Outsourcing means more demand for supply chain management

By Staff -- Purchasing, 2/22/2001

Electronics buyers can expect distributors to enhance their supply chain management capabilities in the coming years as more electronic components are sold through distribution and the outsourcing trend continues.

Component manufacturers have cut back on the number of customers they service directly and are selling more of their products through distribution. Distributor total available market (DTAM) was about 30% five years ago. Today DTAM is about 36% and rising. At the same time customers are cutting back on their number of suppliers, including distributors.

"Customers are saying 'I want to deal with fewer guys. It reduces my cost of complexity and I get better service and more leverage,'" says Fran Scricco, CEO and president of distributor Arrow Electronics. "When a customer wants 100 pieces of a part delivered three times a day, a component manufacturer says, 'I'm not doing that. It's not what I am good at. It's not where I want to spend my resources,'" he says. But it is what distributors do best and both buyers and part manufacturers are relying more on distributors to handle parts and provide supply chain management services.

"Some services that historically a manufacturer used to provide: technical and design assistance, warranty claim, product change notification, distributors have picked them as value-added services as a way to differentiate themselves as competitors," says Robin Gray, executive vice president of the National Electronics Distributors Association. "Manufacturers have trained them and provided some sort of incentive."

Outsourcing drives SCM

While DTAM is increasing so is outsourcing. The electronics contract manufacturing industry is growing at about 20% per year. OEMs are outsourcing more manufacturing and contract manufacturers are turning to distributors for supply chain services such as auto replenishment, in-plant stores, consigned and bonded inventory programs.

Providing those supply chain value-added services has been a savior to many distributors whose margins are often squeezed. "For most distributors at least 50% of profit comes from value-added services," says Gray. "Many components are sold at or near cost. Profit margins are just not there."

Services that are the most popular include bonded inventory, consignment, basically "any variation where the distributor keeps the inventory and not the customer for as long as possible," says Gray.

"Every customer is trying to find a way to not have that inventory show up on their books, but still to have the inventory immediately accessible. Design services are also coming to the forefront," he says.

For most distributors, contract manufacturers are their fastest growing customer segment and supply chain services is one reason. Small to midsize contract manufacturers are big customers for contract manufacturers, but large CMs are also starting to use CMs more. Case in Point: Manufacturers Services Ltd, Concord, Mass.

MSL buys about 10% of its components from distributors, says John Boucher, vice president of global supply.

"Distribution is a supply channel for us. They have services I like. They position assets and do in-house stores programs for me. They provide a service that assures me the supply," he says. "Cash is needed dearly in a high-growth environment. And that's us. So I want to limit liability and not use the cash to tie up inventory and assets," says Boucher.

He says MSL each month determines how much product it is expected to build and the material content for each program it has with OEM customers. "I project what my burn rate will be over the next three months and I look at how many days of supply I have on hand. I may need 25-30 days of supply assurance on the shelf. That's where I bring in the distributors-Arrow and Avnet. They take my order action summary right off my ERP and then I don't have a buyer planner," says Boucher. "I have a master planner. I may have 1,000 part numbers in one place, they have people analyzing the output of the ERP and positioning supply and they're in-house in my facility."

"I trust the distributors in analyzing my ERP," he says. "I'm developing partnerships with these guys. "

Fewer distributors, more SCM

MSL is not the only one, many CMs or OEMs are forming alliances with distributors as they use their SCM services more. Many companies are reducing their number of distributors. Case in point; Sanmina Corp, a contract manufacturer. Sanmina uses about 10 distributors, but is whittling that number down and will likely have only two or three by the end of the year. Among the services that Sanmina uses are JIT, auto-replenishment, in-plant stores, consignment and bonded IC programming, kitting and design assistance, says Latchman Venkatesh, vice president of global supplier management for Sanmina.

Those services are popular with many contract manufacturers, says Paul Katz, vice president, digital supply chain solutions, Arrow.

"We might have an in-plant store or some level of consigned inventory for the CM," he says. "We are likely to have some form of vendor-managed inventory program, consigned or in-plant store to support flow usage, issuing kits to the floor, an auto replenishment system, either operated by the customer or our in-plant store people."

He adds that the distributor may also provide some services such as special marking or packaging because of their particular requirement from the CM's customer.

Those services are also in demand from OEMs. Don Sinclair, director of materials for Advanced Input Devices, uses Arrow for an in-plant store although the company also uses Avnet and TTI. Advanced Input makes keyboards. The company buys about 900 part numbers from Arrow, which has two employees at the company's site to operate the store. In addition, Arrow takes the company's MRP, analyzes it, and makes sure the parts are in the store when needed.

"We've had substantial cost savings in purchasing transactions," says Sinclair, although he declined to be specific.

Emerging programs

In-plant stores, bonded and consigned inventories, and auto replenishment programs are not new, but demand is increasing for them. However, distributors also expect to see demand for some emerging SCM services.

"One is helping customers with bill-of-material (BOM) grading," says Roy Vallee, chairman and CEO of Avnet. "With BOM grading we take a given parts list and help the customer understand which parts are pervasively available and which parts are relatively scarce, not in terms of product leadtime and allocation, but in terms of actual number of units. We can leverage the intellectual capital we have in the form of our broad customer base and broad supply base to help customers do BOM grading and get them the right bill of material," he says.

The next wave in SCM in the distribution industry is design for the supply chain, according to Vallee. Many world-class companies take their engineers, procurement and manufacturing people, put them into work groups to insure that when a product is designed and before it is introduced it can quickly ramp to volume, says Vallee. "But the fact is even that system is not time-effective because the pace of change keeps getting faster. Time to market is king. The next wave needs to be delivering the manufacturability and the availability information to the designer while the design is taking place-products design for the supply chain. That's the next big thing in terms of cost efficiency and ability to ramp to volume," he says. "If you turn over to a world-class manufacturing operation a BOM with a bunch of oddball parts in it, you're going to struggle. So the next key is to get them the right parts in the BOM in the first place."

The expansion of the types of services is indicative of how distribution has evolved and increased its role in the electronics supply chain.

"It's no longer strictly a component business," says Tom Pitera, president of Pioneer Standard Industrial Electronics Division. "We aren't just selling components, we are selling solutions depending on the customer and his stage of evolution."

"We have customers asking us to help them migrate from piece part variance, analysis on bills of materials, to total cost of ownership," says Pitera. "We see that as a very specific area where we are going to see a lot of growth over the next year or two. Customers recognize that the buying of a part at a specific price is one thing, but you need to analyze that acquisition and understand all the total acquisition costs associated with that. Things as simple as bar-coding, vendor-managed inventory, who pays the freight, discounts-they need help with a lot of this," he says.

Some of the tools that will help buyers analyze their business will move to the Web. "Customers can analyze bills of materials for product life cycle and obsolescence, analyze bills of material in quoting using total acquisition cost vs. piece price variance (PPV). By having those tools Web-based it will result in more orders over the Internet," he says.

Pony up

While buyers can expect distributors to improve their SCM capability, they should be prepared to pay for those services. Distributors have bundled the services in the markup of the part. Often a buyer will want to buy parts and associated SCM services. "Another distributor will tell the buyer 'I'll give you that same package for a little less," says Scricco, Arrow's CEO. "We are pressured to lower our price. All the extra stuff that we are doing is the tiebreaker. We end up doing more and more for less and less," he says.