Buyers look to distributors for supply chain services
By James Carbone -- Purchasing, 2/10/2000
With the rapid growth of contract manufacturing and the build-to-order business model, electronics buyers are turning to distributors for inventory management, bonded and consignment inventory programs, control of parts flow, logistics management, supplier research and management, and other tasks that are aimed at making the overall supply chain operate more efficiently.Just as many high-technology manufacturers outsource production to contract manufacturers, CMs are in turn outsourcing supply chain management to electronics distributors. CMs have found that while manufacturing is a core competency of theirs, supply chain management is not. CMs are often building multiple products for multiple customers and are frequently asked to bid on new contracts. Purchasing components and other production material for multiple customers in different industries that have divergent production requirements, and managing the inventory and flow of parts, is no easy task. Buyers at contract manufacturing firms are increasingly turning to distributors for supply chain solutions.
The build-to-order business (BTO) model also is boosting demand for distributor-provided supply chain management. The unqualified success of companies such as Dell Computer and Cisco Systems, which carry little inventory and use their supply chain management expertise as a competitive advantage, has driven other manufacturers to the BTO model. While a handful of large manufacturers may have the clout to demand that suppliers have a warehouse near a manufacturing facility, most do not. They look to distributors to not only provide products, but also to help them streamline the entire supply chain to reduce cycle times, minimize inventory costs, or provide other competitive advantages.
Buyers use distributor programs for various reasons, depending on the industry in which they work. "For a customer who is in an industry where speed is not of the essence, cost and availability may be the overriding concern," says Bill Goebes, vice president of strategic marketing for Arrow Electronics' Contract Manufacturing Services Division. "If you are dealing with the PC or telecom industries where time-to-market is absolutely crucial, there is more emphasis on velocity. There is no one-size-fits-all answer," he says.
Many high-technology manufacturers look for distributor support as early as the design stage of new product development, says Jim Huether, vice president of product marketing for Arrow. In new product development, information is key. Huether says a growing number of Arrow's customers are looking for Arrow to provide product and market information that can aid in the decision-making in product selection.
SCM is required
Supply chain management programs are quickly becoming a requirement, not an option, for distributors. In many cases a distributor cannot expect to win an electronics purchaser's business just because the distributor carries the product lines that the buyer needs. Rather, buyers expect the distributors to also offer programs that lower inventory and cost, speed up procurement cycle time and boost productivity, efficiency and flexibility in the supply chain. That's why Ray Portiss, purchasing director at contract manufacturer MC Assembly, is expanding consignment and bonded inventory programs that he has with several distributors.
Portiss says he does consigned and bonded inventory with several distributors, including Kent Electronics, Future, All American and Reptron. Kent supplies 70% of his connector requirements and some capacitors and resistors. All parts purchased from Kent are in consignment, says Portiss.
He says that MC Assembly decided to do the programs because it needed flexibility and lower cost from its distributors. "Our customer orders are very erratic. We had to find a way to make sure we had the parts when we needed them, and we needed to reduce freight costs," says Portiss. So MC Assembly provided a caged area at its facility for Kent to inventory parts.
"It has cut down leadtimes to my customer," says Portiss. "It has saved on freight costs. If we need to work on weekends, we can because the inventory is here," he says.
Portiss says he will expand the program in the next several months so most of the materials he purchases are in consignment. His goal is to get all lower cost items on a consignment program so buyers can concentrate on more crucial products, which tend to be higher priced semiconductors.
He has bonded inventory with other distributors for semiconductors. Under those programs, the parts are held at distributors' facilities.
Such programs will help MC Assembly run a leaner procurement operation. "I would say I would need fewer buyers," he says. However, he adds that buyers would also have a more strategic role, managing the higher value components and working on supply chain management issues.
Distributors say that the bonded and consigned inventory programs that MC Assembly uses are in great demand. There is also growing demand for in-plant stores, auto replenishment and proximity stores. Demand for SCM is across the board from the newest high-tech start-up to the established OEM.
It starts with start-ups
Start-up manufacturers often use SCM programs because they don't have the resources to buy and effectively manage components and inventory. Case in point: Accelerated Networks, which makes high-speed integrated access devices for competitive local exchange carriers. Accelerated uses Arrow and Avnet for a variety of supply chain management programs, says Dave Fox, purchasing manager.
