The Case for Distribution's Open Market

For those in the electronics supply chain the acquisition of Converge , one of the largest "brokers" in the world, by Arrow Electronics Inc. (NYSE: ARW), the No. 1 global franchise distributor, should raise a few eyebrows.

It does seem a curious move since the major executives in the authorized distribution channel typically like to avoid discussing the subject of the open market. But was the Arrow-Converge deal so odd? Only if you've bought into the negative propaganda and don't fully appreciate the value of the open market. Otherwise, it looks like quite a strategic move. Maybe, it's a signal that the rest of the manufacturing world should pick up on. And the first question they need to ask is: what exactly is the open market?

So let's answer that question. The open market is a "spot" market where electronic components are offered for immediate delivery to anyone willing to purchase at the time of offering. It occurs at the intersection of supply and demand outside of scheduled or contract deliveries.

This intersection occurs when the buyer and seller are brought together by the time frame of their need. Brokers, the most visible symbol of the market, are not the true counterparties to the transactions but just facilitators. When you have a need to buy or sell in the spot market for immediate delivery, anyone in the supply chain is a viable partner regardless of their position in the greater electronics food chain.

Examples of companies who provide such services include franchise distributors sitting on stock in the channel, semiconductor manufacturers holding excess stock because of over-production, OEMs and contract manufacturers with excess inventory and independent distributors with stock.

What may be surprising to many is that the open market by definition encompasses all of the supply chain including the distribution channel and the factories. In this way it is similar to other spot or cash markets in more traditional commodities -- for instance, oil, metals and grains -- despite its own very unique differences.

Despite disparaging remarks about the open market, it exists and thrives because there is a demand and a need for the services offered by providers. The market is a natural response to the unavoidable shortage and excess positions that result from inaccurate forecasts and variable product lead times.

These fundamental inefficiencies require active trade in order to restore balance to the system. The open market redistributes material from areas of surplus to areas of high demand. Without it the supply chain would grind to a crawl and be engulfed in chaos and red ink.

The bottom line? All points in the supply chain with ownership positions in components are de facto market participants and potential trading partners. This makes the open market not some isolated issue to be swept under a rug somewhere but a vital junction with universal implications for all participants in the supply chain.

Think about that the next time someone warns you against using the open market. Instead of warning against the use of a necessity, the dialog should be aimed at leveraging the market's benefits while reducing its risks. Indeed, that is the impetus for this ongoing series of articles. Stay tuned.