Smith & Associates: Independent but Quality Obsessed

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Many high-tech companies -- and rock bands -- are famous for being started in garages.  The $586 million distributor N.F. Smith & Associates had a similar beginning, except it was out of a living room.

“Whenever I think about our start-up today, I remember for an eight-year period we had huge challenges: we were undercapitalized, it was a very erratic market; it was a bootstrap business and there were probably many times the business could have ceased to operate,” said Bob Acklerley, who co-founded Houston-based Smith & Associates in 1984 with his brother Lee. Smith is celebrating its 30th year in business.

The erratic electronics market is in large part Smith’s raison d’etre.  The supply chain serving the electronics industry is known for its volatility. Electronics OEMs manufacture their products based on forecasts and share those predictions with component suppliers and distributors.  Although forecasting has improved since the industry downturn in 2000-2001, sales projections are still notoriously unreliable. Independent distributors like Smith help customers mitigate some of the unpredictability in the market by acquiring and stocking hard-to-locate components and making these available to OEMs. Smith is considered an independent distributor because it is not franchised by component suppliers.

“The model that has evolved helped smooth out supply and demand,” Bob Ackerley said in an interview with Electronics Purchasing Strategies. “You have to understand the dynamics of this business. Every day you have device manufacturers trying to project how many laptops they can sell. They think it is 25,000; then they want more. Or, it’s a dog and they only sell 5,000. Either way you have an issue: you either have incremental demand or you have a problem with inventory not moving. If [authorized] distribution could have handled all that we wouldn't exist at all.”

That’s not to say Smith -- or any distributor – has a set formula for success. “We’ve seen OEMs filing for bankruptcy,” said Bob. “Ideas come and go and customers of distribution [which tend to be small and mid-size OEMs] get hit the hardest. The biggest players now dominate in the smart phone market and for us that means a focus on being relevant to the biggest OEMs because they dominate the business today.”  Lee and Bob have been adding to their management team and have stepped away from the day-to-day operations of Smith in order to focus on the company’s strategy for growth. “One of the things we are looking at is additional services we can offer,” said Lee.

Smith started out with four employees; two of them were Bob and Lee Ackerley. The name “Smith” was adopted from another family member’s business. Neither Ackerley brother had been to business school but both had extensive experiences in sales and understood the industry well. The early 1980s were the heyday of the PC business and experienced some of “the biggest component shortage anyone had ever seen,” Lee Ackerley recalls. “The first eight years of our business we were just hand-to-mouth.”

Things were rocky for a while:  at one point the company got out of the semiconductor business and was selling resistor networks. Then the early 1990s saw the rise of Windows and the Intel PC. “In in 1991 our sales were $11 million and in 1995 they were $350 million,” said Lee. “We were selling everything: logic, surface mount logic, CPUs.” That year, Smith built a new headquarters.

By 1998 the company had expanded into the Asian market. Smith had always bought and sold components overseas, but U.S. companies by then had begun manufacturing in Asia.  “If you didn’t have a presence in Asia you couldn’t compete,” Lee said. Smith expanded through organic growth rather than via acquisitions, he said.

“We usually took a salesperson or two and sent them to Hong Kong to open an office,” Lee said. “There’s a lot of mobility within the company and it is a great kind of perk; it incentivizes everyone because there are opportunities.” At the same time, the company made sure to staff its international offices with people that know the local language and culture.

Smith has 13 global offices, including sites in Hong Kong, Seoul, Shanghai, Taiwan, Singapore and Amsterdam.

As Smith was expanding operations locally and internationally, the electronics distribution industry itself was contracting. U.S.-based distributors began acquiring one another in the Americas and then bought competitors overseas. “Certainly one of the changes that is most significant is the consolidation on both the supply side and on customer side [of the market] where you had many direct small players in the industry and huge consolidation in the customer base,” said Bob. “It’s those kinds of milestones that that change a company: you have to ask what you can do that day to stay relevant.”

Smith’s chosen business – independent distribution – has had an uphill battle for decades.  Authorized distribution, which promotes its suppliers’ products and passes component warrantees and guarantees onto end-customers, faces some restrictions in regard to pricing and in some cases, sales regions.  Independents don’t have the same limitations and often buy and sell around market pricing.  Subsets of the independent market – brokers, for example – buy and sell parts on speculation and have been known to gouge customers during component shortages.  Brokers and less-scrupulous independents have been known to trade in counterfeits, giving the entire market a black eye. The Ackerleys said they have worked hard to raise standards for independents.

Smith has invested millions of dollars in its quality control operations – including a state-of-the-art test lab – and has stringent processes in place that test and inspect incoming and outgoing devices.  The company has achieved global accreditation from the ISO and the CTI and has gained AS9120 (aerospace) certification. “The product going out the door is basically the same as the authorized distributors’,” said Lee. “Our customers demand that every part has come from stable sources and has been tested. They no longer ask us where it comes from – they know it is excess from EMS or directly from component factories. Quality control is non-negotiable and we will not send our customers anything that could be a problem.”

“We’ve seen guys that have one idea and that was take advantage of every situation and make as much money as possible,” said Bob. “In the 1980s [electronics distribution] was the Wild West. You could have a few people with zero overhead just trading this stuff. Our attitude was ‘let’s set the tone from the top.’ We will deal with integrity and stand by what we do.  If you are an OEM or manufacturer you want someone you can trust. If you have problems finding something, we will be a partner and we will do it at fair cost to you.”

“We realized how import the physical side of the business was so we are monitoring product around the world and making sure it was quality product,” added Lee. “We’ve always developed our own proprietary enterprise applications.  We also make sure we are compliant with all regulations and we have to be good at all these things. We also interface with our customers and try to be easy to deal with. That’s a pretty good legacy.”

The Ackerleys have not only reinvested in Smith but have expanded into ancillary business. The company has business in cable assembly, IT consulting and more recently, solar panels. The expansion into these different market segments has helped the company grow and opened up opportunities for employees, too. The successes the company has racked up over the years makes it easier to forget the hardscrabble beginning, according to the Ackerley brothers. “We don’t work out of my brother’s living room,” said Lee, laughing. “We’re not using old analog phones and we don’t have his cats stepping on our keyboards anymore.”