If there’s one thing that distribution knows, it’s how to leverage volume. The number of components that passes through the channel every day is mind-boggling, and suppliers, distributors and customers all know that the more you buy, the better deal you can negotiate. But what happens to your leverage if you are not a volume customer?
Smith & Associates’ Jaime Treinen takes a look at that dilemma in Automotive Electronics Prompt New Supply Chain Challenges. The automotive electronics market is enjoying one of its better growth cycles as solid more cars are being bought and more electronic content is added. Chip companies should be lining up at auto-makers’ doors. But they’re not. For all of the value of the electronics that go into cars, the volume numbers aren’t that impressive. What’s worse, car-makers are competing against consumer electronics companies for semiconductor suppliers’ attention:
Automotive manufacturers are not only competing with each other, they are now competing against buyers in other markets for the very same types of volatile commodities such as DRAM, NAND flash, MCUs, MPUs, FPGAs, PLDs, and sensors. Larger quantity buyers, such as for consumer devices, will always receive the best pricing, that is a simple economic fact.
This could turn out to be a short-sighted strategy for chip makers. While it is true that the number of components is lower, the auto market is strategically a good bet for chip makers. Once a supplier goes through the qualification process for an automotive OEM, the lifespan of that part could be decades. Compare that with the lifespan of a typical consumer product which could less than six months. But to Treinen’s point, if we are talking about commodities, maybe strategic relationships are secondary to a pricing free-for-all.
So in a market where volume is king, what do smaller companies do? They use distribution. By pooling customer orders, distributors get volume leverage with suppliers. By breaking down those volumes, they can sell to smaller customers in reasonable quantities. As Future’s Lindsley Ruth points out in In Electronics Becoming ‘Irrelevant’ is a Constant Danger:
Holding lots of available to sell inventory is an opportunity for us. We don’t view it as a risk because it all boils down to service. Why do buyers get in trouble? They fail to eliminate risk. Two types of risk. How hard is it to find parts? How hard is it to get rid of what you don’t need? In other words, you have too little or too much product. The key is getting it just right.
What is the most expensive part on a board? The one the customer doesn’t have. Inventory matters. Service matters. Service is most important usually when we don’t feel we are getting good service. Otherwise, service is often taken for granted. We don’t take it for granted. We make it a way of life. Security of supply, OTD and flexibility are part of our core. Consider these as key aspects of our no-cost supply chain insurance policy.
In other words, a company buying a single component has leverage in distribution.
A little more than a decade ago, distribution was fated to be replaced by the internet. Buyers could skip the middleman and buy their components direct from suppliers. As it turns out, suppliers don’t want to break down packages of parts. They don’t want to kit, extend credit, or do many of the things distributors do. They also don’t want to hold inventory. As Ruth says in his article, inventory is a risk for anyone — except for a distributor.
Distributors have to perform many tasks in order to continue to grow their business and retain their customer base. But increasingly, the channel is the only link in the supply chain that’s willing to buy and manage inventory. As long as distributors continue to fulfill that role, they won’t become irrelevant.