Any OEM that has moved from dealing directly with its suppliers to dealing primarily with a distributor will have mixed feedback about the experience. In some cases, this transition was not the OEM's idea: Suppliers just can't provide the level of service the OEM expects anymore. In other cases, where the OEM takes the initiative, it's weighed the pros and cons of managing its supply base itself, versus handing it off to a partner. In both cases, what's happened is the total available market (TAM) for electronics components has converted to distribution TAM (DTAM).
This conversion is of utmost importance to distributors, whose future largely depends on increasing the DTAM. For the channel, the real issue is making sure this transition doesn't add cost for or alienate OEM customers. For people like Douglas Kent, these are the issues that keep them up at night.
Avnet Inc. (NYSE: AVT) recently named Douglas Kent vice president of its Velocity supply chain division. Kent spent some time with EBN talking about the future of the supply chain. In the first part of this article, we'll discuss his take on the challenges faced by OEMs.
"I guess what we are talking about is the changing face of distribution," Kent told us. "What are we doing that goes beyond the usual things? What is changing, and how can we embed ourselves as a partner from the strategic level all the way through to the tactical level?"
Avnet Velocity delivers globally available, rapidly scalable, customized supply chain solutions to the direct market for electronic components and equipment. Kent recently rejoined Avnet after 13 years as an international supply chain consultant, research strategist, and academic. His charter now is to take the products and services Avnet currently provides and bring them to the next level. He is also charged with "productizing" these services -- packaging and pricing them so they can be consistently offered to customers.
"As we talk to more customers and suppliers," he says, "there are two big focuses for us: innovation and productization. That is my passion; that is my drive. A lot of what we are doing now is on the leading edge of development, and the key to productizing something it is not doing it alone. We have some interesting alliances with software companies in advanced solutions to help us develop those solutions."
The current focus of many distributors is on the back-end of the supply chain: fulfillment. A distributor takes a customer's bill of material, made up of direct and indirect sourcing relationships; manages the BOM; and delivers components when and where where they are needed. The next level, says Kent, is what he calls the "control tower."
"If we sit in the OEM's shoes, we understand that they would like to have incredible transparency on a multi-tiered basis; they want to be able to proactively shift their supply chain or reprioritize parts of it because of supply constraints. These issues translate to different pressures on their supply base. Most [OEMs and suppliers] aren't honest about recognizing and reporting the things that don't work so well. But as the pressure continues, the potential for risk increases."
The conversion from TAM to DTAM is increasing in frequency as supply chains become more complex and new risks are introduced into the system. Not only do companies have to procure and deliver components; they have to optimize working capital; look at the macroeconomic market; identify risk; adhere to security measures; compete on price; and outmaneuver the competition.
"A lot of OEMs are successfully competing on price, and, yes, they are concerned about overall pricing and cost and the functionality of components," says Kent. "But at the end of the day, they are competing for the end-customer. If something isn't available, the end-customer will go somewhere else."
In Part 2, we'll talk about "productizing" solutions and the requirements for success.