"Purchasing here is supply chain management, not chasing after parts. We manage suppliers on a larger scale, rather than getting into the nitty gritty of managing components," says Fox. Accelerated lets its distributors hold inventory and handle logistics. The start-up company purchases semiconductors, passives, connectors and electromechanical devices through Avnet and Arrow. Accelerated sends materials requirements planning (MRP) data to its distributors, who then buy on behalf of Accelerated. Parts are delivered to Accelerated Networks' contract manufacturer. The supply chain management programs allow Accelerated to carry very little raw inventory and avoid costs. The idea is to use supply chain management as a competitive advantage.
"In fact, we are seeing more customers turning to supply chain management as a potential competitive advantage," says Greg Frazier, executive vice president of Avnet's Integrated Materials Services group. He says Dell Computer and Cisco Systems have raised their interest in supply chain management programs. Dell prides itself on having very little inventory with its BTO model. However, it does have a number of suppliers near its facilities that supply parts when needed. Cisco uses a variety of distributor SCM programs offered by Arrow and Avnet. "Customers come to us and say, 'Can you help Dell-ize my business?'" says Frazier. "Cisco more than anyone else heightened the awareness off supply chain management all the way from design through manufacturing."
Barbara Siverts, manager of supply chain management for Cisco, says the company uses distributors Arrow and Avnet to supply lower value parts and to handle materials management programs. "Our distributor partners are in the information business," she says. "It's not about just supplying components, but developing a relationship that serves our customers and linking up the supply chain to be dependable and flexible. It's a matter of picking a good supplier and developing a relationship based on mutual benefit."
Frazier says that other companies want to copy Cisco's and Dell's success in optimizing their supply chains. He says OEMs and CMs are realizing that they don't need to carry inventory, but can still have the parts readily available through the SCM programs such as consigned or bonded inventory, in-plant stores or proximity warehouses. The programs also can handle upsides and downsides in demand.
SCM: A good deal
Mel Smith, general manager of strategic accounts for Kent Electronics, says SCM programs are a great deal for buyers. "The customer doesn't own the product until it is consumed. If they have an increase in demand, the product is at their fingertips. There is no transit time," he says.
According to Smith, buyers are turning to distributors for SCM because they are looking to do more with less and to reduce cost. "Customers are after inventory reduction; some are after faster time to market; some are looking for reduction in freight expenses. They want an overall reduction in cost," says Smith. Some OEMs and CMs that use SCM programs are looking to reduce their supplier bases and want to establish long-term partnerships with a chosen few.
Many buyers who use distributors for SCM also are looking for flexibility, says David Oppenheimer, director of business development for distributor Wyle Electronics. "They want the ability to change their orders and forecasts and be assured that we will have on the shelf or in the pipeline the parts they need when they need them," he says.
Jim Schaeffer, vice president of marketing for Wyle, adds that they also are looking for "risk avoidance" in the material pipeline, especially as more use a "virtual enterprise model. As customers use multiple subcontractors for production for particular boards or systems, the supply chain management program partner can be effective in redirecting material pipelines from one subcontractor to another," he says.
The whole enchilada
Electronics distributors obviously welcome the growth in demand for supply chain management services. "We see customers looking for help with whole supply chain management," says Walt Tobin, vice president of value-added services for Pioneer Standard. "There are tools available: just-in-time, kanban, two-bin, proximity site inventory--any of these will help," he says. However, buyers should know what their real costs are before using distributors for SCM programs. They need to know the fully loaded costs of the functions they do internally, such as inventory or receiving, before embarking on such a program.
"Many customers make a good attempt to figure that out, but the devil is in the details," says Tobin. "It is painful to come up with a truly full-loaded cost, whether it is a receiving function or a portion of the production line. If we give them a quote of 50 cents on integrated circuit programming, they may not know that my price is better than what they can do internally. But it is essential to know," he says.
Tobin adds that in many cases buyers are looking for "a magic wand that requires little if any involvement of them." But there are no cookie-cutter solutions with SCM because all programs are customized.
CMs clearly see value
While demand for distributor supply chain management programs is growing across all industries, most distributors report that contract manufacturers are their biggest customers for supply chain management services. Goebes of Arrow say that contract manufacturers know the benefits of these programs because they operate in a low-margin environment. "The contract manufacturing community has a higher degree of sensitivity to the concept of SCM because their model is delicate," he says. "One or two serious mistakes can hurt them. They are keenly aware of what the true cost of carrying inventory is and are sensitized to it. More and more they realize what distribution can bring to bear," says Goebes.
