It’s hard to imagine the electronics supply chain without the convenience of e-commerce and instantaneous access to information, but it wasn’t that long ago that faxes and phones were the predominant supply chain management tools. Digital technology has rewritten many of the rules that have governed electronics distribution in the past. But the supply chain had to make significant adjustments to make e-commerce secure, efficient and transparent, and the transition wasn’t always easy.
At its very core, electronics distribution is still about the physical movement of goods from one place to another. Geography has long been one way that suppliers and distributors have defined their relationship. Suppliers have traditionally granted franchises – the permission to resell their brands — on a local, regional or national basis. Only recently have global franchises become common and geographic boundaries less restrictive.
For a long time, the logic of geographic franchises was simple. In order to avoid over-distribution of their products, suppliers chose a limited number of distributors to represent them in a single geography. This avoided too much overlap among supplier and distributor salesforces and head-to-head price wars between distributors carrying the same brand. But the model also proved inefficient: distributors held inventory in every region they were franchised in – to be physically close to customers — so redundancy was common.
There was also another tactic suppliers used to minimize competition. Several top tier suppliers in the U.S. refused to be sold alongside (or “share shelf” with) certain competitors within the same distributor. As the channel began to consolidate through merger and acquisition – regional distributors were becoming national — these linecard conflicts became significant. If an acquired distributor had a conflict on its linecard, at least one supplier would be dropped from the merged entity. In other cases, suppliers dropped the merged distributors.
For a rapidly-expanding customer base this meant buying from multiple distributors to fulfill a typical BOM. Although most customers hedged their bets against putting all their eggs in one supplier (or distributor) basket, one-stop shopping was essentially impossible. As U.S.- based distributors began to expand into Europe, the shelf-sharing problem became exacerbated.
Similar to practices in the U.S., suppliers granted European franchises on a country-by-country basis. Not only were the linecards disparate: commerce was conducted in local languages and currencies. U.S.-based distributors that were the primary consolidators of the channel via M&A ended up with “silos” of business in each European country.
An era of disruption
Eventually EU unification helped erase the lines between countries and suppliers relaxed their stance on sharing shelf. Distributors were able to achieve economies of scale by consolidating warehouses and inventory into centralized hubs – mega-warehouses that served a wide region. Just as the industry’s eyes were turning to the Far East for expansion the dotcom revolution was gathering steam. By using the internet as a common platform, electronics buyers could view inventory on any distributor’s shelf; compare prices; and eventually place an order online. The rise of two-or three-day shipping eliminated the need for inventory to be physically close to a customer’s factory so geographic boundaries became more flexible.
The ability to “see” inventory all over the world also prompted the rise of new distribution models: online companies, aggregators, brokers, auction sites and at one point commodities traders. These companies were primarily virtual and focused on facilitating transactions: they enabled the buying and selling of inventory that belonged to other suppliers, distributors or OEMs.
The internet also seemed to be the perfect solution for companies that wanted to sell excess inventory or search for hard-to-fund parts. The open market—where excess inventory was bought and sold independent of franchise agreements—had existed almost as long as franchised distribution. The open market was not limited by geographic boundaries or pricing agreements between suppliers and distributors. Since this put the authorized channel at a disadvantage – open market prices rose or fell based on supply and demand – traders’ identities remained confidential.
The internet enabled a new level of anonymity that hadn’t been possible when phones, faxes, credit cards, checks and money orders dominated the electronics trade. Businesses or individuals with inventory to sell could set up storefronts online. Many of these companies had legitimate components to sell, but others would collect money and then disappear or ship damaged or even counterfeit parts. Electronics components changed hands so frequently in the open market that counterfeits were mixed with authentic devices, and resales or returns would put those parts back into circulation. The electronics supply chain faced a level of counterfeiting – and fraud — it hadn’t experienced before.
The authorized supply chain recognized that e-commerce was a valuable tool but it had to curtail counterfeiting. The key to avoiding counterfeits was the ability to trace a component back to the original component manufacturer (OCM) and maintain its integrity in the channel – something only an authorized distributor could guarantee. Although the supply chain still does not have a standard for this process, OCMs identify their parts through lot codes and date codes that follow components wherever they are sold. Authorized distributors pass suppliers’ warranties on to customers and guarantee components are handled and stored correctly. If proof of that that information is unavailable, components should be considered suspicious.
It’s fair to say supply chain practices haven’t kept pace with the internet revolution. Global franchises — although much more common – are still not the norm. Catalog distributor Digi-Key was the first to test franchise boundaries in 2004 by offering all its products for sale online in the U.S. and UK. Strictly speaking Digi-Key didn’t have international franchises for all of its brands. However, suppliers saw the advantage of reaching a global customer base without the worries of regional distribution conflicts. Language and currency barriers have been overcome with translation and conversion technology. The electronics supply chain is becoming truly global.
But authorized distribution is still fighting a battle against counterfeits. Verical.com, an Arrow Electronics Inc. company, is an online electronics components marketplace that only sources traceable components from OCMs or authorized distributors. Suppliers that post inventory are audited for their traceability and compliance practices. This guarantee of authenticity enables buyers to safely source inventory from anywhere in the world. Verical also enables customers to determine where inventory is shipped from and what logistics provider they want to use.
The promises of e-commerce – safe, seamless and immediate global sourcing – has now become a reality. Verical.com enables global, one-stop shopping for high-volume orders. But suppliers and distributors have to work behind the scenes to make this possible. Franchise agreements are still important. Compliance has become more complicated than ever. In the coming weeks VericalConnect will take a look at how quality, transparency and security can be achieved in the global electronics supply chain.
The post Digital Revolution Redefines ‘Global’ Distribution appeared first on Verical Connect.
Related posts:
Digital Market Leadership Transforms the Supply Chain
Digitization Enables Rise of the Borderless Supply Chain
Digital Transforms the Electronics Supply Chain