You Can Put a Price on That

In the current marketplace, every cost is being scrutinized, and every line item justified. Ever since the advent of activity-based costing (ABC) -- a process that assigns a dollar value to every activity associated with a business transaction -- anything that doesn't add value can be tagged and eliminated. This is a double-edged sword for the supply chain.

Distribution companies seized on ABC early on for a good reason -- they were giving stuff away for free. Distributors sold components, but they also broke down lots, repackaged parts, assembled them into kits, provided custom bar-coding, and stored the stuff all over the world. Most of these services were free with your order -- customers expected them, and distributors that offered these services were able to differentiate themselves from the pack.

Then two things happened: first, everyone starting providing these services so they weren't differentiating factors anymore; and second, distributors began to realize that providing services comes at a cost. Distributors build and outfit warehouses, hire people to manage them, buy lots of equipment, and spend a lot of money on things that aren't components. ABC gave the channel an opportunity to demonstrate the costs they incur and -- at least the theory went -- charge appropriately for them.

Here's the downside: suppliers and customers were able to use the same procedure to prove or disprove a distributor was adding value to the supply chain. When the Internet began to permeate the industry, the ability to buy and sell online was supposed to eliminate the need for distribution. The Internet would take out all the overhead and the industry would look like one big Amazon.com or eBay. The catch-phrase at the time was OPI -- it stood for "other people's inventory."

That didn't happen for a lot of reasons that we've explored in past blogs. Still, almost every year, distributors have to prove to both their suppliers and customers that they provide value. Every year, they have to justify their existence.

I'm sure if one sat down and calculated it, you could come up with a figure that measures the channel's value. Michael Long, Arrow Electronics Inc. (NYSE: ARW) CEO, provided a number at last week's ECIA conference: $7 billion. That's how much it would cost the industry to replace the distribution channel. That's less than semiconductor companies spend on a single fab, but it's still a big number.

The distribution channel reaches 90 percent of the global electronics customer base, according to a presentation recently given Harley Feldberg, global president for Avnet Inc. (NYSE: AVT)'s Electronics Marketing business. Here's another number: the global electronics market is estimated at more than $1 trillion. Distribution accounts for 25 percent of those sales, or about $289 billion. That's a lot of inventory.

Managing that inventory continues to be a challenge in the supply chain, and EBN will shed some light on that during our Webinar tomorrow, November 2 at 2:00 p.m. ET, which you can register for here: Highwire Act: Inventory Balancing Between OEMs/EMS Providers & Suppliers. Please join us.