Buyers turn to independent distributors
By by James Carbone -- Purchasing, 8/24/2000 2:00:00 AM
These are tough times for electronics buyers. Because of a lack of investment in new capacity, many components are in short supply, leadtimes for some parts are stretching, and prices are rising.
The bad news is the seller's market will continue until at least the end of the year and maybe longer for some parts. With parts in short supply, many buyers are turning to non-franchised independent distributors for a variety of parts including tantalum and ceramic capacitors, flash memory, chip resistors and logic, among others.
"It's about as busy as it can be," says Chuck McGee, president of sales and marketing for independent distributor America II. "Shortages are much more widespread. A few months ago it was flash and tantalum capacitors. Now it seems that there is very little that is readily available."
He notes that ceramic capacitors, sram, dram and logic have stretching leadtimes. "A/D and D/A converters are hard to get. ADI, Linear Tech, Maxim, Dallas Semiconductor lines are all in short supply. Leadtimes are 24-32 weeks. Micron has sold out of synchronous dram for the year."
He says tight supply conditions will last for awhile because little capacity has been added. Even once capacity is added, it could take months before it can impact overall supply.
"Most semiconductor and passives manufacturers were reluctant to jump in and say this is for real," says McGee referring to the increased demand for components which started last year. "Suppliers have long memories about 1995 when everybody jumped in and added capacity." In 1995 prices were high and demand was strong. Many companies added capacity. Demand then slackened and there was a supply glut resulting in plummeting prices.
With many parts currently in short supply, buyers are turning to independent distributors such as Classic Components, necx.com, Smith and Associates, Advanced MP and America II. Evidence: A recent Purchasing Magazine survey finds 67% of electronics buyers at OEMs and contract manufacturers buy from independent distributors. In fact, more than one-third buy daily or weekly, according to the survey. Two years ago a similar survey found that only 15% of buyers purchased regularly from independent distributors.
Because of tight electronic component market conditions, 57% say they will increase their purchases with independent distributors over the next six months, while 38% say their level of business with non-franchised distributors will stay the same.
The average purchase with independent distributors is between $1,000-$10,000, according to 56% of respondents. Twenty-two percent say their average buy is between $10,000 and $50,000, and 15% say they place orders of $50,000.
In the past, shortages of logic and dram often had buyers scrambling to non-franchised distributors. But in 2000, shortages of capacitors and connectors are driving buyers to independents, according to the survey. Seventy-one percent say they are buying capacitors, while 60% report they are buying connectors from non-franchised resellers.
When buyers call independent distributors, they know they will pay more for parts than from their franchised distributors. "Once they know you need something that is on allocation, they can almost name their own price," says Tim Russell, purchasing manager at contract manufacturer Genesis Manufacturing, Oldsmar, Fla. "But there are so many independent distributors out there, that you can shop around a little." He buys memory, logic, capacitors and connectors from 15 independent distributors.
When it comes to finding scarce parts, many buyers in fact check with a number of independent distributors. Twenty-five percent say they use 10 or more independent distributors. However, most buyers-69%-use six or fewer non-franchised distributors.
As might be expected, price is the key issue for buyers purchasing from independent distributors. Seventy-one percent listed it as a "chief concern" when buying from non-franchised distributors. Buyers often have to pay higher prices for parts from independents because the parts they purchase are often in short supply. Independents admit their prices are higher, but note that that they have to pay a higher price to get parts as well.
Many buyers see the higher price as a tradeoff. "Franchised distributors sometimes cannot meet our leadtime requirements," says Thomas Sheridan, senior buyer at Netcom, Wheeling, Ill. Sheridan buys capacitors from more than 10 independent distributors. "Independent distributors have met our delivery requirements, but at a higher price than franchised distributors. But we need to keep our lines running so we buy from them." In other words, being able to buy parts at a higher price is better than not being able to buy them at all.
In fact, despite the fact that prices are higher, 95% describe their experience in buying from independent distributors as "positive" because they are able to get the parts they need. Two years ago, 85% of buyers reported a positive experience in buying from independents.
Leland Ackerley, president of Smith and Associates, says he is not surprised by the 95% figure. "We have made what we do a lot more legitimate than it used to be," says Ackerley, referring to major independent distributors. He says some independents "did not invest in their business and ended up with a reputation of two guys in a kitchen with a phone and a fax."
While buyers traditionally buy from independent distributors during shortages, some OEM and contract manufacturers are partnering with independents even during periods of oversupply.
"Buyers are looking at us differently," says Bob Kramich, vice president of marketing at necx.com, Beverly, Mass. "We are being evaluated as an independent market maker that sells and buys product from the OEM." He adds that independent distributors are a "two-way street" for product for buyers, whereas franchised distribution is a one-way street because they only sell components.
"Buyers see us as a strategic supplier," says Kramich. "We help them [OEM and contract manufacturers] acquire product in spot situations, purchase product opportunistically on the open market when pricing is beneficial to them, and liquidate access inventory that they may have in their warehouse."
Ackerley says as OEMs and CMs use fewer franchised distributors, they also are using fewer independent distributors so they can build closer relationships with them. "It's the number-one trend at this point. Big CMs handle X amount of manufacturing. They all need to deal with independents. They are picking two or three," says Ackerley.
Whether buyers partner with a handful of independent distributors or shop around for the best price for a part, they can expect independents to improve their e-commerce capabilities.
For instance, Smith and Associates has just rolled out its Open Market Messenger, a Web-based tool that allows buyers to negotiate online in real time with Smith's traders.
"It's like AOL Instant Messenger," says Ackerley. "It sits on a buyer's desktop and whenever he has a requirement, he can submit it and send it to a salesperson who can respond back. "It's going to be the standard way that corporate buyers do business."
necx.com has had online negotiating capability for about six months, and more business that used to be conducted over the phone is now being done online, according to Kramich. "For the first five months in the year we had an average $600,000 per month in online revenue. In June, we did $2.8 million through online negotiation."
He says in June, necx.com traders conducted 120 negotiations online, which yielded $2.8 million in sales. In addition to its online negotiating efforts, necx.com plans to open an online trading exchange that will enable buyers and sellers to negotiate directly with one another. necx traders will not be involved, but the company will charge a fee to either the buyer or seller depending on the component.
Now Playing: 