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How to get more from your distributor relationships

The right distributor can help OEMs and CEMs create more innovative and successful products, reduce costs and improve quality.

Understanding how the supply chain works is an important part of selecting the right distribution partner. Here's an insight into the how the distributor-supplier relationship is established, and what factors drive it forward.

Most electronic components distribution business is done through franchise agreements between component suppliers and distributors. These agreements don't come about by chance. Component makers are always looking at ways of optimizing the performance of their distribution networks. Distributors seek out suppliers that can complement their product offerings, help them to penetrate new markets, or both. As a general rule, the small distributors win franchises from smaller suppliers and larger firms from the larger ones. However, there are exceptions.

Sometimes a particularly innovative new component manufacturer may attract the attention of larger distributors because it has a unique solution for a particular application. On the other hand, a small distributor may offer a large component supplier access to a niche market that is not so well served by others. In most cases, it usually comes down to the distributor competitively "pitching" for the franchise against other candidates. However, winning the bid is just the first step in a long process when it's a deal with one of the larger, advanced technology semiconductor businesses.

When distributors win a franchise for this kind of product line, it's not just a question of putting stock on the shelf and waiting for the phone to ring. Distribution's role in providing in-depth technical and applications support to the electronic design community means that sales engineers and field applications engineers (FAEs) need to be much better educated and informed than in the past. Customers will often select commodity products – diodes, transistors, op-amps etc. – on the data sheet alone.

However, advanced devices, including the more complex FPGAs, microcontrollers and application-specific parts, have a greater impact on both the cost and performance of the final design. It's here that distributors can add real value to their customers' businesses but they have to make a significant commitment to technical training if the required levels of expertise are to be developed.

Leading semiconductor companies set up professional in-house training academies. Winning a franchise is dependent upon the distributor being willing to send staff for training, often for days at a time. Such training then needs to be regularly updated so that key people are kept abreast of the latest advances in technology. As a result, it's not unusual for FAE training to take a month or more each year.

The larger component makers may require that the distributor recruit specialist staff to support design-in activity. This usually means dedicated FAEs and perhaps additional sales staff too. Together with the cost of inventory, this means that there is substantial up-front expense for a distributor to sign a new franchise line.

Setting up the right inventory profile is another activity that can take considerable time and effort. The component manufacturer will normally suggest the initial stock profile, based on their knowledge of the most popular products. The distributor will then adapt the profile, based on its knowledge of specific customer requirements or likely future requirements. The accuracy of the stock profile with respect to customer demand can be a crucial factor in the success of relationships throughout the supply chain.

As the relationship progresses, the component manufacturer will require regular feedback from the distributor, not only with respect to sales revenues but also the number and types of new customers where business has been won. Where the manufacturer relies heavily upon the distributor for demand creation, the distributor will have to report where products are going to be used in new designs. In the case of FPGAs and microcontrollers, one measure of the distributor's performance may even be the number of development kits sold – on the assumption that design-in success will be directly related to the number of development kits that are in the market.

Clearly, for a distributor, signing a major semiconductor franchise involves a great deal of investment in inventory and time. Well-qualified FAEs and sales engineers demand competitive salaries, so it's not just a matter of start up costs – operational costs are significant too. The challenge for the distributor is to remain competitive while running a profitable business that can invest in added-value services. Offshore manufacturing complicates things further. If the distributor spends days, weeks or months giving technical support to a customer, there is no guarantee that component orders will follow when the product moves into manufacturing, perhaps on the other side of the world. A system of design registrations is often established between the component maker and the distributor. Commercial agreements are then put in place to ensure that the distributor is rewarded for providing technical support, wherever component orders are placed. The reward may come in the form of a design fee or commission payable on production orders.

In the past, smaller local distributors have been widely regarded as offering the highest levels of technical support. However, they lack a global perspective and there is always a danger that they will inadvertently recommend devices that may not be available at the manufacturing location, or may only be available at a premium price. Working with a distributor that has global reach has clear advantages for customers who intend to manufacture at locations other than where their products are designed.

Streamlined logistics are essential if a distributor is to offer competitively priced parts to its customers. Efficient and effective IT links between component manufacturers and distributors are part of the process. Another consideration is the effectiveness of the distributor's in-house systems – particularly where these span countries and continents.

Most global distributors have grown, at least in part, through acquiring other companies. For those that focus heavily on this strategy, IT integration has often created unforeseen technical challenges, additional costs and significant disruption to customer service. Distributors that have strong core IT systems and resources, and that have only acquired relatively small business during their development, have found it much easier to integrate order processing and logistics, maintaining high levels of customer service along the way.

So what does all this mean for OEMs and CEMs wanting to get the best combination of qualified technical support, competitive pricing and effective logistics from their distributor relationships? To start with, think about the products for which technical support it likely to be needed. In most cases, that will be advanced semiconductors or sub-assemblies (such as power supplies), not commodity parts like op-amps, basic microcontrollers, transistors, diodes or passive components. Then look at the distributor's product offering. It's unrealistic to expect in-depth technical support from distributors with 200 or more franchises, so seek out those that focus on the types of devices for which you may need support. If your design and manufacturing are done locally, you may not benefit from the global capabilities of some distributors but bear in mind that distributors with warehouses throughout the world will usually hold higher inventory levels and some of their suppliers will allow, or even encourage, product being shipped between locations to satisfy customer requirements.
Finally, look for distributors with a high ratio of well-qualified FAEs to sales engineers. One FAE to ten salesmen is not a real commitment to design support – one FAE to every salesman is.

Author
Phil Gee, VP Sales EMEA, Nu Horizons Electronics

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