The Battle for Logistics

As long as OEMs have been outsourcing their non-core functions, someone with such areas of expertise has been willing to pick up the slack. More often than not, that slack has become a battleground for services providers — in the electronics supply chain, mainly distributors and EMS companies.

Yesterday, Flextronics Global Services, a division of EMS {complink 2085|Flextronics Corp.}, announced the opening of two new value-added services/logistics facilities to serve the European and India markets. (See: Flextronics Expands in Europe, India.) Earlier this year, distributor {complink 453|Arrow Electronics Inc.} entered the reverse logistics business with its acquisition of Converge. A few years before that, {complink 577|Avnet Inc.} spun off a pure-play logistics business. If you go back far enough, you'll find distributors offering turnkey manufacturing and EMS companies offering procurement. And so it goes.

From the business standpoint, it makes sense for both groups to further penetrate the logistics business. With merger and acquisition in both distribution and EMS petering out, companies are turning to organic growth to expand profitability. One way to do that is by entering new or adjacent markets that fit with your business model. Distributors buy, sell, inventory, and ship components. EMS companies buy, inventory, assemble, and ship components. Distributors and EMS companies serve the same constituency — electronics OEMs — and have global infrastructures to support them. They also source from the same suppliers.

Distributors and EMS companies have historically butted heads when one gets too close to the other's turf. When distributors offered turnkey manufacturing services, they were seen as competing with their customers, the contract manufacturers. When EMS companies started offering supply chain management programs, they were seen as competing with distributors.

There doesn't seem to be as much overlap in the logistics arena. Distributors seem to be focusing on front-end logistics — procurement, inventory, selling, and shipping components. FGS, at least, is emphasizing its post-manufacturing logistics — distribution and supplier-managed inventory, reverse logistics and repair, product transformation, and service part logistics. Still, Arrow's entry into reverse logistics is narrowing the gap.

While distribution and EMS have been butting up against one another, a third party has entered the fray: logistics services providers such as UPS and FedEx. These companies are leveraging their core competencies — pickup,sorting, shipping, and tracking orders — into the electronics supply chain. Logistics services provide global and proximity warehousing, order-tracking services, and online tools to assist small businesses. Logistics providers can also address the front end and back end of the electronics supply chain. They've been doing this all along on a smaller scale. Now they are ratcheting their capabilities up and moving into new and adjacent markets that fit with their business models.

When outsourcing first started, the lines between OEM, EMS, and distributor were pretty clear — everybody focused on their respective expertise in design, manufacturing, and logistics. The lines have been blurring almost since outsourcing began: OEMs, EMS companies, and distributors are providing designs or design services; EMS and OEMs both manufacture; distributors, EMS, and logistics companies all provide pre- and post- manufacturing support. The battle for the OEM's heart and mind used to be primarily between EMS companies and distributors. In this case, I wouldn't bet against the new guys.

5 comments on “The Battle for Logistics

  1. Steve Saunders
    October 27, 2010

    What a great blog! I really learned a lot. Of the three categories – OEM, EMS, distributor – which one is most likely to produce the ultimate boundary crossing company in the future? Is there a particular company that you would bet on to become the dominant player?  

  2. Barbara Jorgensen
    October 27, 2010

    This will be an unpopular opinion, but the EMS companies, particularly Foxconn, have been crossing boundaries all along and succeeding at it. Flex and Foxconn are now more commonly referred to as ODMs (original design manufacturers) since they have taken on the design of cell phones and PCs. So technically  they compete with OEMs.

    Depending on the market, EMS companies source components directly from suppliers (rather than through distribution) so they compete with the channel. I say “depending on the market” because when supply gets tight, the biggest customer wins and to suppliers, distributors and EMS companies are both considered customers. When there is oversupply, EMS companies are more likely to use distribution so they don't get stuck with inventory they don't need.

    And on the logistics side, EMS companies are sourcing from suppliers (like distributors); managing inventory (like distributors) and after manufacturing, they are shipping manufactured goods to end-customers (like distributors such as Ingram Micro).

     Now, the one area I can see UPS and FedEx succeeding in is post-manufacturing logistics and here's why: EMS companies ship and support their particular brands or on behalf of their brands (Acer, Lenovo, and the cell phone brands) UPS and FedEX can support any brand they want: HP, IBM, Apple, Lenovo, Acer, Dell, Toshiba, Sony, Nokia etc. etc. and they may already do so.

    Back to the original question, the EMS companies are the companies making the most headway into others' turf and as long as they can do it more cheaply (as Foxconn has) they will continue to push the envelope.

  3. Steve Saunders
    October 27, 2010

    thanks Barbara!

  4. DataCrunch
    October 27, 2010

    Barbara, excellent analysis.  However, I do still see a fine line between companies like UPS and FedEx and EMS/ODM companies like Flex and Foxconn.    Yes, there may be some overlap potential, but at the moment I can’t envision a company like UPS getting into the EMS and ODM businesses and on the other side I can’t see Flex and Foxconn becoming global logistics services providers that would compete against UPS and FedEx.  I can see EMS companies, like you mentioned providing limited logistics capabilities to their clients, but not enough to take market share from UPS and FedEx. And I can see a company like UPS providing additional value added services to their clients, but still it would be in my opinion a distinct line between these two type of businesses.  Again, very interesting post and thanks.     

  5. Barbara Jorgensen
    October 27, 2010

    Hi Dave–thanks for your well-reasoned thoughts. There are many angles to all of these issues and your feedback helps direct us to areas we have to consider. Things were easier when there were clear distinctions between manufacturers and services compnaies, but as the lines blur it gets complicated but it also gives us plenty to write about!


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