As someone who has been trading and analyzing the open-market for electronic components for two decades, I have seen many problems arise due to inflexible purchasing processes. Although direct purchasing and franchised distribution are reliable, they can also be reliably high, and the last price you paid is not necessarily the best price. That’s why smart purchasing teams renegotiate their pricing as often as possible. But renegotiation can prove to be a costly organizational challenge for all parties.
The companies that are innovating and remaining agile have purchasing directors who are strategic about supply chain partners while remaining vigilant about quality and guarding against counterfeit parts. The optimum solution is to find an open-market partner they can trust and then maximize the strategic advantages from the relationship at every level.
For example, leading open-market suppliers do more than just provide shortage sourcing in today’s market. Savvy companies are turning to open-market partners for cost-savings services such as purchase price variance (PPV) programs and vendor managed inventory (VMI), among other strategic services. The quest for market share is expanding supply chain relationships and demand for expert services. These services, however, must be backed by supply chain expertise and highly customized to meet unique strategies for addressing shrinking margins, increasingly tight inventory levels, and pricing volatility. Outsourcing to leverage core expertise has been gaining over the past couple of years, and expanding supply chain relationships are supporting growth and differentiation.
Trust is the key element in every relationship, and when it comes to choosing an open-market partner, trust is similarly essential. In my experience, some of the top reasons companies are turning more and more to independent distributors for dedicated supply chain services include:
- Quality System (QC test lab)
- Pricing (for example, PPV programs)
- Purchasing Power
- Inventory Management (for example, VMI services)
- Credit Terms
One strategic service example that illustrates these supply chain relationship advantages is when we were able to provide a contract manufacturer (CM) support through a PPV program. We took a bill of materials (BOM) for its upcoming build and processed it through our internal systems, searching for other parts we could source from trusted vendors the firm wasn’t familiar with. Several matches were returned from our search, and we prioritized them based on the CM’s criteria. We then negotiated with our suppliers to purchase the parts on a lead time and provided a cost savings for the CM.
The largest CMs and OEMs (original equipment manufacturers) understand that, along with the high level of service that comes with being a "number one" customer to component manufacturers and franchised distributors, there are also global account service costs associated with those relationships. As a result of increased market competition and pricing pressures, CMs and OEMs are increasingly turning to the open-market. They do so to test their purchasing power in order to save money and trim margins while ensuring that they are receiving the highest-quality product every single time. The key to these service success stories is finding an open-market partner you can trust and then working together to reap the rewards of superior cost and inventory management.
When dealing directly with manufacturers and franchised distributors, the largest OEMs are paying a premium for the high level of customer services and quality parts they are getting. These OEMs are well aware of this situation. However, in a razor-thin margin industry in which cost control has become the utmost priority, relationships with direct manufactures and franchised distributors—which have traditionally been set up to guarantee stock availability—may sometimes become a hindrance when OEMs look to trim margins and better manage expenditures.
Some OEMs have addressed the dilemma by testing the independent market for solutions. Because these open-market strategies are new to OEMs and some CMs, they are often hesitant because of quality concerns. What bewilders them is how it is possible for the independent distributors to offer lower prices than direct manufacturers and franchised distributors. One of the reasons is that independent distributors are often able to absorb excess parts or inventory from their customers at lower costs—the same parts that OEMs are sourcing from their conventional channels. What’s more, some of the best independent distributors implement a more stringent quality assurance standard than some of the franchise players because they are aware of the risks in the market and lingering negative perceptions of how some independent distributors source their products.
In today's maturing supply chain, leading, global independent distributors provide a favorable combination of the reliability of a franchise distributor and the flexibility of an independent distributor. When it comes to quality, these industry-leading independents are typically able to provide their customers with increased quality standards in addition to greater agility, more cost-savings, and more customized, strategic services. The key to these supply chain success stories is doing your due diligence to find the best, leading open-market partner you can trust and then working together to reap the rewards of superior cost and inventory management to realize your goals.
Jennifer Kabbara is the Trader Development Manager for Smith & Associates, where she facilitates the collaboration, growth, and global unification of Smith for traders. Jennifer also supports the recruiting and integration of new traders. Jennifer joined Smith 20 years ago, beginning her career in broker and OEM sales and purchasing. She moved through the ranks and has held various strategic management roles at Smith: training manager, trading floor manager, and director of trading operations. Jennifer earned her BA in Journalism from Texas A&M University. She can be reached at [email protected].