OEM, EMS requirements of distributors differ
By James Carbone -- Purchasing, 4/10/2008 2:00:00 AM
In some ways buyers at OEMs have different requirements of electronics distributors than buyers at electronics manufacturing services providers.
OEMs frequently need distributors to provide design services, component end-of-life management and supply chain design and collaboration services. Buyers at EMS providers generally are more price sensitive and look for terms and conditions from distributors such as rebates and extended payment terms. They also generally need more design for manufacturing support.
However, both EMS and OEM buyers have similar requirements for high quality, on-time delivery and flexibility, according to distributors.
"The pressure points for each are different based on their margins," says Gerry Fay, senior vice president global and strategic accounts Avnet Electronics Marketing, based in Phoenix. For instance, EMS is a low-margin business so buyers are very price sensitive. If they can get a better deal on price, the difference goes to the bottom line. "EMS providers are always looking for purchase price variance because that is how they make their money," says Fay. "There is a little more price elasticity with OEMs."
For example, while OEMs may move business from the U.S. to Asia for cost reduction, "they will allow for some period of time to maintain our demand creation margins," says Fay, pointing out that margins for products that distributors help get designed into new equipment are higher than margins for other parts purchased from distributors.
OEMs require more design services from distributors than EMS companies. "I can count on one hand the number of designs we have helped with at EMS providers, whereas tier-two and tier-three OEMs look for design services from distribution all the time," he says.
For EMS providers, inventory management is "critical to their customer service and to their profitability," says Brian McNally, president, global alliance and supply chain, for Arrow Global Components in Melville, N.Y.
"EMS providers are challenged with inventory management across the many customers they serve," he says. They must service their customers in a very low margin environment so they look for distributors for help in managing inventory.
McNally adds that the "broader the number of customers served by a certain EMS location and the more low-volume, high-mix content, the more EMS providers need our involvement. We allow them to operate in a leaner environment, without sacrificing customer service," he says.
One reason EMS providers need more inventory support is forecasts. Craig Conrad, senior vice president, chief marketing and strategic planning officer for TTI in Fort Worth, Texas, notes that most OEMs have multiple product families that have different forecasts. Many of those OEMs outsource to EMS providers.
"With EMS providers you have to take that up a notch because they are dealing with multiple different customers or multiple products within an OEM customer," he says.
Generally EMS suppliers "are one level removed form the end customer forecast," he says. If a forecast is wrong either way, they have to react to it. So if demand is higher than the forecast called for, the EMS provider relies on distributors for inventory. If demand is less than the forecast, the provider relies on the distributor to hold the inventory. Bonded and consigned inventory programs and auto replenishment services are popular with EMS providers.
Because many OEMs outsource, they may have less demand for inventory management, but still have interest in "command and control" supply chain programs, says Fay. For instance, OEMs may determine that 20% of parts on a bill of materials can cause 80% of the company's supply issues.
Such parts may be leading-edge components or have a proprietary technology such as field programmable gate arrays, says Fay. The OEMs may have three EMS providers and may want to have a central point of storage for those critical components and control which EMS provide get those parts.
The distributor can be the central point of storage and handle the disbursement of parts.
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