Distributors Secure Role With Extra Services

Distributors are often called middlemen of the supply chain. At the most basic level, they link suppliers' products to end-customers. In early electronics relationships, distributors were proximity sales locations. With their warehouses across the country, distributors would take large volumes of components, break them down into smaller lots, and resell them to customers. This helped suppliers manage small customers that couldn't buy products in large or standard lots.

The channel has evolved beyond expanded sales, but distributors have continually struggled to convince suppliers of their value to customers. The Internet now enables customers to buy anything anywhere in the world, and global logistics can deliver products within days. As a result, being nearby to serve local customers is no longer enough. Distributors have to add value along the way.

One way distributors achieve this is by becoming experts in suppliers' products. Back when chip or IP&E companies offered a wide array of products, distributor salespeople aligned themselves with a brand -- AMP, Texas Instruments, Intel, or Motorola. Distributors were encouraged to promote components to be designed into a product, securing a long-term relationship (design win) if the product design took off. Suppliers would give successful distributors a higher profit margin on fulfillment orders or pay a commission on design wins. New products -- usually the higher-prices, higher-value ones -- were heavily marketed.

Product introduction remains a key value to suppliers, particularly in the high-tech sector. SCM World published its 2012 Chief Supply Chain Officer Report (registration required) this month. According to the report:

In the case of new product introduction, it is all about managing time. Supply chain management can be a way to speed up the new product development process (through strong integration of the supply chain and product development teams), provide timely and cost-effective launches, enable flexibility in product ramp-up, and orchestrate the phasing in of new products and the phasing out of existing products. Here, hi-tech companies again view such levers as more highly relevant than those in other sectors.

In electronics, the power equation traditionally has been weighted strongly in suppliers' favor. Distributors were aligned with certain brands, many of which would not be sold alongside one another. "For years, a distributor didn't carry Motorola, Texas Instruments, and National Semiconductor at the same time," Roy Vallee, the former chairman and CEO of Avnet Inc. (NYSE: AVT), told us before his July 2011 retirement. "It was hard to make an acquisition if a [competitor] carried a conflicting line. Back in those days, we had dozens of product lines, and over time [Avnet] was going to reduce the number of total franchises and increase the mindshare for our suppliers."

Distributors continually ran the risk of losing a franchise, which could represent millions of dollars in sales. That hasn't entirely changed. Franchise agreements are still highly valued. But there are fewer electronics distributors now, and some distributors are larger than their suppliers. But adding value is still a priority, according to the report.

For expanded offerings of value-added services to be a source of value creation, the key has to be that the customers see this as important, so that one can differentiate oneself from the competition. Our survey results indicate that the logistics and distribution industry has the highest proportion of respondents who see the offering of such value-added services as a source of competitive differentiation for their companies.

Technology has changed the competitive dynamic. Suppliers have transformed from broadline providers to niche businesses. Distributors have refocused their expertise from products to technologies. Rather than providing a single device, distributors provide a solution: a combination of products designed to fit the customer's need. This has shifted distributors' relationships with suppliers. Instead of being the single focal point of distributors' efforts, suppliers become part of a solution. Although suppliers remain important to distributors, more attention is being paid to the customer. Ultimately, this benefits both supplier and distributor, the report said.

As indicated, building customer loyalty through customer service is the most highly rated means for value creation through supply chain excellence. The factors for success come from the ability to convert customer loyalty into revenue gains. These factors naturally depend on whether customers use customer service as a purchasing decision criterion (rated most highly by hi-tech respondents), and whether a positive experience leads to a repeat purchase (rated highest among retail respondents). Assuming that these factors are in place, then strong value creation potential can result.

Distributors continue to find ways to add value to both supplier and customer relationships, as I will examine in upcoming blogs.