The electronics supply chain has known for some time that only so much growth is available through the sale of hardware such as components and computer systems. Prices of mature products continue to go down, and new products don’t hold their value for as long as they used to. The next logical step is to expand into services related to that hardware—kitting, packaging, consignment, assembly, engineering etc.
That’s not a new idea to the channel: distributors have been adding services for decades. Logistics and reverse logistics are the most recent examples. And there’s still opportunity for expansion. Smith & Associates vice president of marketing Mark Bollinger got some feedback on this at electronica:
To meet the new growth and the diversification opportunities, we heard continuously from visitors to our booth as well as in seminars, round tables and on-the-floor conversations, that manufacturers need more flexible services along the supply chain. Extending reach into new markets means extending into new locations and having partners with that reach and local knowledge is a critical component to not only realizing first market opportunities, but also to succeeding without overextending in additional facility investments. Exposure to new customers and new markets goes hand-in-hand with the need for flexible solutions and local knowledge and contacts.
Note the word “knowledge,” which came up a lot during Dr. Barry Lawrence’s presentation at the recent ECIA Executive Conference. Distribution continues to face new challenges in hardware sales: Amazon.com is getting into industrial distribution, for example. The implication is any company with a good e-commerce engine can sell components. What differentiates electronics distributors, Lawrence said, is knowledge, citing some recent research. Customers were asked what they want from their channel partners: the answer was knowledgeable salespeople; help in finding new business; and help in conducting their business.
The same could be said of suppliers. Recently, semiconductor maker Broadcom realized it had some holes to fill in its marketing efforts, as Gina Roos writes in Broadcom Targets Mass Market with Mouser’s Help. It’s a real endorsement of the channel.
Here’s the problem with services, at least as far as distribution is concerned. First, as Lawrence pointed out, distributors have a hard time putting a price tag on services. Services cost money: distributors buy the products they sell; invest in warehousing and technology; hire people and even loan money to customers. Providing engineering support also requires an investment, and distributors look to suppliers to defray these costs. The fact that many suppliers offer programs to offset distributors’ costs is further proof that there is a value to services.
A second but related problem is customers historically have not been accustomed to paying for services – at least as they are currently presented. A decade ago distributors tried to charge for services a la carte—that effort was a spectacular failure. Customers see the hardware they buy and the price of the hardware. Distribution compensation programs are based on hardware sales: commissions are paid that way and design-wins are attached to volume orders. Services were, and for the most part remain, bundled within the price of product orders.
So how do you charge for knowledge? Distributors are beginning to offer subscriptions for intellectual property such as lead time and pricing trends. EDA tools, such as those recently offered by Digi-Key and Mentor, are also subscription services. But there is just as much IP out there for free: distributors point to the massive effort it takes to comply with regulations such as RoHS, WEEE, Conflict Minerals and international trade laws. Compliance is a cost of doing business, but few organizations track and assemble data for as many as 600 suppliers and disseminate that information to hundreds of thousands of customers. Surely that’s worth something?
There are no easy answers to this dilemma. Lawrence did point to a number of publications available through the National Association of Wholesaler-Distributors that tackle pricing issues. I took a stab at reading some of the introductions and got hopelessly confused. But even if the answers are complex, if the distribution industry is going to capitalize on service, they have to be found.