An enterprise exists in eternal pursuit of maximising profits. Electronics industry is no exception. And perhaps it exists in most dynamic environment, be it technology or manufacturing process or adaptation of business model to survive and be ahead of competition per se.
Role of semiconductor component distributors (also referred to as authorised distributors, franchised distributors and simply distributors in this article) is pivotal for enterprises engaged in electronics business. Let us look at the semiconductor value chain in Fig. 1.
This article talks about distributors shown in the middle just after the semiconductor vendors and before original equipment manufacturers (OEMs).
In most simplistic way, one may understand the distributors as entities that acquire components from chip-component manufacturers and deliver them to OEMs on agreed terms for logistics. Whilst doing so, they ensure that stock in their own warehouse is minimum (see Fig. 2). The appropriate basic understanding about electronics distributors is depicted in Fig. 3.
There are three major tiers of semiconductor and electronic products sales:
Tier 1. First tier is most simple yet covers almost all large opportunities. These are sales directly done by semiconductor component manufacturers such as Intel, Philips, Texas Instruments, Vishay, AMD, Sharp, etc to OEMs like HP Compaq, Dell, Nokia, Ericson, Sony, Huawei, etc. The OEMs, in turn, use the components to manufacture end-user products.
Tier 2. Second tier comprises franchised distributors. They market and distribute electronic parts and products predominantly to OEMs on behalf of the semiconductor component manufacturers. Distributors refer semiconductor component manufacturers as principals and often as vendors.
Tier 3. The third tier comprises all other selling and distribution channels. It includes independent distributors, stockists, surplus sellers, obsolete part sellers and value-added resellers (VARs). They, in turn, sell to OEMs, contract manufacturers and other distributors and resellers.
Tier 1 is simply a business reality that where big opportunity exists, there is no place for a mediator. Manufacturers would like to interact, manage and service directly in order to keep the costs to the minimum and relationship degree at the highest.
Second big chunk of sales are done to OEMs whose size is smaller than the above-said mega OEMs. Here, the number of customers is high. They are spread over different geographies, cultures and judiciaries. It is not viable for manufacturers to open their own offices, expand infrastructure and take credit exposure everywhere. Distributors fit well here. They carry franchise for several manufacturers, thereby making business potential overall large in a territory for them.
Independent distributors (tier 3) generally stock products, offer credit terms to their customers, provide value-added services such as kitting, pass on manufacturers’ warranties, provide rejected material acceptance (RMA) services and quality assurance to some degree.
Franchised distributors have sound business agreements with their vendors for prices, allocation of quantities, lead times, geographies and other aspects. They restrict themselves to the broad yet limited product lines they are franchised for. On the bottom of tier 3 lie the brokers and retailers.
Value-added services for the supply chain
Supply chain consulting. Can propose various options for the supply chain with pros and cons and help arrive at a customised solution. For large projects, logistics involving two or more parties and legal agreements between them are suggested.
Economies of scale, augmentation and ability to handle mega accounts. Distributors are well aligned with their principals and major customers as far as strategies and plans are concerned. They have financial muscle and bandwidth to augment the supplies when projects blossom.
Labelling/packaging. Under special agreements with customers, customised labelling and packaging can be offered which facilitates the manufacturing.
Consolidated shipments and consolidated invoicing. Normally, distributors avoid entertaining the cases involving components and products which they are not franchised for. As a special service, an agreement can be reached for clubbing the non-franchised items which can be either sourced by the distributor or arranged by the customer at distributor warehouse. A consolidated shipment is then made to the customer under a single invoice.
Electronic data interchange (EDI). Whilst distributors have systems to keep all their customers informed on the status of execution of their orders, they provide access to EDI facility to select customers. Customers can then track and monitor their order status in real time.
E-commerce. Many distributors have extended EDI for facilitating B2B and other e-commerce. In emergency, customers can go to a distributor’s website on-line, purchase components using credit and debit cards besides electronic fund transfers.
Quote cells. Quote cells of distributors can be very helpful if involved right from the bidding stage. These quote cells are well equipped to even cross advise the parts when a non-franchised part is encountered in the parts list sent by the customer.
Buffer stock management. Despite the best management skills and processes, it is not possible to run manufacturing setups at all times without any cushion for inventory. As the trust and agreement between distributor and customer builds up, customers can leverage buffer at distributor warehouse rendering reduction in the cost of inventory carrying.
Customer-managed inventory. Using their strong warehouse management software and techniques, distributors can offer an upgraded service. Customers are able to pull the stocks allocated and locked specifically for them.
Replenishment services. As the name suggests, distributor refills a designated lot of inventory on getting a manual or automated notification. This is an implementation of Japan’s famous Kanban concept of manufacturing in which production is done in the right size of batches.
Lead time reduction services. SCM team of customer works with the distributor to develop forecasting system. Using the forecast, distributor organises the availability of items on required dates of shipment. It is possible to attain shorter lead times after initial first shipment.
Vendor-managed inventory (VMI). Vendor-managed inventory is a continuous replenishment program in which the distributor manages and replenishes stocks at the customer store or warehouse level. This enables the distributor to project and anticipate the just enough amount of stock it needs to organise in order to meet the customer demand.
Project implementation and safe passage. In electronics field, product life span is short. New products and projects pop up very frequently. Every new project requires an implementation that is right for it. Distributors are apt at steering and navigating a safe and effective implementation. Customers should call their intervention right in the beginning stage. More than OEMs, electronic manufacturing service (EMS) companies require this service.
