Independents expect recovery in second half 2003
Staff -- Purchasing, 12/12/2002 2:00:00 AM
In the past, independent distributors were the Rodney Dangerfields of the electronics supply chain. They didn't get any respect.
But times have changed. Independents are recognized as a useful part of the supply chain. During shortages they are often the only source for hard-to-find parts. During the current downturn, many independents have helped OEMs and contract manufacturers get rid of excess inventory. In addition some buyers have used independents as sources for low cost parts to reduce bill of materials costs for their companies.
"Some buyers know if they are paying $1 for a part they can get it for 50¢ through an independent distributor," says Christopher DeNisco, CEO of SND Electronics in Greenwich, Conn. "A lot of contract manufacturers have gotten very savvy in taking advantage of the spot market to save money."
The independent has become a legitimate part of the supply chain, says John Hopkins, chairman of SND. "That wasn't always true." Twenty years ago franchised distributors and component manufacturers had a "you dirty brokers" attitude towards independent distributors, says Hopkins. "But we always managed to be a huge part of the marketplace. We were the firemen, the emergency guys. Without us, lines were going down. We always understood our niche. The problem was there were some dishonest people in the business," he says. Dishonest people who sold counterfeit or defective parts or recycled parts as new parts.
Purchasers sometimes have mixed feelings about doing business with independent distributors. During times of shortages, buyers know they will have to pay more for parts through independent distribution. On the other hand by doing business with independents, buyers keep their manufacturing lines running.
During the current downturn, many buyers at electronics manufacturing services (EMS) providers and OEMs have enlisted the help of independent distributors in getting rid of excess inventory.
In some cases independent distributors will buy the stock outright. In other cases, the parts will be sold on consignment and revenues will be split. Buyers are under no illusions that they will recoup what they paid for the parts. Depending on market conditions, buyers will get a fraction of what they paid. But most OEMS and EMS providers are happy to get parts off their books.
SND has been doing consignment deals for years. "We have done deals with Marconi, Solectron, Jabil among others," says DeNisco. "We purchase their excess outright or take it on a consignment basis, sell it and do a revenue split," he says. Consignment may be a better deal for buyers. Selling their excess buyers' parts to an independent, buyers may get only 10 cents on a dollar or less. "We advise the OEMs they are better off just consigning it to us and letting us sell it. There may be one line item that may be a winner and we split the revenue," he says.
Many independent distributors will evaluate an OEM or EMS provider's inventory and advise buyers on how much they will be able to recoup.
"Our asset recovery group will do an analysis of inventory and estimate recovery value across product segments," says Frank Cavallaro, chief operating officer for Converge in Peabody, Mass. "It is a thorough process."
Several options
Converge will help customers sell off inventory in several ways. In some cases it will buy the inventory outright, sell it through consignment or buy under a co-location agreement.
"With co-location we own the inventory inside the customer's warehouse. It gets shipped out on an as needed basis for other customers, or gets to be used internally," says Cavallaro.
With consignment, Converge takes physical possession of the inventory and it may be stored in cross docking warehouses until it is sold.
Buyers can monitor the status of the inventory in consignment through a real time Web site. "They can see the sales generated from that inventory immediately and they can run reports as far as velocity of sale, the timing of the sale and how much has been recovered," says Cavallaro.
Which program is best for a company depends on the goals of the customer for the material. Converge and other independent distributors will do an inventory analysis report to identify the "time/ price risk."
"In some cases a customer may want to recover assets immediately so a straight purchase sales agreement is in order," says Cavallaro. "Sometimes they have more of a time horizon so they can trade off time for recovery dollars so the consignment model works better." How much a company can recover also depends in what kind of parts are involved.
If the inventory includes a diverse set of high mix products, consignment probably works better. If a single set of similar products is involved then an outright sale to the independent may be best. "If you have two or three memory line items that are standard, pricing is stable enough where the return is going to be acceptable," says Cavallaro. "If you have a bill of materials with a diverse set of products, then a systematic release of inventory into the marketplace through a consignment program is going to be your best bet," he says.
Such a bargain
Some independents are very aggressive about buying excess inventory because they are anticipating an industry turnaround next year. One such company is America II in St. Petersburg, Fla. "We are buying anything that appears to be a bargain. We are loading up on inventory across the board," says Chuck Magee, executive vice president of sales and marketing for America II. "We are putting in vast amounts of inventory because now is a good time to buy. We are looking for bargains right now in anticipation of a stronger '03," he says.
