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Shift Happens: Thoughts on Industry Change

Admittedly, when I saw that Avnet Electronics Marketing Americas president Ed Smith would give an “Unplugged” presentation at last fall's Electronic Components Industry Association Executive Conference, I smiled thinking someone had finally given Smith a mic and a standup slot. If you've had the pleasure of meeting Smith, two things are instantly clear about him: He's a very funny guy, and he's an even smarter guy.

For this particular session, Smith shared his knowledge, not humor, with the attendees, and he took the time to chat with us after the conference. Though he spoke in the fall, his thoughts are ringing true as we all plan for a successful 2014.

Overall, Smith addressed three important and related categories: margins, ship and debit, and counterfeiting.

Margins have fallen from 16.5 to 12.5 in the last eight years, he said, and they are somewhat out of the control of distributors.

“It should be much cleaner for us to set our own margins, because we know the services we set for the customers,” Smith said. “We give them terms, days we hold inventory, do programming. We should be in charge of our own margins, instead of suppliers setting margins for us using ship and debit.”

Ship and debit
Ship and debit — the process by which a distributor ships goods at a lower price to the customer and either absorbs the difference between the acquisition and selling price or debits the supplier for it — was created many years ago to protect distributors, because prices could drop quickly.

“It's crept out of what it was supposed to do,” Smith said. “Going through the whole quoting process adds a lot of cost to the transaction. It's so expensive, it's outlived its usefulness in the industry. It used to be used on a limited basis, but today it's not.”

Counterfeiting
Price inconsistencies also come into play, and have become an entré for counterfeiting, according to Smith.

In some ways, we are causing counterfeiting by having price discrepancies that are dramatic between customer sizes and bases and the gray market. [Suppliers and OEMs] are selling stuff to EMS providers at a broken cost, at a very low cost. EMS providers buy extra and sell it out the back door and make money because they are still below the cost that the distributor gets from the supplier. That crates a grey market which then people can put counterfeit parts in.

Avnet and other authorized distributors have noted an increase in customers returning parts that they didn't actually buy from a distributor, which puts counterfeit parts into the supply chain. “We're changing our processes so that everything that goes out to a customer has a lock code and a date code, and if it doesn't come back with the exact codes, we'll reject the parts.”

Smith favored a move New York City made recently to fight the counterfeit fashion and accessory market.

One of the ways to combat counterfeiting is to hold the buyer of the counterfeit parts accountable. Our military contractors know who the authorized distributors are. So when they go to a broker market, they know the risks. Just as New York does on Canal Street, arresting the buyers of fake pocketbooks, they should arrest the customers. If [customers] knew that there was risk for buying them, they wouldn't do it.

The lost years
A final issue Smith offered as a concern for the electronics supply chain is the amount of change in the executives in recent years.

“Someday, they're going to call these last couple of years the lost years in the Americas,” he said. “There's been really limited to no growth. But everyone has an expectation of growth and there's been a change over in our top 25 suppliers. What happens is you lose the relationships, you lose the agreements that were made, the investments that were made in particular marketplaces. It's difficult to untangle. Clearly the change of executives exacerbates the margin issue.”

Avnet, like any smart distributor, will continue to work through such issues with its suppliers but margins remain top of mind for all.

This issue [of margins] doesn't go away. It's a longer term issue that I don't think has a solution up front today. But the industry needs to adjust how we do these things. Some suppliers think we're just a logistics company and want to pay us single digit margins for being logistics. But we're also a bank where we give deserving credit, we hold inventory, we do a lot of different things and we need to get paid for those things. One of the things I think is going to have to happen is the customers are going to have to pay for the services they use an the supplier will have to allow us to charge the customer for those services. Overall, people are willing to pay for the services they need.

Smith doesn't believe answers to the issues he noted will come easy, nor will they come in public but instead behind closed doors in meetings of supply chain partners. “I think it's going to take the industry to shift their thinking, either as a group in ECIA, or by the distributors coming together and working with the suppliers one by one. That change will be forced. As margins continue to drop, the model breaks down at some point.”

