Seek Trusted Channel Partners For Success In Turbulent Times

One thing the electronic components supply chain learned following this year’s earthquake and tsunami in Japan is the value of a good distribution network. Concerns about supply chain continuity early this year were exacerbated when the Japan tragedies struck in March, causing customers large and small to stock up on parts they needed most in anticipation of shortages.

Although companies in Japan were largely up and running within three months of the disaster, electronic components distributors say the situation is having a lingering supply chain effect in the form of a renewed focus on risk.

“The [Japan situation] just really sent everybody for a loop,” said TTI Inc.’s Michael Knight, senior vice president TTI Americas. “It had been a long time since we’d had a shock like that.”

Knight also said a resulting trend is that many OEMs are starting to look more closely at supply chain risk—specifically, the ability to get the products they need when they need them. And that’s a situation that bodes well for electronic components distributors.

“[It’s] good news for distribution because part of our value proposition is to mitigate risk in the supply chain and make sure the customer doesn’t [have a line go down] for want of a reel of resistors, for instance,” Knight added. “We saw a lot of people paying attention to that.”

Combine the heighted focus on risk with a greater need for supply chain flexibility these days, and it’s not hard to make the case for a strong distribution network, Knight and others say. As product lifecycles shrink, designers are challenged to get their products to market faster.

As the fear of supply disruptions hover overhead, it’s no wonder distributors are anxious to step in and prove their value to original equipment manufacturers (OEMs) and electronic manufacturing services (EMS) firms alike.

“I think the OEM and EMS bases have leaned much more toward distribution in general in the last decade because of flexibility,” said Jim Magee, president of Florida-based independent distributor America II Electronics.

“Demands and production are so lean, [customers] need to be able to pull in and push out very rapidly. Companies realize they may pay a little more, but the added cost is worth it because of the flexibility in their supply chains,” he said.

Mitigating Risk

The monsoons and subsequent flooding in Thailand this fall reinforced the renewed focus on supply chain risk. TTI’s Knight said it was too soon to assess the extent of the problem in late October, but he anticipated a similar situation to the Japan disasters.

“It’s starting to feel like it may have as big or a bigger impact… than the tsunami and earthquakes in Japan,” Knight explained. “That’s going to be a wrinkle that we’re all going to have to contend with.”

As of early November, the flooding had hit the hard-disk drive (HDD) market the hardest, as major plants for Western Digital, Toshiba, and others were flooded and had been shut down for weeks. About 50% of total HDD assembly capacity is in Thailand, according to industry estimates, leading to HDD shortages this month and throughout 2012.

The flooding also was affecting production of several key end products, electronic parts, and systems—specifically automobiles, car components, cameras, and analog and discrete semiconductors, according to industry analyst firm IHS, which released an update on the situation in early November.

IHS pointed to an indirect impact the floods were having on the production of other devices and systems, as well, such as notebook PCs, dynamic random access memory (DRAM), cameras, and set-top boxes.

Other industry watchers pointed to potential problems in the tantalum capacitor supply chain due to shutdowns at NEC-Tokin Corp. and Rohm Co. Ltd. operations in Thailand as another example of how the disaster is affecting the industry.

“Tantalum capacitors are critical components used in the production of notebook and tablet computers, smart phones, automotive electronics, and digital video cameras, among other items,” analyst Dennis Zogbi wrote in a report for TTI’s MarketEye industry analysis source.

“The supply chains to the smart-phone and computer industries in Japan, Korea, and Taiwan will be significantly impacted by this event, and price increases are inevitable so that other tantalum capacitor vendors can meet short-term demand,” Zogbi said.

Knight and others argue that distributors play a crucial role in keeping manufacturing lines running smoothly (or as close to that as possible) during such crises, using inventory management and logistics capabilities to keep the product pipelines open.

Such skills are a key reason customers have become increasingly dependent on distribution in the last 10 years, Magee said, adding that a distributor’s primary role is providing customers with inventory when and where they need it.

Magee said this takes on even greater significance among independent distributors, who often fill a void in the channel when OEMs have a tough time getting the components they need.

“Our main job is to help the manufacturer keep their production moving,” he said. “There’s a lot of inventory out there, but even a small four-week change [in lead times] can make it tough for a franchised distributor to get the inventory. So customers often turn to independent distributors to fill the need.”

A Few Good Independents

But the danger of purchasing counterfeit parts rises as companies turn to the open market in times of crisis. This situation feeds the desire for risk-mitigation that Knight points to, and authorized distributors emphasize their ability to provide customers with authentic products directly from the manufacturer.

Increased fear of buying counterfeit parts is affecting the independent market as well. Magee said more and more of America II’s OEM customers are taking a hard look at their supply base in an effort to qualify and consolidate the number of independents they work with.

Realizing the growing risk of counterfeit products on the open market, but still needing to source products that may not be available from authorized distributors, customers are taking a closer look at independents to ensure they are buying from a trusted source, Magee said. As a result, OEMs are seeking independents that perform extensive product testing and verification to ensure authenticity.

“[OEMs] are realizing they need independents in their supply chain, but they know there is some risk in the broker channel, so they’re really keying in on independents—consolidating down and going through processes where they come out and do physical audits of quality systems,” Magee explained.

“We’ve really built our model around the quality system. We have a third-party testing house inside our warehouse, so we have the testing ability to guarantee the integrity of everything that leaves our building,” he said.

“What we’re seeing is, rather than go straight to the open market, [manufacturers] are trying to pre-qualify independents so they can get what they need when they have [supply chain] interruptions,” Magee added.

Today’s shorter product lifecycles are contributing to those supply chain woes as well. There was a time when an OEM would design a product and it was good for many years, Magee explained. Today, that cycle can be measured in months in some cases, contributing to excess inventory in the channel and making it difficult to get key components that may be out of production.

“A lot of OEMs are really keying on asset reclamation and getting dollars back,” said Magee, noting that independents such as America II will manage excess inventory for customers, taking ownership of the inventory and selling it on consignment. “It’s really a change in the way they are using the channel more than anything.”

The trend toward consolidating independent sources is really an extension of current supply chain trends, Magee add ed , in which end users of all types are trying to streamline their supply chains by dealing with fewer sources. Increased scrutiny of suppliers and a heightened focus on their ability to keep customers up and running are key components of such efforts.

“Independent or franchised, all supply chain guys want to consolidate [their supplier base] these days,” Magee said. “I think it’s a natural progression that’s going on right now.”

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