The electronics supply chain has always had a problem bridging the gap between the design of a product and the manufacturing of that design. The issue is most pronounced in distribution, where companies are rewarded by their suppliers for design wins (securing a component's position in a design). Component makers frequently compensate distributors for these engineering-intensive efforts by giving them a little extra margin on component orders when a design reaches the production stage. The problem: Not every design reaches production.
The distribution industry measures its health based on a ratio of bookings to billings. A 1:1 ratio means fulfilled orders (billings) are going out at the same rate as new orders (bookings) are coming in. Anything over 1:1 indicates growth.
Michael Long, CEO of the $21 billion distributor Arrow Electronics Inc. (NYSE: ARW), recently told analysts on a Webcast that his company has been using new product designs as a litmus test for industry health. "I used to think it was the book-to-bill that drove the industry and the backlog of orders," he said. "I now believe that the number of design wins your company grabs over time is one way to measure when you are coming out of a downturn."
It's an intriguing idea. OEMs have been squeezed like everyone else in the high-tech world, Long said. They are not wasting valuable engineering time on designing products they can't sell. "We know the economy drives business ups and downs, but a more meaningful measurement for us is 'Are your customers still designing?' Do they believe this is something they'll be able to sell in the future?"
Arrow started tracking design wins in 2009. Its measuring stick is the number of approved designs won by Arrow engineers in companies around the world. "From start to finish, it takes about six months to get a product out in the market," Long said. "So we can tell if we are designing faster than the market is moving."
His company is bullish on the future, because it is seeing an uptick in design activity, he said. "Last quarter, our design wins were in the double-digit range. It looked a lot like the last time the industry pulled out of a recession." Last year, Arrow design wins grew about 8 percent.
"When we start seeing activity in the double-digit range, we believe there is pent-up demand out there," Long said. "The question is, when is it going to come?"