EMS requirements on distribution can be challenging
For many distributors, electronics manufacturing services (EMS) providers represent a large portion of their annual revenue
By Jim Carbone -- Purchasing, 10/2/2008 7:47:00 PM
Many electronics distributors are concerned about consolidation in the EMS industry because they could lose customers and revenue.
However, some see consolidation in the EMS industry as healthy in the long run for distributors and for the entire electronics supply chain.
“Consolidation is necessary for the EMS industry,” says Gerry Fay, senior vice president, global and strategic accounts, Avnet Electronics Marketing, based in Phoenix. “The EMS industry is struggling because there is a lot of capacity in the channel, so it is difficult for EMS providers to charge a premium for their capacity. Hence, they have low margins. The more the EMS industry can consolidate and reduce capacity, the better its operating model will be,” he says.
A healthy, profitable EMS industry would be good for distributors, OEMs and component manufacturers.
Some distributors say that EMS is a growing portion of their business because of the growth of outsourcing. While distributors welcome EMS business, they also note requirements that EMS providers have on distributors are different than OEM requirements and sometimes are challenging.
“EMS is more challenging than OEMs,” says Fay. EMS providers have stringent requirements because they have razor-thin margins and they “can’t afford to have any glitches.”
Large distributors have engagements with large EMS distributors, but they also do a lot of business with second- and third-tier EMS companies.
“Most people talk about the top seven or eight EMS players when it comes to distribution because of the significant purchasing volumes they have,” says Brian McNally, president of Arrow Europe, Middle East, Africa and South America for Arrow Electronics, which is headquartered in Melville, N.Y. “But in North America, there are around 800 other small and medium-size EMS companies that we do business with.” He estimates that about 60% of Arrow’s EMS business is with second- and third- tier EMS providers.
Smaller distributors also do a significant amount of business with second- and third-tier EMS companies. Such EMS providers have different requirements than tier one EMS providers such Flextronics or Foxconn. Sometimes it is just a matter of scale.
Most EMS providers use distributors for quote support. “For a large EMS provider, a 5,000-line item quote is not uncommon. For a small and medium-size EMS, that would be an exception,” says McNally.
However, smaller EMS providers often call distributors not only to get prices, “but so we help them cleanse their bill of materials,” he says.
“Often times what happens is that a part they quote is not perfectly specified,” says McNally. “When we put it through our quote process, they get the proper supplier part number out of that. It is an enormous value added service,” he says.
Another difference is smaller EMS providers often have less volatility in manufacturing than large EMS providers so their business is more steady.
“They are focused on a narrower customer set and have been engaged with that customer set for a long time,” says McNally. “They tend to build for those customers in the same place at the same site.”
Also see: Using distributors can lower acquisition costs
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OEM, EMS requirements of distributors differ
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