Catalog houses see more small orders from EMS providers
Jim Carbone -- Purchasing, 10/21/2004 2:00:00 AM
Catalog distributors have long been a staple in the electronics industry supply chain. The distributors specialize in small orders for parts used in new product designs, small production and product repair.
While catalog distributors are not immune to economic downturns, they are less affected by them than distributors who supply larger volumes of parts for production runs. During a downturn, OEMs and electronics manufacturing services (EMS) providers need fewer parts because demand for end equipment declines. However, OEM's design teams still continue to design new products despite the downturn and those teams often use catalog distributors for prototype builds. The average order is usually below $300 but the margins on the parts are higher than parts supplied for volume production.
Many component manufacturers, OEMs and distributors had a strong first quarter, but business slowed down in the second and third quarters. Catalog distributors, however, remained healthy.
"We haven't seen a slowdown so far this year," says Rob Birse, director marketing communications for Allied Electronics in Forth Worth, Texas. "Business was strong in the first quarter and is stronger than ever now. We don't see any downturn."
He says average order frequency is increasing. "We are seeing more customers buy more often and buy different products. Our primary audience is the research and development marketplace and companies are still investing in new product development for sure," says Birse.
While OEM design has long been the bread and butter for catalog distributors, EMS providers are emerging as a significant customer segment.
"Two or three years ago, EMS companies weren't on our radar screen at all," says Paul Tallentire, president of Newark InOne. "Their volume requirements and purchasing practices were something that were alien to small order, high margin, high service distributors."
However, a lot of high volume EMS manufacturing has moved to China and other parts of Asia, he says. The EMS companies in North America, "are running on much lower production runs and we are growing our business with EMS customers."
He says the trend will likely continue because, while a lot of high volume manufacturing has moved offshore, there are certain segments that will stay in North America. "The American government won't allow defense and the government spend to go offshore," says Tallentire.
In addition, medical equipment manufacturing will likely stay in North America rather than transition to China. "The material and labor savings you would have in China aren't as important as quality, consistency and speed to market," he says.
The medical industry tends to be small volume, which is suited to the catalog distribution business model, says Tallentire.
"One of the biggest quotes that we had was from a company that builds operating tables," he says. "You would not believe the technology in operating tables. The customer builds 800 per year almost all made to order. There is diversity in terms of parts and margins are higher. It's an ideal customer for us."
The medical equipment industry is outsourcing more manufacturing than in the past. If manufacturing stays in North America, it will be good news for other catalog distributors including Digi-Key, based in Thief River Falls, Minn.
More volume
Digi-Key in recent years has expanded upon its catalog distribution model and now has a division for volume production. About 75% of the division's business is with the EMS industry, says Steve Tsukichi, vice president of marketing. "We target small to midsize EMS providers and OEMs," he says. "We have 155 people devoted to volume business division. We brought on a lot of new lines and developed infrastructure internally. Our volume business division generates 30% of our sales," he says.
Tsukichi says while Digi-Key is generating more sales with its volume business, it is not deemphasizing the catalog business. "In fact we are putting more emphasis on it than ever. Our customer base has grown every year," he says. "Our volume business division was created because our engineering customers asked us to extend the relationships with them in the production area," he says.
Tsukichi adds that while its volume business is growing, it is unlikely Digi-Key will ever grow to the size of an Arrow or Avnet.
"We don't want to be a traditional volume distributor because we don't think that business model is that successful," he says.
Tsukichi says that the volume business is different than the catalog business. For one thing margins are smaller and the average order is higher. For Digi-Key, the average order is about $250. The volume business is more than twice that amount.
"In addition, volume orders are bigger and more complicated and often times they require negotiation. There may be terms, schedules," says Tsukichi. To address those issues, Digi-Key has a vice president of strategic accounts who visits customers.
"His mission is to overcome the hurdles that customers have in doing business with different business models. He tries to convince them that Digi-Key is a viable volume supplier," says Tsukichi.
Catalog distributors are confident they will be able to continue to grow sales.
"We have experienced double-digit growth this year and we believe we can sustain it," says Kevin Hess, director of marketing and business development at Mouser Electronics. He says Mouser's strategy has been to get current customers to buy more products.
"We are in the prototyping business so we are always adding inventory, new products, new technologies to our catalog so customers can see the newest thing. We have a catalog every 90 days, unlike other catalog houses," says Hess. "We are the first place people can come to for those new products and technologies."
While Mouser issues a new catalog every 90 days, it is also increasing its business over the Internet. About 20% of its revenue is delivered from Web sales, says Hess.
Mouser does not have a specific goal in terms of moving more business to the Internet. Rather, Mouser will do business with customers however the customer wants: phone, fax or Internet. Mouser's goal is to increase its business with existing customers and how customers buy from the distributor is not important.
"However, our business on the Internet is growing substantially. Engineers especially like to use the Internet to find information about a product and pricing," says Hess.
"Often they will use the Internet to find what they are looking for, but they will call in because they have a relationship with our salespeople. Or they may add the part to their shopping cart and buy from us online," he says.
Hess says Mouser's Website "is like an inside salesperson where you can get the information you need and make it easier for customers to source parts."
Newark InOne's strategy is to increase its number of active customers and increase its footprint within large customers. "We've had considerable success with General Dynamics, Raytheon, Lockheed and Motorola," says Tallentire. Newark InOne doesn't get large orders from those companies, but hopes to get more frequent orders.
"We're a small order distributor. Our average order is $275 with about three lines per order," he says. "We aim to supply products through the lifecycle of the product through design, support of small volume production and repair."
He adds Newark InOne supplies parts for limited production runs and wants to give customers what they want.
"That can be difficult because what a guy from corporate purchasing wants is different than what the guy in the design lab wants," says Tallentire. Corporate purchasing is looking for cost reduction. "For the design guy it's about his ability to find solutions, find alternatives," he says.
Those diverse requirements make it challenging for catalog distributors. "Many purchasers are trying to standardize components that design engineers can use in their creative work. It is unprintable what design engineers think about that," he says.
Digi-Key hopes to grow sales by expanding its global footprint. It had about $40 million in sales outside of North America sales last year and expects that to increased in the next several years.
"We have several global initiatives," says Tsukichi. "We have had a fair amount of success in Japan. It isn't producing a lot of revenue yet, but we are laying the groundwork for it. We expect to be in South Korea with a catalog and Website by the end of the year. In 2005, we are looking at Taiwan, Singapore and China."
Tsukichi says China may be the most challenging location to do business in because of a lack of infrastructure. He says to get product delivered to a customer in Europe takes 38 hours. "To Japan it's 48 hours. In China it takes six or seven days," he says. "We get it to the country quickly, but when it gets there, who knows what happens to it?"
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