It's no secret that most companies that use electronics distributors are small- to medium-sized OEMs and electronics manufacturing services (EMS) providers. Large OEMS such as IBM, Hewlett-Packard and Lucent buy virtually all of their component requirements directly from parts manufacturers.

However, some distributors report that their business with large OEMs and EMS providers is growing. In some cases OEMs and EMS companies say while they may pay higher piece prices when they purchase from distributors, some of the supply chain service programs actually help them reduce total cost. Many OEMS and EMS providers use distributors for new product introduction (NPI). In some cases, a large company has no choice but to buy from distributors because some chip suppliers sell products only through electronics distributors.

One EMS provider that uses distributors in a limited way is Celestica. Celestica's spend with distributors is "targeted," according to Perry Mulligan, vice president of supply chain management and customer solutions.

"We use them for small volume support for new product introduction," says Mulligan. "They provide us with quick turn, low volume partial reels of smaller quantity purchases to facilitate the NPI launch."

For volume production, Celestica purchases complex field programmable gate arrays from distributors. He says in many cases suppliers of those parts sell only through distribution. "Some suppliers have consciously decided that they are not going to invest in their own infrastructures to support outbound logistics," says Mulligan. "The vast majority of their components need to be programmed before they can be used. We buy the parts from distributors and use the distributors as value-added service providers for programming these devices as well as stocking."

Mulligan says less than 10% of Celestica's spend for production materials is with distributors and about 90% of its spend with distributors is for parts that need to programmed and are sold only through distributors.

"We don't use distributors for low value purchases such as resistors and capacitors," says Mulligan.

However, Mulligan says Celestica will use distributors more in the future. "Our market is changing and I think distribution has the potential to increase its footprint within Celestica in our emerging business model," he says.

Celestica wants to focus on emerging markets in the EMS industry, which includes defense, aerospace, telematics and medical equipment.

"If you look at some of the production requirements for those industries, they include more specialty components," says Mulligan. "A lot of the production is high mix, low volume, which, in terms of total landed cost, we can help engage distribution more effectively."

Mulligan adds that distribution may be able to support Celestica in new product introduction efforts in China and other low-cost manufacturing locations. However, he says distribution does not have the same level of NPI support and infrastructure in low cost countries as it does in North America. If distributors develop that support, Celestica may use them more in low-cost areas.

Like Celestica, EMS provider Flextronics uses distributors for NPI. Dan Pleshko, vice president of global procurement for Flextronics, says distributors are willing to kit parts and ship small quantities of components rather than entire reels for new product introduction.

However, Flextronics also uses distributors for volume production as well.

"Where we have high-mix, low-volume business, it is advantageous to use distributors," he says. "They help us with the whole order-fulfillment process. But they are strategic for full-scale production, also."

He says Flextronics likes to purchase 10-15% of its direct production requirements from distributors. "We think there is a healthy mix that you should run with your purchases between direct buys and distribution," says Pleshko. "We try to manage that closely. We have relationships with distributors just like we do with strategic direct suppliers."

Like Celestica and Flextronics, telecommunications equipment manufacturer, Alcatel, uses distributors to purchase programmable semiconductors from companies that sell only through distributors. However, Alcatel uses distributors for low-value component purchases as well. "We buy from the usual suspects: Arrow, Avnet, Memec, TTI, " says Burt Rabinowitz, vice president procurement and sourcing. "In North America, about one third of the parts we purchase are through distribution," he says.

He says Alcatel uses distributors for flexibility. "With the popcorn parts it helps us tremendously not to have our people manage low-value items. Distributors stock for us and make the parts more readily available than if we had to go out and buy them from component manufacturers," says Rabinowitz. "With standard parts, they eliminate the need to worry about liability management because they own the liability."

He says Alcatel can get parts from distributors in about four or five days from the time an order is placed. It may take two to three weeks to get the same part from a component manufacturer.

"We forecast to them and they keep a large rolling stock available for us," he says.

Rabinowitz says Alcatel has some programs with distributors that help Alcatel manage parts that are not obsolete, but are not currently being used by Alcatel.

"We have some components that are excess to a forecast. They aren't obsolete and we will use them again, but we have an excess amount of them," he says.

Instead of holding onto the parts, Alcatel sends them to a distributor. "The distributors act as a resale point to our contract manufacturers (CMs)," says Rabinowitz. "Our CMs look up part XYZ and they see Alcatel has it in inventory, but the inventory point is actually an electronics distributor. The distributor maintains that stock and knows which CMs are authorized to buy," he says.

"The distributor knows what the cost needs to be and ships and bills the CM. We do a fee for service with the distributor," says Rabinowitz.

"It's a huge benefit because providing CMs with parts is not a core competency. Distributors handle a multitude of small component orders that otherwise we would have to fill every single day," he says.