America II is buying semiconductors, including digital signal processors, discretes and logic. "We are investing in synchronous DRAM , but we also always buy trailing edge technology," says Magee. "That is one of our mainstays. Even as distributors and manufacturers obsolete parts and move on. We want to take care of that portion of the supply chain."
He says that flash memory is one of the biggest bargains right now, everything from 1-megabit to 32-megabit densities. "We have loaded up on flash in anticipation of something good happening next year. A lot of it is speculative on our part," says Magee.
The speculation is based on the fact that businesses are overdue to make IT investments. Many companies have not upgraded since 1999.
"Business investment is low and purchases of network equipment and servers have been delayed," says Magee. "But many businesses are going to have to invest in IT infrastructure whether they want to or not. There comes a time when you need to."
However, Magee admits there are no signs that an industry recovery is underway. He says he doesn't expect any upturn until at least the second quarter.
Others think it may be later than that. "We expect the pickup will come at the end of next year," says Andrea Klein, chief executive officer of Rand Technology in Irvine, Calif. "Wireless handheld will be the first segment to pick up. Infrastructure products will take longer to come around because they are going to depend more on the overall health of the economy rather than consumer confidence."
However, Klein notes that most analysts, distributors and component manufacturer were forecasting a recovery by the third quarter of this year. "The big second half everybody expected never came to fruition."
She says the lack of forecasting ability is one of the biggest problems facing the industry. "There is a lack of visibility. We can't predict anymore. No one has any vision. Samsung or Motorola or Microsoft have no vision for Q1."
The lack of vision can have a big impact on business. "If I am a contract manufacturer and I am building for a customer, the customer may give me a four-month forecast," says Klein. "But I don't trust the forecast so I buy four to eight weeks out because I don't want to get stuck with inventory. It's like the whole industry is stuck in quicksand," she says.
Most independents believe that a recovery will happen within a year and when it does it may mean severe shortages because of a lack of investment by component manufacturers over the last 18 months. Now is a good time for buyers to check out the capabilities of independent distributors and to try to forge relationships with several.
While most independents will be able to find scarce parts, some offer a variety of services as well. For instance IC Solutions offers co-sourcing services that can complement an OEM or EMS provider's purchasing department.
"We help customers with our information systems to confirm that they are getting the lowest worldwide prices," says Mark Howlett, executive vice president of IC Solutions in Aliso Viejo, Calif.
"Most customers have downsized their staffs. We find they have fewer people trying to do more and as a result they are not as efficient as they used to be in testing their pricing," says Howlett. "We have come up with a pricing optimization service. We partner with the customer to make sure they are getting the lowest overall price with the best available terms and deliver," he says.
"We are finding success in working with customers and being almost an extension of their procurement staffs, taking advantage of our people and our systems to help them streamline their supply chain," says Howlett. "We want to take what they've done correctly and leverage our products and services to give them some competitive advantage."
Smith and Associates is also trying to build relationships with customers. It will evaluate inventory and advise customers about the market for the inventory, but also offer some IT solutions.
"We talk to them about what their IT needs are, how they can take part in private exchanges or other sorts of IT solutions that would streamline their purchasing process," says Mark Bollinger, vice president business development. "We have an extranet that customers can go to check their inventory and their sales for consignment programs."
"We don't handle hard copy reports anymore because no customer wants them. They get their information from the extranet," says Bollinger.
When the market turns, buyers should be careful how they use independent distributors. Often when a part goes short, the knee-jerk reaction is to call as many independent distributors as possible to try to find the best price. That can drive the price of the part up because it creates an impression of false demand.
If a buyer calls an independent distributor and the distributor does not have the part, the distributor will call another independent distributor about the part.
"If you have a big requirement one independent may go to two independents and they go to two more," says DeNisco. "Next thing you know a 10,000-piece requirement looks like a million-piece requirement and it drives the price up."
Top independent distributors
| Company | 2001 calendar year sales ($ mil.) |
| SOURCE: PURCHASING |
|
| 1. Smith & Associates | $324.4 |
| 2. Converge Inc. | 229.0 |
| 3. Classic Components Corp. | 167.0 |
| 4. Advanced MP Technology Inc. | 158.9 |
| 5. America II Electronics Inc. | 149.0 |
| 6. Rand Technology | 110.0 |
| 7. SND Electronics Inc. | 88.0 |
| 8. West Coast Engineering | 60.0 |
| 9. IMS Inc. | 41.6 |
| 10. Triangle Electronics Group Inc. | 32.0 |
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