Distribution World – Links in the supply chain

Distribution World – Links in the supply chainJuggling the needs of your customer with your own capabilities is one thing but what happens when it involves the next link in the electronics supply chain? Who calls the shots when something goes wrong? Richard Wilson
From component to manufactured product the electronics supply chain is a large, and some may claim uncontrollable, beast. So imagine my surprise when I was recently fortunate enough to sit in on a round-table discussion between representatives from a product design firm, a contract manufacturer, a distributor and a semiconductor supplier.
Seeing all aspects of the supply chain represented in one room was an achievement in itself and I was not taken in by the friendly banter taking place between the purchasing manager for contract manufacturer GSPK Electronics and the sales manager from distributor 2001 Electronic Components.
I knew what my first question would be: “So you all look pretty friendly now, but who calls the shots in the supply chain?”
“It is all fine when everything is working well in the chain,” kicks off Roy Greer, managing director at 2001 Electronics. “When things start to go wrong then it is important that we communicate with each other, which usually means a message on the mobile phone at twenty to twelve on a Saturday night.”
The main activity in the supply chain seems to be juggling the needs of your customer with the your own capabilities – over which you have direct control – and the capabilities of the next group in the chain – over which you have little or no direct control.
“Our chosen logistical route is to blame everything on the distributor,” quips Steve Lloyd, GSPK’s sales and marketing manager. But the jokey reply strikes at the core issue manufacturers and their suppliers have.
Market pressures and cost efficiencies are forcing design firms to ask their manufacturers to respond to new orders in weeks rather than months. This means that lead times on some components, which can be as high as a couple of months, must be compressed to meet the customer’s deadline. That time compression seems to be one of the supply chains core activities.
“A 16 to 20 week lead time is no longer acceptable,”says manufacturer Lloyd. “We need to supply within two to three weeks of our customer’s call-off. We must engineer the supply chain to meet this and spit products out.”
Tools of the trade for dealing with the compression of lead times within the chain are buffer stock agreements, usually between the contract manufacturer and its distributor, but similar stock-holding arrangements could also exist between the distributor and its components suppliers.In certain cases they may also exist between the manufacturer and its customer.
After that the biggest and most important activity in the chain is communications. Quarterly project reviews are augmented by monthly meetings between one or more of the parties in the chain, and has already been pointed out, when problems arise, daily contact is the norm.
But do not be fooled into believing that the chain represents one big business agreement between all parties. The reality is that it is a series of separate deals between connecting links in the chain; customer – manufacturer, manufacturer – distributor and distributor – supplier.
All parties in the chain rarely meet together, because they do not need to in order for the chain to operate.
Despite claims that supply chains are far more open business processes than they once were, it is still true that each party deals separately with customer and suppliers. That is how the chain works and it only works if each party can make their individual businesses out of the process.
“We buy and sell manufacturing hours,” says Lloyd. “We don’t buy components to make a profit, but to allow us to buy and sell hours.”
Manufacturers like GSPKwill always reserve the right to shop around for components from a number of suppliers and distributors. There are no special relationships other than getting the right parts at the right time, which invariably means as quick as possible.
The distributors know that they are competing for business from the contract manufacturers and for Greer at 2001 that means competing with bigger broadline rivals.
While there are benefits for a manufacturer to more and more of their business with a smaller number of broadline distributors, Greer says that smaller distributors do have an ace up their sleeve. That card is the specialist component.
“We can use specialist parts to win an in to the contractor and then will also win the supply of other components,”says Greer.
Everyone in the supply chain must be working for themselves first and foremost. In doing so, and as long as no one party gets too greedy, then together they will make the chain work for everyone involved.
It’s a clever trick if you get it right, which probably explains the mixture of smiles and suspicion Isaw in the faces around the table.
Inevitably the more “distant” members of the chain do deal directly with one another, and what is decided at those meetings can prove critical to the future shape of the the whole chain.
Firstly the manufacturer cannot be relied upon to specify one of the distributor’s lines. So it is important that distributor’s like 2001 win design-ins for their lines with the contractor’s customers.
However, so crucial is this link between the distributor and the contract manufacturer that it can affect their business decisions when seeking design-ins.
“When a distributor wins a design-in at the customer they must be careful not to lose that business when it goes to subcontract,”says Roy Greer, managing director of 2001 Electronic Components. “That depends on the distributor/contractor relationship.”
Greer reckons that 30 to 40 per cent of the UK distribution business is in contract manufacturers and it is growing.
Contract manufacturers vary in size and Greer believes it is important for a distributor to recognise their own size limitations. &quo t;You have to find the subcontractors who are the right size for you,” says Greer, who adds: “There is an entry-ticket for the distributor and the cost of entry is getting higher and higher.”
Pricing is the other issue that brings the greatest interaction between the parties in the chain. “The key for us is to speak to the supplier and the distributor,”says Alex Lister, GSPK’s strategic purchasing manager. “That gives us a three-prong attack on pricing.”
The component supplier at the start of the chain can easily feel they are losing direct contact with the end-customer with both distributors and contractors in the chain. So they welcome any openness by the manufacturer in the prices they pay. “It is important that I have this visibility,” says Heide Perry, Maxim’s distribution manager for southern Europe.
GSPK’s Steve Lloyd believes that customers should expect a level of openness of pricing within the chain. “The customer knows what we are paying for the component. We know the margin 2001 is making on these products,” says Lloyd. “That is a big change in the market-place.”

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