23 July 2013
How can electronics design companies collaborate more effectively with the supply chain?
One theme that emerged from New Electronics' reader survey focused on the supply chain – with issues ranging from getting practical advice on new technologies to dealing with unpredictability of supply.
So how can electronics design companies and the supply chain collaborate more productively?
I prefer the term 'supply network', rather than 'supply chain', because most UK/Ireland based organisations work within a 'network', which they join or leave, based on commercial considerations, rather than a more formal 'supply chain'.
Globalisation has changed the electronic components supply network dramatically. Today, a typical OEM could be designing products in multiple locations and not necessarily in one country. At the same time, it may be using several of the 500 or so Independent Design Houses (IDH) in the UK and Ireland for specific projects and is probably using multiple electronic manufacturing services (EMS) providers.
Industry statistics compiled by ecsn demonstrate that, while manufacturer authorised distributors have increased their share of the UK/Ireland electronic component market from approximately 25% in 2002 to more than 40% today, they are now tasked with 'demand creation' and supporting most customers.
Alex Grout, European distribution manager for Omron Electronic Components, accepts this change has been driven partly by manufacturers like Omron, but says it wouldn't have happened if customers didn't want to buy from distributors and consolidate their spending with a limited number of suppliers. "Many customers said they appreciated the value that a good distributor adds and expressed a preference for dealing with Omron through an intermediary. Consequently, the proportion of our business transacted in EMEA via distribution has risen to approximately 50% over the last decade."
Independent design houses
Customers turn to independent electronic design consultancies because they have specific expertise or domain knowledge that is not available or affordable in house. Combining the IDH's IP with their resources shortens the project design cycle and adds significant value to the end product.
IDHs provide a cost effective, specialised 'pay as you go' service, which can either augment or replace existing design resources with a new style of 'virtual' OEM model, where all key functions are outsourced.
Chris Shipway, UK country director with Avnet Memec, says exciting technology breakthroughs often come from small innovative companies without the resources to create demand internationally. "They contribute market specific expertise to create a solution that allows the end customer to get to market quickly with competitive breakthrough products, and create business opportunities that enable state of the art suppliers to grow to the next level and continue to invest in development."
Ismosys' managing director Nigel Watts believes the key to successful supply network/IDH engagement lies in first understanding the true value of the sector and its needs. "As Europe becomes more design centric and the focus on demand creation in the mass market weakens, the necessity to identify, motivate and reward design companies becomes paramount." IDHs have the potential to perform multiple roles, ranging from a design concept for an OEM to contracted FAE support for emerging semiconductor manufacturers. "But," says Watts, "they have long been the forgotten market segment, principally because they fall in the crack between OEM and authorised distribution coverage."
Despite the challenges of tracking revenue from the point of design to the point of manufacture, authorised distributors will engage, in some way, with most of the IDH community on behalf of component manufacturers, but they may not deliver the level of technical support required because it cannot be justified economically.
However, IDHs have to recognise the commercial facts of life and do what they can to assist manufacturers and their authorised distributors in generating the sales revenue and profit which justifies their existence.
Linear Technology's Alastair Boyd says manufacturers give IDHs as much support as they can, via demo boards, samples and data which doesn't take too much resource. "If IDHs want my FAEs to do what I call 'heavy lifting' – doing the design for them – I will expect help in tracking the opportunity to production. But IDHs often either don't know, don't care or hide behind a non disclosure agreement." He also believes there are too many brokers within the supply chain living off those who have put money, time and resources into hiring and training staff who support the electronic design community.
Watts puts the typical IDH's disconnect with the supply network down to an inability to 'sell' its service to a wider audience – where exposure to more customers and suppliers can be of huge benefit. "Greater profile and support with, and from, component manufacturers can be of major advantage to the design house, providing early access to new technology or commercial support for key projects," he notes. Watts believes the supply chain must work more effectively with IDHs by treating them like real customers and identifying the benefits they can add to the demand creation role. "This is what Ismosys set out to achieve with its Design Partner Program. It is no coincidence that traction and support for the programme has grown exponentially as the resources in the channel and from suppliers have reduced."
The supply network can make or break a product or a business. The best design made in the best factory can still fail if you can't meet demand or if you have a warehouse full of stock with no demand. John Bowman, marketing director at Anglia, points out: "Demand in all markets is harder to forecast than ever, so flexibility is key to commercial success – and that's where UK/Ireland manufacturers and distributors score."
Bowman says Anglia has often been able to match the offshore factory gate price when supplying a UK EMS for a UK end customer, while adding faster and more flexible delivery. He cites the example of ETI, manufacturer of the Thermapen food thermometer. "We set up a three way supply chain agreement with Wilson Process Systems that allowed ETI to place firm orders on a rolling schedule two weeks ahead. It provided a non binding forecast of demand a year ahead, which allowed us to place orders for long lead components and Wilson to make the bare pcbs".
Although ETI underwrites the value of inventory, it is only invoiced for the components used, which keeps the capital employed in finished goods to a minimum. "Effectively, ETI can adjust its manufacturing schedule on a weekly basis, which has been key to allowing it to grow quickly into a new market," Bowman concluded.
Whilst there is a growing appreciation amongst OEMs of the advantages of a short supply network and an improved understanding amongst UK distributors and EMS businesses of how to work together to offer a competitive package, it remains a fact of life that the industry is now global and, in order to be effective, needs to be adequately funded, with the costs borne by component manufacturers, customers or authorised distributors.
Traditionally, authorised distributors have shouldered this burden based on sales commissions. If this is to continue, there needs to be increased transparency across the global supply network and mutual collaboration to increase the probability of reward via sales revenue. This would be the ideal outcome for all concerned, because the costs are minimal and the rewards are great for all.
Adam Fletcher is chairman of the ecsn, the Electronic Components Supply Network.