Tobin of Pioneer Standard says it's not just the "Super 7" of contract manufacturing that use distributor's SCM programs. "The customers we deal with are the other 99.99% that don't have a billion dollars to place with distribution," he says.
Tobin says CMs appreciate supply chain management programs because of their diverse, volatile workload. Like an OEM, a contract manufacturer has to plan a production line and pipeline inventory and schedule a factory workload. "If the CM is doing work for 15-20 different OEMs, all of them are giving the CM forecasts. But everyday probably one of them didn't forecast properly and they need extra boards," says Tobin. "That's challenging for the materials manager of the CM trying to keep 15-20 different production lines going. It's more challenging than an OEM that is building two or three different boards for their own use," says Tobin. CMs use distributors' consigned and bonded inventory programs, in-plant stores and auto replenishment to help keep lines running.
To quote or not to not quote
Another area where CMs need a lot of support from distribution is the quoting process. "If you think about where the CM is in the food chain, it's easy to understand why they have a high level of quote activity," says Goebes. "They are trying to win new business with a myriad of customers and those turn into quotes," he says. Tools that can quickly turn quotes around will be more widely used. Many distributors are using extranets with CMs. Some sites handle a bill of materials and factor in the CM's special contract pricing when quoting the parts. Such a tool provides instant information and can save buyers from making numerous phone calls to price out a bill of materials.
In fact the Internet will become more important to distributor SCM programs, because to be successful SCM requires the timely flow of pertinent information. "Many customers have come to the realization that one thing that distribution does best is plan and manage inventory," says Goebes. "But when a customer asks us for consignment, it's generally indicative of a flawed process somewhere. If someone is holding inventory, it's costing everybody money. We are being asked more to improve the information process flow when it comes to the physical distribution of the material so that everybody's cost can be reduced," he says.
The role of extranets
Extranets will be used to help manage the flow of materials through electronics supply chains. In fact, extranets will play a large role in most distributors' SCM programs. Many distributors already are capable of electronic data interchange (EDI) with customers. For instance, with auto replenishment, an EDI signal is transmitted to notify the distributor when a customer's part bin is empty and needs to be replenished. However, in the next two years, the Internet will play a large if not dominating role in distributors' supply chain programs. Many large OEMs and CMs already have extranets with distributors, and now small and medium-size customers are moving to extranets.
With extranets, a customer can see a variety of customized information. For instance, if a buyer has bonded inventory with a distributor, the extranet site could show real-time information about how much inventory is being held in bond.
"Customers are looking for custom environments for their information that allow them to become self-sufficient," says Huether of Arrow. "Extranets dramatically reduce the cycle time of transacting business." Arrow provides customized extranets with its Pro Series extranet tool. Other distributors offer similar extranet tools.
Longer term, the Internet will also link all partners in the supply chain, says Wyle's Oppenheimer. "We are looking at developing tools that we can bring to the entire supply chain so we can communicate with suppliers as well as our customers on a regular basis," he says.
Pay the fiddler
Buyers should be aware that while distributors have been eager to offer supply chain management programs, there is growing concern among distributors that they are not charging enough for these programs. With bonded inventory, for example, it costs 0.6% of sales for every month of bond that a distributor provides for a customer, according to Steve Kaufman, chairman and chief executive officer of Arrow Electronics. So if a distributor sells $1 million of parts per year to a customer and holds 30 days of stock, the distributor has committed $83,000 of non-moving capital.
Some supply chain management programs are even more expensive to distributors, and buyers may not even realize it. Example: proximity warehouses. "If you put a proximity warehouse at a customer's site, it costs money," says Kaufman. There's capital investment involved, the cost of a building and employees to run the facility. Often there are other services that are provided at warehouses including tape and reeling, parts kitting operations and integrated circuit programming. There often is an increase in freight charges because customers may demand two or three shipments each day.
"Everybody wants something for nothing, but at the end of the day, they realize that if they try to extract that, suppliers can't survive," says Goebes.
In some cases, it's hard even for distributors to determine the true cost of supply chain management programs. With some services, costs are tangible. Example: IC programming. "There are labor costs, capital equipment investment and setup costs. Those are tangible," says Tobin of Pioneer Standard. "But with a packaging change or an EDI link, it may be harder to get a true idea of what the real cost is," he says.
"The challenge for distribution is to show value for what we do and not be ashamed of asking to be compensated for the value that we bring," says Tobin.
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