Expertise of servicing OEMs, ODMs and EMS. Distributors do not restrict themselves to a very limited customer base. Their big and small customers fall into various categories, viz, OEMs, ODMs and EMS. They understand traits of each customer type in depth. Specialists for major accounts are appointed since the interaction style and service technique is diverse.
Taping and reeling services. Today’s high-speed machines for electronics manufacturing require the feed lines to receive components in tape or reel form. Not always the components are available in desired packing. This means components need to be repacked in the required packing form.
Programming and re-packaging facilities. Many components are one-time programmable (OTP) or multi-time programmable (MTP) and require to be loaded with software program before mounting on the boards. Distributors enter into agreements with their customers to do this activity at their end before shipping. They ensure that the devices are programmed properly, tested and checked before re-packaging.
On customer’s request, a copy of test report is also sent. Bar codes, labels, laser marking, holograms, quality and inspection certifications and stamps are also provided by distributors on the batches and consignment packs.
Backward traceability. Test data of all devices are kept by semiconductor manufacturers and distributors (for parts e-programmed by them) for a specified time for backward traceability, lest a quality issue arises. Also, many end customers have processes making it compulsory to comply. Distributors provide the customers test reports of components and products supplied by them on demand. Country of origin certificate (COC) is also supplied to customers on request.
Rejection material acceptance (RMA). Distributors and their principals have sound processes to deal with rejections. It is worthy to state here that semiconductor manufacturing has graduated to six sigma and better quality levels. Therefore it is extremely rare to spot RMA cases. However, in the practical world, one can still see rejection popping up with claims made for compensation. Once an RMA case is reported by a customer, they are advised to follow certain procedures through which the proclaimed rejected part is assessed. A case found legitimate is disposed by replacement or monetary compensation under warranty terms.
Green channels. In order to facilitate faster movement of shipments for premium customers, distributors create green channels. It is an internal system to classify customer orders and delivery advices where certain internal approvals are either skipped or processed on priority.
Die-level support. Electronic parts are mostly dies put into standard forms with suitable leads that manufacturing lines can accept. One can understand die to be otherwise a complete electronic or semiconductor part which is too small and delicate to handle and manoeuvre by electronic manufacturing machines. But certain mass manufacturing customers and customers using critical processes may be in position to receive dies, work on them to make their own proprietary assemblies to use further.
Integrated warehouses. Large distributors have several warehouses located to provide optimised logistics and comfort of vicinity to customers.
Business transactions in multi currency. Many distributors offer facility to customers to transact in local currency at their in-country billing stations and also in international currency at their international billing stations.
Transfer opportunities. Sometimes the designs happen in one part of the globe and the project is transferred to another region for manufacturing. Customer’s handshake with distributor remains intact as regional facility of distributor in manufacturing region takes up the charge.
Strong warehousing and contract review systems. Distributors invest heavily in their core area of warehousing and logistics. State-of-art software and facilities ensure negligible complaints on errors in customer order execution.
Value-added services not limited to SCM
Bringing in vendor support. One big advantage in engaging with a franchised distributor is that the customer automatically comes under the umbrella of principals. He gets entitlement to different facilities and initiatives by semiconductor component manufacturers for enabling the market verticals and build the opportunities.
Customer relationship management (CRM). Distributors invest in CRM software and deploy them to serve their customers better. Using this capability, they capture every touch with the customer in detail, which helps them in drafting effective plans and activities to service.
Technical support. Distributors invest in resources for providing technical support to customers. They have a team of trained technical sales and marketing engineers and field application engineers.
Reference designs. Distributors, their vendors and their ecosystem partners invest in building reference designs as boards, products and system-level solutions. These reference designs are not merely proof of concepts but also a close version of the final product that customers can develop further with very little effort.
Design reviews. Some principals run programmes for evaluation of designs done by customers. Expert teams at vendor’s place conduct the reviews. There can be criteria for selecting the cases for such in-depth support. Distributors help in getting this support.
Sampling and prototyping support. In order to make conducive condition for parts to get designed in and pace up the design process, distributors and their vendors invest in providing samples of parts.
Design tool support. Distributors sell and loan out evaluation kits and development boards to speed up the design by R&D teams of their customers. Customer is saved from capital expenditure and risk of landing up with the tools that could become futile in case the project is suspended or when new designs are taken up.
Trainings. It is part and parcel of the activities by distributors and their vendors to keep on conducting trainings for their current and future customers. These trainings are done both in normal class-room/seminar-type atmosphere and through webinars.
Date code. Distributors have system which ensures that they do not carry old parts in their inventory. An old stock may create quality problems during manufacturing and later in field.
Design partner programme. Distributors provide complete turnkey solutions to their customers for certain targeted segment and end-equipment, which are currently hot and emerging with huge potential in the future.
There are plenty in international market who dump old, fake, remarked, excess or obsolete inventory to innocent buyers by offering low prices and ready stocks. Many such fraudulent sellers self-claim to be authorised distributors. Dealing with such miscreants and fly-by-night operators not only causes heavy loss of money but hardships of shop-floor rejections, troubles in locating the real fault and corrective costs.
Associating with electronics distributors opens up a treasure of value-added services for OEMs. ODMs, design houses, contract manufacturers, etc. A long-term relationship with distributors would ensure an unmatched edge over competitors and sustained profitable growth.
The author is an engineering and management professional who has served as head of business development and FAE team at WPG Electronics, as vice president and SBU head at Kobian Pte Ltd and headed marketing department at industrial electronics division of Crompton Greaves Ltd