M&A Redefining Distribution Supplier Relationship

Electronics distributors serve several masters. In addition to the all-important OEM and EMS customers, distributors represent hundreds of component suppliers in the marketplace, and publicly traded companies answer to their shareholders. Keeping their constituents happy all the time is a feat most distributors are still trying to achieve.

Electronics distributors' ongoing expansion, largely through merger and acquisition, meets a number of stakeholder needs. Acquisitions help distributors reach more customers, while also consolidating resources such as inventory and personnel. Suppliers gain visibility in additional markets without establishing their own sales or support offices around the globe. If an acquisition is well-managed, a distributor's profits will increase and shareholders remain happy. But conflicts may also arise through expansion — most of them on the supplier front.

Just a few decades ago, component makers practiced the informal policy of refusing to “share shelf space” with an immediate competitor. The classic example was in the semiconductor market, where leading US suppliers, such as {complink 2657|Intel Corp.} and National Semiconductor, didn't want to be sold through distributors that also carried Japanese vendors such as Hitachi and Toshiba. Even US competitors, such as Altera and Xilinx, or Intel and AMD, rarely have franchise agreements with the same distributors.

Shelf-sharing has since gone by the wayside, but practices still exist that make M&A a challenge for distributors. To keep from being overdistributed in a particular market, suppliers grant franchises that limit distributors' rights to a specific region. A {complink 5703|Texas Instruments Inc.} distributor in the US, for instance, may not carry TI products in China. If a global distributor can only sell TI products in the US, this makes it difficult to provide the same products and services around the world.

Supplier relationships remain keenly important in the high-tech sector. In addition to the typical sales relationships, distributors and suppliers have become strategic partners in everything from product design through end-of-life product management. It's interesting to note that a survey of supply chain executives across a broad range of industries identifies supplier relationships as a key to creating value (with cost-reduction a number one priority). In the “Chief Supply Chain Officer (CSCO) Report of 2012,” the authors write:

In second place are stronger supplier relationships. More than three-quarters of survey participants (77%) believe that these have resulted from high performance in the supply chain – a rise of seven points year on year. The hi-tech sector is fully 10 percentage points higher than the all-sector average, with 87% ranking it as a high-value outcome. In that industry, as well as many others, the ability to obtain supply when faced with disruptions or capacity shortages, to collaborate with suppliers in product development, and to integrate better through information sharing and co-ordination can all be sources of competitive advantage and value. When Microsoft entered into the game console market, for example, it relied on Flextronics, Nvidia and Intel heavily to develop the supply chain for its product development effort. More recently, Cisco worked closely with Foxconn on the successful launch of its Viking router product.

In fact, high-tech companies emphasize supplier relationships across the customer-service spectrum. Distributors' ability to respond to customers during a catastrophic event, such as the natural disasters of 2011, is tied directly to relationships with suppliers. While in most industries, responding to natural disasters was not number one on the “most-valued” CSCO list, disaster management still moved up the ranks. According to the CSCO study:

Although leveraging opportunities created by supply disruptions ranks last on our list of value drivers, this has actually changed most significantly in the space of 12 months. In 2012, 48% of those surveyed say this is of high or very high value – up from 40% last year. At the same time, the proportion saying it creates little or no value has fallen from 27% in 2011 to 23% today. Experiences garnered in the aftermath of the major disruptions in Japan and Thailand last year have no doubt convinced more supply chain professionals that such events tend to reward those whose strategies, plans and supplier communications are more finely tuned.

In upcoming posts, I will dig deeper into how distributors add value to the supplier side of the equation, and how that translates into value for shareholders and customers.

1 comment on “M&A Redefining Distribution Supplier Relationship

  1. chhorvarnb2b
    October 19, 2012

    Currently, the government of kingdom of Cambodia had facilitated to all inverstor that want  to invest in Cambodia involved with the taxation, rules and so on.

    Therefore, it is a good opportunity for business partners to expand their money,

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.