Buyers look to partner with distributors

source: Electronic Sourcing article

Having the right number of capable distributors can help EMS providers avoid shortages, reduce cost and manage supply chain risk By James Carbone.

One of the most important challenges for electronics purchasers is determining the optimum number of suppliers their companies should use for the commodities needed for production.

Buyers want to have enough suppliers to guarantee continuity of supply and to ensure there is healthy competition for components and other production materials that are purchased. However, they also need to make sure they don’t have too many suppliers because then they could lose purchasing leverage if a large number of suppliers were awarded a small amount of business for a commodity.

The issue can be especially challenging for buyers at electronics manufacturing services (EMS) providers, who often must purchase parts from suppliers that are on their OEM customers’ approved vendor lists (AVL).

Adding to the challenge is that many EMS buyers by at least some – and in some cases the bulk – of the components needed for production from electronics distributors. Buyers at those companies must make sure that the distributors they use can provide the components and value-added and supply chain services to help the EMS provider meet the requirements of OEM customers.

One such EMS provider is Vexos, a small, full-service EMS provider based in Markham, Ontario, Canada that builds boards and systems for OEMs in the automotive, communications, medical, safety and security and other industries. “We buy almost exclusively through franchise distribution,” said Stephanie Martin, senior vice president of supply chain management for Vexos. “We are in distributors’ sweet spot.”

Wanted: Fewer distributors

She said Vexos uses 38 authorized distributors for the semiconductors, passives, connectors, electromechanical devices and other components that Vexos needs for production.

“Last year we used about 50 distributors, but late last year we started to consolidate across the company in both North America and Asia. Now we are working with 17 distributors. However, most of Vexos’ spend is with just five distributors and much of what it purchases is from global distributors such as Arrow, Avnet and Future and some specialist and catalog distributors such as Mouser.

“We have certain distributors for certain commodities,” said Martin. “For instance, when I’m looking at my high-end active products, I’m going to focus on the top three distributors,” she said. “If I’m looking at quick turn, startup or low-volume jobs, I’m going to look at Mouser or Digi-Key or Newark,” said Martin.

She said with resistors and capacitors “she leans in the direction of TTI because the distributor is much stronger in passives.”

However, while Vexos is leveraging its spend with a fewer number of distributors, it is still challenging to have price competition because there has been consolidation in the distribution industry and distributors “tend to be very close in price.”

The supply chain factor

In determining which suppliers are awarded business, Vexos factors in value-added and supply chain services that distributors offer. Such services can reduce cost of ownership, improve  delivery and reduce supply chain risk.

“We rely on them for various supply chain services,” including bill of materials scrubbing, said Martin. She said about 70 per cent of components on a BOM have incorrect part numbers and Vexos relies on distributors to review the bills of materials and correct the part numbers.
Martin added that Vexos also uses distributors for forecast sharing, bonded inventory, tape and reeling and IC programming. “Actually, we tend to use most of the services” she said.

Vexos also purchases components from non-franchised independent distributors. “We do use some of them for spot shortages, but we limit the ones we use,” said Martin. She said the independent distributors EMS provider uses are qualified by Vexos before purchase orders are placed.

“We qualify them differently than franchise distributors,” said Martin.

She noted that franchise distributors purchase components directly from component manufacturers and the parts are packaged on reels or tapes. When Vexos buys from them, the parts are still in the original packages. However, with independent distributors, the parts are often in packages that have already been opened so there could be potential quality problems with the parts.

“You have to inspect independent distributors’ quality processes, their supplier selection process and you have to do extensive audits,” said Martin.

Like Vexos, EMS provider Kimball Electronics, based in Jasper, Indiana, Ind., has also reduced the number of distributors it uses, concentrating much of its spend with a few proven distributors.

The number of distributors that Kimball uses is down significantly from five years ago,” said Jamey Mann, director of global purchasing for the EMS provider. “Our top four global distributors make up 88 per cent of our electronic component distribution spend,” he said.

Distribution reduction journey

“We have been on a journey to focus on reducing our distribution supplier base through consolidation to a smaller set that are able to deliver global services and leverage. We will continue to compress our spend into these major distributors,” said Mann.

He said the four primary distributors that Kimball uses are able to deliver the “global scale that smaller, regionally based distributors can’t deliver.” In addition, Kimball’s global distribution partners deliver the flexibility “required to support our global customers and operations.”

Mann said while Kimball is concentrating the majority of its spend with several preferred distributors, there are times when it needs to purchase components from other smaller distributors. “Due to the complexity of components we procure, at times we must align with smaller, specialized distributors,” said Mann. During times of shortages and for “small form-factor quantities,” Kimball also purchases from catalog distributors.

“In addition to these suppliers we do have a very small, tightly controlled set of preferred independent distributors,” said Mann. “We use these partners on a very limited basis and have a very strict process to govern the validation of materials procured as authentic prior to shipment and use,” said Mann.

Kimball “leverages the strengths of our preferred global distribution partners” by using their supply chain programs and value-added services including tape & reeling services, programming, and other services that they offer related to product lifecycle management.

Partnering with distributors

Mann said Kimball regards its distributors as partners and as such they are expected to develop supply chain programs that Kimball needs and have the production materials when the parts are needed, “at the cost we require, and delivered to an agreed window.”

He said distributors are monitored, measured, and reviewed on an ongoing basis to ensure that they are fulfilling the agreed solutions. Mann said distribution performance has improved. “Their performance is measured on an ongoing basis related to quality, service, and competitiveness and in recent years has seen solid improvements in all areas,” said Mann.

Having the appropriate number and right combination of distribution partners is also important for large global electronics companies. While many large electronics OEMs and EMS providers have the purchasing volumes to buy directly from component manufacturers, many of them purchase a certain percentage of their production parts through distribution.

For example, Jabil Circuit, based in St. Petersburg, Fla., purchases more than 10 per cent of the components it needs through distributors, including large broad line, specialized, catalog and independent distributors, said Graham Scott, senior director global commodity management at Jabil Circuit.

“We probably deal with most distributors. With the market situation that we are today where it is undersupplied we end up using franchise distribution more than we do normally as we require inventory,” said Scott.

Distributors help an EMS provider reduce costs, manage inventory, provide shortage components and supply chain value-added services that help reduce cost. In some cases, Jabil needs to purchase components from specialized distributors for such products as radio frequency integrated circuits, said Lloyd Kaplan, senior advisor, Jabil Intelligent Digital Supply Chain Solutions. “In some cases, suppliers will only sell certain products through some of their specialty distributors,” he said.

Scott said there are times when Jabil purchases from catalog distributors, although Jabil is an EMS provider and not an OEM. “Not all of our customers are high volume,” said Scott. “We have a lot of high- mix, low-volume business. In cases like that we use some catalog distributors to support that business.

He says Jabil also purchases from independent distributors. “We limit the number of independents to less than 12,”’ he said.

Having a set of preferred capable distributors is important for EMS providers to completely satisfy the needs of OEM customers. “We need support from our distributors to ensure that we have the flexibility to meet market requirements from customers,” said Scott.

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