Strategic Purchasing
How Many Distributors is Enough?

How Many Distributors is Enough?

Several years ago I asked a buyer at a mid-sized electronics manufacturing services (EMS) provider how many distributors his company used for electronic components.

"All of them," he quipped.

In fact, he did not purchase components from every single distributor, but bought parts regularly from at least 25, including the major broad-line distributors, catalog distributors, and distributors that specialized in passive, electromechanical, and interconnect products. He said his company also purchased components from independent distributors when parts were in short supply and could not be purchased from authorized distributors. In addition, the EMS provider said he needed to buy a small number of connectors from a specialized distributor.

He acknowledged that his company used too many distributors and needed to focus more spend with fewer of them. However, his company had several facilities, and he said buyers at the plants had their favorite distributors.

Many buyers at small and midsize OEMs and EMS providers have seen the advantage of using fewer distributors. They find that by purchasing more components from fewer distributors, they can get a better price for parts. Also, when you purchase a higher volume of components from one distributor, that distributor is often more likely to provide certain services that can lower total cost for EMS providers or OEM customers.

Of course, it is difficult to determine the ideal number of distributors a company should use. There are many factors, including the type of parts that need to be purchased and the services that an OEM or EMS provider requires.

Some bills of materials (BOMs) are lengthy and diverse and require a wide variety of semiconductors, passives, and connectors, which may mean buyers have to use multiple broad-line distributors. Some BOMs may include specialized parts that can only be purchased from a limited number of distributors.  Other BOMs may have a number of mature or obsolete parts.

A buyer may need a distributor that can review the BOM and determine which components are obsolete or will soon become obsolete and suggest alternatives. If alternatives are not readily available, a buyer may need to make sure one or more of the distributors his company uses specializes in obsolete or hard-to find parts.

Most distributors provide some value-added or supply chain services, and sometimes buyers take them for granted. However, not all distributors are created equal in delivering such services. Some may be strong with technical assistance and design services, and others may offer a wide array of value-added services. Some may offer only a select few services.

There is always cost associated with delivering such services, and a distributor may not be willing to provide them unless a company purchases a certain level of components. If services such as IC programming, auto replenishment, in-plant stores, kitting, connector and harness assembly are needed, buyers obviously need to make sure the distributors they decide to keep are willing and able to provide them.

The head of supply chain at a mid-size Canadian EMS provider recently told me that his company buys about 80% of the components it needs from just five distributors. The company has about 200 OEM customers and buys a wide range of components. In total, about 90% of those components are bought from distributors, which also provide needed value-added services, including consigned inventory, IC programming, and other supply chain programs.

He said that although his company only uses five distributors for the bulk of its purchases, those distributors are invaluable because they ensure continuity of supply, help cut total cost, and reduce supply chain risk.

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