Possibly one of the most misunderstood dynamics in the electronics supply chain is the impact of Internet-based buying and/or e-commerce.
A little more than a decade ago, brand owners became capable of selling their wares directly to customers without shipping, storing, or managing them elsewhere.
What we now know is that the Amazon.com-model has worked extremely well in the consumer/retail space where customers buy finished products. While e-commerce plays a significant role in the electronics supply chain, customer business models are simply not well suited to source, purchase, and manage large volumes of components online.
E-commerce has had an impact on how component manufacturers plan and ship goods, has increased the complexity of electronics supply chain transactions, and has prompted realignment in many supply chain relationships. In a previous report I noted that many manufacturers are struggling with the most effective way to reach their customers and manage unfinished inventory. Manufacturers are split between low-cost mass production — outsourcing to China, for example — and more variable mass customization. In electronics, distributors continue to shift their models to support both strategies. (See: Distributors Secure Role With Extra Services. )
In electronics, e-commerce has not “cut out the middleman” as many feared. Low-volume, low-mix orders, typically handled by catalog distributors, moved from paper to the digital world. Broadline distributors that have typically struggled to support this type of customer, began to provide online ordering capabilities. In some cases, this meant partnering with sites that had already set up e-commerce capabilities and sourced from a variety of inventory pools.
Other distributors developed their own e-commerce tools. At the time, analysts viewed the strategy as “betting $2 on every horse.” Roy Vallee, who has stepped aside as Avnet Inc.'s CEO and will retire from the chairman position in November, said the company was going to engage with its customers in all the ways customers wanted, and that included e-commerce. However, customers didn't opt to buy production orders online.
Instead, distributors began to use online capabilities to track customer orders, analyze data, and use that data for planning purposes. Authors of “The Chief Supply Chain Officer Report 2012” (based on a global survey of supply chain executives) note:
Perhaps the most obvious implication of eCommerce is that all companies have an opportunity to make more direct contact with their customers. For industrial or B2B brands this connection lends itself to ever deeper product information sharing, forecast collaboration and order streamlining, but is essentially just a super-powered version of the telephone-and-catalogue relationship it replaces. For consumer brands, the implications reach into order management and fulfillment and potentially mean significant changes to channels.
Large-scale order fulfillment, if anything, has shifted more toward electronics distribution. Part of the reason is the increasing variety of products that component suppliers are releasing. The CSCO report noted that the effect of the digital consumer is increasing stock-keeping units (SKUs) because customers expect a wider variety online:
A Wells Fargo investment research report last year claimed that Amazon offered 80 times the number of items as did Wal-Mart.com, suggesting that the bar for variety is getting higher quickly.
In electronics, the implementation of RoHS also increased SKUs in the supply chain as manufacturers transitioned from leaded-products to unleaded devices — sometimes manufacturing both. Distributors developed their own in-house identification systems to separate RoHS-compliant and non-compliant parts. They created separate bins and even facilities to store RoHS-compliant devices, which have to be treated differently than leaded devices.
Upon shipment, distributors had to reconcile their component-identification systems with the part numbers that customers were familiar with. The channel also had to provide documentation to confirm designated RoHS devices were lead-free. These systems have enabled distributors to manage other types of complexities, such as a wider variety of devices now offered by component makers. Chip makers that used to provide a soup-to-nuts suite of devices have now broken into specialized units for logic, DSP, and microprocessors; memory; FPGA; analog; digital; and everything in-between. Electronics customers now have a wider variety of components to choose from, but selecting these parts has become more complex.
For customers that already know what they need — engineers, labs, or prototype houses that require just a few high-mix orders — e-commerce fulfills orders quickly and effectively. Suppliers of these parts are happy to let distribution handle these orders because servicing low volumes — even digitally — is not profitable or efficient. The same dynamic applies to fulfillment orders, but for different reasons. Customers may know what components they need, but a wide array of choices means there is a “best” solution among the choices.
Even when those choices are narrowed down, there is a vast array of delivery mechanisms to consider. Can suppliers drop ship to the manufacturing site? If so, how close is the supplier's warehouse to the plant? Is there a distribution warehouse closer? If so, does the distributor have the volume the customer needs? Most e-commerce models can manage those variables for one, two, or even a dozen SKUs, but an average electronics bill of material (BOM) has hundreds of SKUs.
In future posts, I will look at the impact e-commerce has had on managing this level of complexity.