There has been a lot of seismic shift in the electronics industry, both literally and figuratively. All have impacted procurement to some degree.
Within the distribution channel, there has been a slow but expanding level of attention paid to design engineers in addition to procurement. For distribution, the upside is clear: designers influence the components that go on a board and therefore represent a significant sales opportunity. For suppliers, which utilize distribution because they can’t cover the entire potential customer base, reaching designers is an opportunity to secure a socket on a board.
Once the customer’s end-product reaches production, there is a better than average chance the devices selected for the design will generate long-term sales for both suppliers and distributors.
This effort is called “demand creation” and it is a cornerstone of the business relationship between suppliers and their channel. If it’s done well, demand creation is invisible to the customer; generates sales growth for a distributor, and secures a long-term relationship for the supplier. It’s crafted to be a “win-win-win” situation.
But the system also has its flaws. Distributors are sales-driven organizations and many of their employees are paid on commission. Engineers have to be hired to support customers with their design needs. Since engineers generally don’t generate sales dollars, they are a fixed cost in the distribution channel. So distributors look for ways to defray those costs. “If you aren’t getting returns [on your design efforts] you can’t do the work,” says Michael Knight, senior vice president, Americas, for TTI Inc., echoing the sentiments of many distribution companies.
Many suppliers support demand creation in part because they don’t have to deploy salespeople to call on distribution customers. Distributors reach tens of thousands of small customers across all markets. Suppliers acknowledge the channel plays a significant role in getting new products in front of customers.
Some suppliers offer incentives to distributors to focus on their new products. But compensation is where the system begins to break down. Should suppliers relinquish a portion of their profit margin to distributors? Should devices be priced higher to compensate distributors? Should suppliers pay distributors for their design efforts? All of these methods have been tried in the past or are currently being utilized, but neither suppliers nor distributors are entirely satisfied. Suppliers take a hit if their profit margin is lowered; distributors may not be paid adequately for the time they spent assisting designers, and customers want to pay the lowest possible price for their components. Meeting all these requirements is a challenge for channel partners.
“Charging” customers for a service they expect understandably makes suppliers and distributors nervous. Yet, the investment suppliers make in product development and the efforts distributors make in bringing new products to market have to be recouped. Thanks to significant changes in attitude, distributors and suppliers are finally pulling together to develop a better system. Why?
- Suppliers and distributors agree demand creation is necessary: Suppliers want to get their newest products in front of customers as quickly as possible, but new product announcements can be scatter-shot. Catalogs are now largely online and many industry publications have been shuttered or become Web-based. Instead of new product announcements being collected in one spot, they are fragmented across online publications, distributors, and suppliers or aggregator websites. Unless buyers know what part number they are looking for, differentiating a new product from an older device is difficult. Distributors act as a central clearinghouse for new products.
- Reps aren’t getting “face-time:” Engineers are busy doing more with less, so they aren’t meeting with reps as often as they used to. Reps are a key source of new product introduction (NPI) and often work closely with distributors.
- Products are more technical: Instead of one size fits all, components are being developed toward specific applications such as mobile, industrial, medical, mil/aerospace and consumer. Some work better in one application than another, and understanding this helps engineers make better decisions.
- Customers receive better service: Sometimes components enter the market with an end-of-life date already decided. For a consumer application, this may not be a problem. For industrial use, it could be. Since suppliers share lifecycle information with distributors, distributors can guide a designer toward a long-lived choice. This doesn’t mean selecting a different supplier: suppliers usually offer a variety of devices within component families.
So how are partners making this work? There are generally two ways of compensating distributors for their design efforts: money or service. When a distributor gets a component designed-in, a supplier may offer that distributor price protection, meaning the distributor will have a preferred price or exclusively sell that product for a period of time. Another way is for suppliers to provide a higher profit margin on a device, which works well with high-priced or proprietary semiconductor products.
On the service side, suppliers will train distribution salespeople in-depth on their products. This is an outlay of cost for most suppliers: developing materials and bringing people together for training sessions cost time and money. But suppliers see this as a value because a well-trained salesperson who understands the merits of a product is in a better position to secure a sale. This saves distributors the time and effort of training salespeople who more often than not will manage an array of products rather than just one supplier’s.
Even though demand creation is largely targeted at engineers, buyers play a leading role once a design is done. Buyers are responsible for knowing if a component is sole-sourced; what price the market can bear; trade restrictions on specific technologies, and environmental mandates. Buyers will know if a part is in short supply and track pricing peaks and valleys. Suppliers and distributors are very careful so that demand creation expenses don’t spill over to customers. If a demand creation effort sails through purchasing without raising red flags, then suppliers and distributors did the job well.