Suppliers & Distributors: Uneasy Partners, Part 3

The electronics distribution industry is at an inflection point. Not since the 1990s has there been so much change within both the channel and its supplier base. During that decade, globalization, the internet and M&A changed the face of the supply chain. The same forces are at play now, but the results have been very different. In a series of admittedly subjective articles, I'm going to take a look at how distribution relationships have changed over the years and why it matters in 2017 and beyond.

As the electronics industry entered the millennium, the supply chain was becoming global. Suppliers were granting worldwide franchises to distributors so they could fulfill in Beijing a component order that originated in the Americas. The electronics manufacturing services (EMS) industry was booming and offshoring was ramping up. The dotcom boom was fueling unprecedented electronics industry growth as the capabilities of the internet were unleashed.

The internet also provided a new venue for procurement. OEMs and EMS companies could buy components online from suppliers anywhere in the world, threatening the existing supply chain model. Companies with parts to sell had a virtual global storefront for advertising their wares. Comparison shopping no longer required dozens of phone calls, and online component auctions were becoming common.

The telecom and datacom industries that supported the internet were growing exponentially. Components, however, were growing short in supply. During periods of scarcity, component makers and distributors typically took care of their largest OEM customers first. But this cycle was different: OEMs had outsourced their manufacturing to EMS companies and they needed parts as well.

Unbeknownst to vendors, OEMs and EMS companies were placing duplicate orders for parts. That didn't seem risky: an active gray market ensured that excess inventory could easily be resold. Moreover, parts were in such short supply that resellers could charge top dollar.

When component makers found out about this practice some, such as Motorola Semiconductor, threatened to cut off customers that practiced arbitrage. This threat was largely empty because component traceability at that time was unsophisticated and gray marketers could hide behind the anonymity of internet. Besides, business was so good nobody wanted to create waves.

As it turned out, double-ordering — among other miscalculations -- created the false impression that demand was infinite.

When the dotcom bubble burst in the 2000-2001 timeframe, the supply chain found itself with $13 billion in excess semiconductors alone. Companies such as Cisco that were known for their supply chain acumen were writing off millions of dollars' worth of inventory. Things in the supply chain got ugly.

As part of their franchise agreements with suppliers, distributors agree to take back, from their customers, a certain amount of inventory. OEMs began pushing their excess back on distributors; so did their EMS. EMS companies claimed they bought parts on behalf of their OEM customers; OEMs claimed they bought the parts for themselves. Both parties were now disavowing ownership of excess inventory.

Companies that bought direct from suppliers also found themselves with excess. Suppliers didn’t want the parts back so they appealed to their distribution partners for help. Distributors stood to alienate both suppliers and customers if they didn't accept the inventory.

The inventory glut of 2001 damaged everyone. Dotcom companies went bankrupt. Factories were shuttered. Layoffs were rampant and component prices bottomed out. OEMs felt EMS providers took advantage of OEM supplier agreements to secure components. EMS companies complained that OEMs kept too much component information under wraps. Distributors no longer trusted forecasts from suppliers or customers as they waited for inventory to burn off.

New supply chain practices emerged from that period. OEM/EMS contracts spell out clearly who owns components that are procured. Distributors began to check orders against historic data to flag anomalies, and component tracking vastly improved. That development would come in handy during the supply chain’s next big challenge: the battle against counterfeiting.