Dissecting the Distributor-Supplier Relationship

As the distribution channel has evolved, so has the value proposition it offers to suppliers and customers. Distribution serves several masters: suppliers, customers, and, for publicly traded companies, shareholders.

In addition to reaching a wide variety of customers, distributors also help suppliers by providing data on the marketplace. While a typical chip supplier may handle 50 customers directly, a distributor may reach hundreds. These customers play in markets outside the chipmakers' direct reach. By reporting customer forecasts, actual sales, design information, and fulfillment data, distributors give suppliers a window into the demands of the broader market. Order histories from distribution customers help suppliers forecast demand when they are planning production.

There are all kinds of complexities tied to distributor-supplier relationships, but the facts speak for themselves: On average, component makers channel about 30 percent of their products through distribution. (This can be lower or higher: FPGA companies, for example, sell a higher proportion.) {complink 453|Arrow Electronics Inc.} and {complink 577|Avnet Inc.}, the electronics industry's leading distributors, each of which hit the $1 billion sales mark in the late 1970s or early 1980s, have reached more than $20 billion in annual sales. This wouldn't have happened without suppliers' support.

However, the customer remains the driver behind all this effort. As high-tech customers changed, so did the channel's approach to the market. Distributors expanded nationally and then internationally. They figured out ways to make customers' lives easier, by breaking down component volumes into smaller lots or kits. However, research shows that securing a customer and retaining a customer is more challenging than ever.

One of the major disruptors of the electronics supply chain has been the Internet, which increased the opportunities for business by creating new categories of products. At the same time, Internet buying — what a recent report calls the “digital consumer” — changed the game for businesses that interact directly with customers. On the retail front, customers expect to be able to find any single item online. A SCM World survey of supply chain executives across industries shows the differing impact digital buying has on various industries:

    An interesting observation in the data here shows that hi-tech and distribution firms are most clearly expecting at least some impact on SKU assortments from the digital consumer. Logistics and distribution respondents who are most likely to say they expect “much larger SKU assortments” are also least likely (16%) to say they expect “little or no impact”. Clearly, eCommerce is changing their world. Hi-tech respondents are similarly unlikely (17%) to say they expect little or no change, but interestingly are the most likely of all to see a drive toward smaller SKU assortments (18%).

    This finding may reflect a level of sophistication associated with the steeper learning curve in hi tech exemplified by the case of Motorola, which under new leadership recently installed by Google is reportedly planning to “cut the number of devices [it] makes from the 27 it introduced last year to just a few”1. Apple, whose product line-up is famously simple, seems to be able to succeed by pushing its complexity into the post-purchase content assortment rather than physical inventory. Complexity may be on the rise with digital demand, but not all businesses plan to tackle it in the same way.

This data refers to the end-products electronics distributors don't typically sell. The high-tech channel deals with the components that go into these products, which represent millions of stock keeping units (SKUs). If anything, the number of SKUs that electronics distributors handle is growing. High-tech components are becoming so specialized that a single product family has dozens of iterations. Sorting through this kind of complexity is one of the ways electronics distributors have become more important to their customers. The supply chain executives survey notes:

    Here again, we see the same theme of those closest to consumers bracing for change while those upstream wait to see the impact. It is telling that hi-tech firms, whose product lifecycles are shortest and learning curves steepest, seem most certain that manufacturing will be impacted by eCommerce and the digital consumer.

    This group (comprising 336 survey respondents) is nearly evenly split between believers in low-cost mass production and more variable mass customisation, suggesting that the end game may include significant amounts of both approaches.

The implication for electronics distributors is significant as brand owners — the channel's end-customers — struggle to find the right mix. Although distributors serve many manufacturers of consumer items, industrial products traditionally have been the backbone of the business. Industrial supply-and-demand dynamics differ from consumer, which provides an additional challenge — or opportunity — for electronics distributors.

4 comments on “Dissecting the Distributor-Supplier Relationship

  1. Anna Young
    October 21, 2012

    Barbara, You gave an interesting and historical narrative of what the electronic component distribution market was like and the current situation. In your opinion, what lies ahead, what will be the factors driving future change, how will the market evolve and how prepared are distributors for the future you predict?

  2. Barbara Jorgensen
    October 22, 2012

    Great questions, Anna! First, I think the drivers will include pressure for distributors to take on more tasks that are related to their core business. A perfect example is reverse logistics for electronics products. Distriutors already have warehouses and tech knowhow, so it's a logical fit. As to how prepared they are: better than ever. Leaders in the industry are constantly listening to their customers and figuring out ways to meet their needs. This is a big switch fom the past where suppliers called the shots, and periods in which distributors figured they knew better than their customers what their customers wanted.

  3. Tim Votapka
    October 23, 2012

    Suppliers called the shots – indeed they did! And distributors often conveyed a sense that they knew more about the customers' needs than the customer. That's a dangerous road to follow. Well done article.

  4. msurdyka
    January 31, 2014

    Hello I recently enjoyed your article on the relationship between suppliers and distributors. Our company is about to launch a new product and will need the help of distributors to get the product out there. What exactly should we supply to them (marketing, sales sheet, etc) to ensure that they are successful? Thanks so much for your time. Michael Surdyka

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