Supply-base reduction offers challenges to most suppliers, and few feel the challenge more than independent distributors that have been fighting to reverse perceptions that their quality is not up to par.

Product quality has always been an issue in the electronics supply chain, but it seems to be more of an issue as more manufacturing and sourcing has moved into low-cost Asian countries. In some cases, substandard components that don't work up to spec and counterfeit parts have been sold on the open market.)

"Quality was something that was a differentiator in independent distribution," says Frank Cavallaro, CEO of Converge in Peabody, Mass. "Now it is a barrier to entry. If you don't have a quality process that is auditable and certifiable, you can't play in the game anymore." That wipes out 90% of independents that are out there, he says.

Demonstrating high quality will be crucial if independent distributors are to grow revenue in 2007 and beyond. Last year revenue of the top 10 independent distributors was flat, according to Purchasing's annual survey of the distribution industry. However, eight of the 10 posted revenue gains. Ironically, the top-two nonfranchised distributors—Converge and Smith and Associates—suffered sales declines in 2006.

Converge's sales dropped a little less than 1%, but Smith and Associates' sales dropped 19.8% to $408 million.

With the sales decline, Smith and Associates dropped to number two in the top independent distributors ranking, replaced by Converge, which had sales of $450 million. Some independents had very strong years. Commodity Components International grew revenue 30% to $34 million; Advanced MP Technology increased sales 23.8% to $265 million and America II Electronics' sales rose 20% to $276 million.

Doug Kelly, CEO and president of Smith and Associates in Houston, said product mix was different in 2006 than in 2005 which impacted revenue. "We sold less of the high dollar product. Individual unit prices were down for us because some higher dollar products that were strong for us in 2004 and 2005 were not as strong in 2006," he says. Kelley says it is not uncommon for product mix to change from one year to the next.

Kelly and other nonfranchised distributors are cautiously optimistic that 2007 will be a growth year, although most industry analysts are forecasting a slowdown in the industry.

The challenge that independent distributors face in 2007 is that many large companies are reducing their number of suppliers and want to use only one or two independent distributors. Independent distributors will have to compete to become the nonfranchised distributors of choice for OEMs and EMS providers.

"These (large companies) are global organizations for the most part," says John Irving, executive vice president of Fusion Trade in Andover, Mass. "Their procurement is run under global auspices. They have a defined list of suppliers they can buy from. These are global lists so if you are on that list, you're dealing with them across the globe," he says. If you are not on the list, then you lose out on businesses.

To be approved, an independent distributor has to prove it has quality systems in place. Large independent distributors know that and many have a rigorous parts-screening process.

In fact, the Independent Distributors Electronics Association, a trade group for nonfranchised distributors, has developed inspection standards to guarantee they buy and sell quality parts. These standards are necessary. Kelly of Smith and Associates says that more customers are doing quality audits of independents to make sure they have the correct quality processes in place.

Being an approved global supplier to an OEM or EMS provider is important because more of independent distribution revenue is coming from outside of North America. "Our big growth is in southeast Asia and China," says Irving. "Our Singapore office is growing. We are also seeing growth in Europe and Eastern Europe."

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