While global supply chains continue to expand and extend their reach, tighter margins and intense competition challenge OEMs to improve processes and streamline operations across the board. Taking a page from the solar industry, we are seeing a real movement in semiconductors to vertical integration, particularly among the service and component distribution channels.
Vertical vs. horizontal chains
"Vertical integration" refers to a company having, in-house, the supply chain necessary to conduct all aspects of its business, from design and manufacturing to assembly and logistics, and all points in between. The company has built-out and extended its capabilities to encompass multiple stages of production or functions.
In contrast, "horizontal integration" refers to supply chains that are not originally housed under a single company ownership, but generally have been acquired and merged into single companies. The horizontal aspect refers to the company having acquired competitors or other companies that perform similar functions as it does to extend its expertise or market share. Usually, horizontal integration begs the question of monopolies because it intentionally reduces competition.
Electronics manufacturers have been going through a period of focused outsourcing; simplifying supply chains to make them leaner, more transparent, and more fluid. Component distributors have been responding by increasing their integration strategies in different ways, and with varying successes, depending on the history of the breadth of their core competencies. Some distributors have moved more in the direction of horizontal integration to deepen their reach and extend aspects of their core, while others, such as Smith & Associates, have continued on a longer-trend of vertical integration. Vertically integrated distributors are leveraging existing capabilities and aligning what is in-place across their global offices to offer more elegant and seamless value added services to customers.
Transparency, sustainability, and improved margins
One example of vertical integration that is increasingly demanded of distributors is support for remarketing of existing products, whether components, assemblies or IT equipment that might need refurbishing, updating, or reworking, for example. Distributors with deep logistical capabilities and sophisticated ISO 17025 laboratories are in particularly prime positions to vertically integrate the existing services they provide customers into a more encompassing, aligned, value added, global service.
The shift to wider service demands is not just a market opportunity for distributors. Rather, this event has been building from EMS and OEM companies for a while. It is rooted in the rise in importance of strategic management demands from EMS and OEMs, such as increased transparency, improved sustainability and reduced environmental impact, and especially value extension of existing assets. Considering that global distributors have at their core the sophisticated processing of components for assembly and/or disassembly, testing and quality control, handling end of life (EOL) events, and lead in market pricing awareness of any given component at any given time, the vertical integration of global distributors is a natural step for the industry.
Transparency in particular has been critical and continues to be a key factor in reducing counterfeit risks while also improving processes throughout and across organizations. Vertical integration addresses demands for increased transparency by eliminating the use of third-party partners and keeps the supply chain more secure and verifiable because of the in-house handling of such services. Additionally, asset disposition is improved both for return on existing assets through remarketing, turnkey handling of warranty and repair events, and in improving corporate sustainability and environmental stewardship goals by reducing the amount of material going to electronic waste and landfills.
Quality at the core
Central to the current rise of component distributors' vertical integration movements is the capability of these largest, global companies to build upon their existing, fundamental strength: quality and absolute reliability in a volatile market both pricing and quality-wise. Demand for broader, more turnkey services from component distributors reflects the ongoing rise in transparency along the supply chain to reduce counterfeit risk as well as safeguard investments in existing IT equipment, notably servers and computing equipment. Companies both from the user side, such as large enterprises, and the manufacturer side, such as EMS and OEMs, are looking to maximize investments and replace or rework only what is necessary, not scrapping entire, large installations. Whether the equipment is to be evaluated for disassembly and value recovery of EOL components, or piecemeal upgrading, there is an expectation of the highest-level of expertise, laboratory sophistication, and appropriate component handling and proper asset disposition (including environmental awareness).
Global supply chains are streamlining and simplifying and distributor vertical integration in increasing in order to consolidate costs, align goals, and provide full transparency and accountability.
Kirk Wehby is chief operating officer for Smith & Associates, overseeing Smith's global operations, quality, logistics, security, and facilities.