Distributors Withstand the Effects of Offshoring, Part 1

In the great migration of US manufacturing jobs overseas, the electronics distribution channel stands against the trend. US distributors have downsized in line with economic cycles, but offshore manufacturing has not directly affected the channel's employee ranks here.

“I have not heard distributors talking about layoffs or job losses during the past several years. Business has been good for the electronics industry during the recession,” says Robin Gray, president of the Electronics Components Industry Association, which includes global electronics distributors. “On the other hand, I also have not heard about anyone doing much hiring. Everyone seems to be staying lean.”

The distribution industry is not immune to job loss — layoffs have occurred as a result of mergers, acquisitions, and the past two recessions. But the channel's role in the electronics ecosystem has rendered it geographically neutral in terms of offshoring.

Distribution has been evolving over the years to make its services transparent to its customer base. That means the employees can be concentrated anywhere in the world. For distributors based in the US, such as {complink 453|Arrow Electronics Inc.}, {complink 577|Avnet Inc.}, Future Electronics Inc., Digi-Key Corp., and Newark/element14, that still means the Americas. Most distributors have been adding staff in the high-growth Asia-Pacific regions, but not at the cost of domestic jobs.

Part of the reason is the channel's structure.

Global distributors operate in all the major electronics regions: the Americas; Europe, the Middle East, and Africa (EMEA); and the Pacific Rim. As distributors based in the Americas have expanded across the globe, they have continued to support their expansion domestically. {complink 2164|Future Electronics} greenfields its offshore operations, duplicating the inventory, sales, and services footprint of its headquarters in Pointe Claire, Quebec. Like Arrow and Avnet, Future Electronics locates warehouses in the three major regions, but its corporate, sales, administrative, and IT support are concentrated in the Americas. (Arrow and Avnet have regional and technology-focused business units.)

Sales offices follow a similar pattern. Their operations are supported either from hubs close to the warehouses or from satellite offices established in principal locales.

One of the reasons the model has succeeded internationally is the skill set of US distributors. They have evolved in response to the demands of US technology companies — a customer base that has driven innovation in design, service, and manufacturing. As a result, the distributors have developed a business model that takes advantage of technology, efficiency, and economies of scale. In many cases, best-practices fine tuned in the US have been integrated with local practices overseas to preserve the look and feel of businesses within the region.

Even if a customer with a US manufacturing operation moves to Beijing, its distribution contacts do not automatically follow. In fact, a US account manager is likely to take a larger role in helping this customer transition its supply chain overseas. This means coordinating with supplier contacts in the new location, transferring products to the nearest warehouse, setting up and managing forecasting and other information-sharing protocols with foreign factories, and adding staff in the foreign location.

These services make up only half of the distribution equation. In part 2 of this blog, I'll talk about the design side and how the channel is adapting to customer demand.

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7 comments on “Distributors Withstand the Effects of Offshoring, Part 1

    February 8, 2012

    I am struggling to understand how distributors do not downsize in location 1 if their customer base moves to location 2.  Surely distributors must be affected by offshoring unless the offshoring (of their customers) only adds additional revenue to the distributor.

  2. Barbara Jorgensen
    February 8, 2012

    FSCOT–I'll admit it doesn't always make sense. Here's how I think of it: a typical manufacturing factory has multiple people that perform multiple jobs–for the sake of discussion, let's say 100 people. A distributor typically only has one person who manages the supply chain relationship with that factory (an account manager)–whether it is with purchasing or engineering. If the factory shuts down, 100 people lose their job. At worst, the distributor will lay off one account manager. However, if that factory moves, the distribution account manager can still manage the relationship even if he/she stays in the US and the factory is overseas. In fact, since that account manager also deals with the factory's suppliers–the TIs, Intels, AVXs and so on–they are actually the best person to help the factory figure out how to get stuff from location 1 to location 2. So in this case, offshoring means 100 fewer manufacturing jobs, with no net loss to the distributor.

    The ability for a distributor to be a one-stop shop — to manage products from many suppliers through one central channel — is the main value proposition. If every supplier had one salesperson calling on that factory, those suppliers would likely lay people off if the factory moved or shut down. Distributors replace that need for numerous salespeople.

    A long-winded answer–hope it makes sense 🙂

  3. _hm
    February 8, 2012

    It may be that US distributors are big and they purchase production from parts manufacturer in % of production and maintains inventory. They are in postion to provide best price and delivery schedule. Also, they are in close proximity with parts manufacturer and can soon help customer in difficult time.

  4. Daniel
    February 9, 2012

    Barbara, as long the market generate demands for product/components, nothing goes wrong. If there is a shortage from a source, they may try to manage it from a different source, so the manpower requirement is same in the channel. If the demand for components start decline, ofcourse they have to short cut the man power strength. Without any business, I don’t think they may retain the staff.

  5. Barbara Jorgensen
    February 9, 2012

    @Jacob–absolutely right. That's a bit of a different scenario than offshoring, which merely shifts demand from one region to another. When the economy tanks, as it has twice since 2008, there are job cutbacks in the channel. Although public distributors haven't discussed the layoffs in detail, they will say they've “scaled back” in line with the market.

  6. bolaji ojo
    February 9, 2012

    Barbara, Is it possible we are not counting accurately here? As you very well know the North American and European distribution markets had many more players 10 years ago. Not all these companies survived the consolidation of the market. That consolidation was driven in part by the transition of production to Asia. Arrow and Avnet became big as a result. At the beginning of the last decade, few knew about WPG but it is today probably the world's biggest components distributor from its base in Taiwan. Is it possible therefore that the market did lose jobs if we included the companies acquired by the giants?

  7. Barbara Jorgensen
    February 9, 2012

    Bolaji–it is absolutely true that jobs were lost because of industry consolidation. However,  the acquired companies weren't weakened by offshoring. I was able to talk to many of the VEBA folks after the Arrow/Avnet acquisition, and that was not an issue. In fact, VEBA was a distributor in Asia/Pacific before Arrow and Avnet and well-positioned to support that business. The acquirees, including the VEBA companies and Marshall Industries, were mid-size broadlines competing with Arrow and Avnet. Marshall used to differentiate itself by carrying Japanese product lines, but when that barrier dropped, it was really a matter of size. VEBA tried to support an array of specialty semiconductor demand-creation distributors but found its customers also needed IP&E. Minus major investments or acquisitions of their own (VEBA wanted to buy TTI at one point) , VEBA and Marshall couldn't go head to head with Arrow and Avnet on a global scale. Did the shift to Asia influence all of this? Yes, in the sense that distributors had to have a presence there. But in terms of whether US jobs were lost because of offshoring, I believe the distrbution industry consolidation would have happened anyway.

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