Downturns have a way of highlighting things that aren't working very well, and design registration is one of them. The practice, in which distributors are rewarded for designing a supplier's component into an end product, has operated the same way since the 1980s. The idea of revising it has come up numerous times, but channel dynamics have put it back at the top of the fix-it list.
Distribution has taken on the role of design assistance both to help customers get to market faster and to get a firsthand view of an engineer's plans. By assisting in the design, a distributor can sell the components on its linecard to the customer. The emphasis is on the best solution, but it's also a good opportunity for the distributor. Once a design is secured, the distributor registers the win with the supplier. This process is meant to protect the distributor if another distributor or rep calls on the same customer.
The problem is a disconnect between the design and the production of the end product. After a design is secured and the BOM is determined, production may move from, say, Dallas to China. The procurement division in China may not be able to source the components. It may show different pricing, or it may have a relationship with a company other than the original distributor. Since the distributor's compensation depends on delivering that order, any disruption in the process threatens revenue. It's also a problem for the supplier, which also loses on the sale.
Distributors have developed systems to track components, but challenges remain. The easiest parts to track are proprietary parts that can't be substituted at production. But this represents only a small segment of the component offerings and the bill of material, and distributors may focus most of their attention on these parts to the detriment of others. Suppliers feel their brands are not adequately represented by distributors.
During the recent ECIA Executive Conference in Chicago, Alex Iuorio, senior vice president for supplier management at Avnet Inc. (NYSE: AVT), told attendees that the distributor can focus its design registration on about 40 of its hundreds of suppliers. Of those, only a few have programs that guarantee a profit for the distributor. Supplier executives, including Paul Doherty, global account director for TE Connectivity, say many of their products aren't proprietary but are equally important to a design. IP&E, TE's market, comprises 80 percent of a BOM. It is a big part of the channel's business.
The partners have experimented with flat up-front fees for design work, price protection, higher profit margins, and split commissions to compensate distributors for design work. Each has its pros and cons. In the meantime, distributors' emphasis on solutions, rather than a specific component or brand, has obscured supplier visibility at the end customer. It's an old struggle that has emerged time and time again.
John Simari, a distribution manager for Texas Instruments Inc. (NYSE: TXN) and a longtime advocate of channel practices, reiterated the urgency many in the industry feel. This important component of the supplier-distributor relationship hasn't evolved since the 1980s, but the channel has. There has to be a better way, Simari says, and it is up to suppliers and distributors to find it.