Distributors play bigger role in switch market

By David Hannon -- Purchasing, 3/22/2001

It's not easy being a switch supplier these days.

OEMs are putting more pressure on switch suppliers to cut leadtimes and provide continuous supply so the OEMs can keep their inventories low but keep production constant. This trend is leading switch makers to rely on distributors more, according to John Gordon, senior analyst in the Electronic Components Business Group at Venture Development Corp. of Natick, Mass.

"OEMs are maintaining smaller stocks of components and parts in an effort to reduce costs, so they rely more upon vendors to ship products on time as needed and in the correct quantities," Gordon says. "Meeting these stringent leadtimes and tight delivery schedules is a challenge to many vendors. It seems clear that as switches become more of commodity items, sales and distribution strategies will become more important."

Gordon points to a recent VDC survey that says more than 93% of OEMs surveyed stated they had experienced some sort of problem with supplier leadtimes. In 1996, that number was 83% and in 1992 it was 64%.

"Clearly the importance of addressing leadtimes is vital and growing," Gordon notes, adding that this type of increased demand is leading more switch vendors to work through distributors.

Kiyoko Toyama, president of NKK Switches in Scottsdale, Ariz., says NKK is currently running as much as 65% of its supply through distributors. In 2000, NKK signed on with major distributors Future Electronics and Arrow Electronics. Toyama says there has been a lot of consolidation of midsize distributors, which means the actual number of distributors NKK deals with has dropped, but the coverage has increased through the combination of multi-regional distributors.

"We had a relationship with Arrow in Canada and we extended that relationship to cover all of North America," Toyama says. Distributors do well in certain segments of the industry, according to Toyama, most notably in dealing with contract manufacturers, she says. Larger distributors overlook a lot of small to medium-size companies, and that's where regional and local distributors can add value.

Gordon feels distributors can bridge the gap between distant vendors and smaller OEMs. "The ability of distributors to provide better coverage and service to smaller accounts is a benefit to those suppliers based far away," he says.

Darell Wilk, director of sales and marketing for switch products at ITT Canon Industries, says his company currently uses distributors to sell 35% of its products. Wilk says he sees distributors taking on a more advanced role in the supply chain, offering more value-add and supply chain management services. ITT Canon increased its place in the switch industry when it acquired C & K Components Inc. in June 2000 and saw more than 20% growth that year. This year, Wilk expects a much more moderate 5%-10% growth and already reports a slow start due to some inventory adjustment issues.

Despite the pressure for faster, streamlined supplies, Toyama says switch suppliers are still not moving to the Internet to help distribute product, but are relying on more traditional methods.

"There is not as much [online buying] as it is hyped up to be. Many of our distributors use the services that put their inventory online, but I don't see RFQs posted and people bidding online." Toyama says she expects serious online relationships will grow from the already established supply-chain relationships where both companies are comfortable enough with each other's business models to make the jump to cyberspace.

Gordon, however, reports more movement in the switch market toward e-commerce activity as vendors and distributors start to view the market globally. In fact, he says, the distribution channels are becoming less distinguishable from one another now. As vendors improve their relationships with distributors, buyers are having a more difficult time telling from whom they are buying. And from a competitive point of view, the level and quality of services being offered by vendors is being matched by many of the distribution houses.

Some market watchers in the switch industry see a move toward more standard products and away from customized products to limit reliance on sole-source vendors. Wilk says he's seen that trend, but only in certain sectors and not across the board. Fueling that trend are some new Asian competitors that are changing market dynamics for standard products, driving prices down.

Switch consumption in Asia-Pacific markets should be nearly $400 million greater in 2004 than their present total of $1.7 billion, according to a 2000 VDC report. The growth for the Asian market in 2002 is expected to be more than 6%. In the past several years, China has emerged as a significant manufacturing location for switches, according to a VDC report. The European market is in the midst of a leveling off in 2001 and is seeing 2% CAGR at present. VDC believes this slower growth is temporary and the market will return to higher growth rates, reaching more than 2.5% by 2004.