.”
Bandy says this is how the supply chain should work. “In order to fully understand the needs of the direct customer, it is essential that we understand their market and needs. We often meet with the OEM and CEM at the same table and this helps us to understand the significance of the required component that may go on to a PCB and then into an aircraft.
“The consequences could be extremely expensive, if not disastrous, if we misunderstand and do not do our job correctly.”