What do you think? Are margins and the way they are established concerning? Has ship and debit outlived its usefulness? Can counterfeiting be thwarted? And what are you doing as a member of the supply chain to establish and maintain relationships over periods of executive changes? Share your thoughts below.

14 comments on “Shift Happens: Thoughts on Industry Change

  1. _hm
    January 14, 2014

    As a parts distributor, 12.5% is considered very good margin. Technology risk is minimum and value addition is almost nil. I consider this to be very good margin.

     

  2. Hailey Lynne McKeefry
    January 15, 2014

    @HM, i have to disagree. If my boss came and told me that i was going to make four percent less next year, i'd be really unhappy. Even if he said, but even at a four percent loss you are still making a good salary! Loss is loss and less is less.

  3. _hm
    January 15, 2014

    @Hailey: It happens. One need to take deep breath and move along.

     

  4. Daniel
    January 15, 2014

    “Margins have fallen from 16.5 to 12.5 in the last eight years, he said, and they are somewhat out of the control of distributors.  “It should be much cleaner for us to set our own margins, because we know the services we set for the customers,” Smith said. “We give them terms, days we hold inventory, do programming. We should be in charge of our own margins, instead of suppliers setting margins for us using ship and debit.”

    suzanne, the effect of such changes in margin can be nullify by volume sales. Normally for large volume sales distributors or vendors used to offer further discount by reducing the margin. For them, they can sell the second product without much effort.

  5. prabhakar_deosthali
    January 17, 2014

    In my opinion, the reduction in margin can be countered by having increased sales so that the net profit remains same.

    So to get the correct forecast of the coming year we need to know what is the growth rate of the component industry. If the growth rate is more then the distributor makes more profit in net terms though not in percentage terms.

  6. Hailey Lynne McKeefry
    January 24, 2014

    @Jacob: you said:
    suzanne, the effect of such changes in margin can be nullify by volume sales. Normally for large volume sales distributors or vendors used to offer further discount by reducing the margin. For them, they can sell the second product without much effort.

    Distributors are quite sensitive to margins and margin changes–and sometimes margin decrease can't be passed on readily to price-sensitive customers. I bet this is one of those “easier said than done” moments.

  7. Daniel
    January 26, 2014

    “Distributors are quite sensitive to margins and margin changes–and sometimes margin decrease can't be passed on readily to price-sensitive customers. I bet this is one of those “easier said than done” moments.”

    Hailey, most of the distributors are using dynamic pricing method so they can always keep a certain margin on all the sales. When price decrease, they can pass such benefits to customers and vice versa.

  8. Daniel
    January 26, 2014

    “In my opinion, the reduction in margin can be countered by having increased sales so that the net profit remains same.”

    Prabhakar, that's one option. Certain vendors are fixing margins in lot. I mean first lot certain percentage, second lot less margin than the next etc. so volume sales are beneficial for both customers and vendors.

  9. Hailey Lynne McKeefry
    January 29, 2014

    @Jacob, i agree with you…i was talking about the other directions. prices going up are what put customer's on edge. 🙂

  10. Daniel
    January 30, 2014

    “i agree with you…i was talking about the other directions. prices going up are what put customer's on edge. :)”

    Hailey, customers always have 'n' options to get the products at a better price. Negotiations, sourcing from alternate sources etc are some of the feasible methods.

  11. ahdand
    January 31, 2014

    @Jacob: Yes as long the market is not a monopoly one there will be many options for many buyers. It’s the competition for the sellers not the buyers.

  12. Daniel
    February 2, 2014

    “Yes as long the market is not a monopoly one there will be many options for many buyers. It's the competition for the sellers not the buyers.”

    You are right Nimantah. Due to competition, customer can have a better price too.

  13. Eldredge
    February 4, 2014

    As I once observed at a former employer, we lost a buck on every part we shipped, but we made up for it in volume.

  14. Daniel
    February 4, 2014

    “As I once observed at a former employer, we lost a buck on every part we shipped, but we made up for it in volume.”

    Elderg, the effort for selling one piece and thousand pieces are same. So they can offer a better price for volume sales.

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