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The Case for Distribution’s Open Market

For those in the electronics supply chain the acquisition of {complink 11309|Converge}, one of the largest “brokers” in the world, by {complink 453|Arrow Electronics Inc.}, the No. 1 global franchise distributor, should raise a few eyebrows.

It does seem a curious move since the major executives in the authorized distribution channel typically like to avoid discussing the subject of the open market. But was the Arrow-Converge deal so odd? Only if you've bought into the negative propaganda and don't fully appreciate the value of the open market. Otherwise, it looks like quite a strategic move. Maybe, it's a signal that the rest of the manufacturing world should pick up on. And the first question they need to ask is: what exactly is the open market?

So let's answer that question. The open market is a “spot” market where electronic components are offered for immediate delivery to anyone willing to purchase at the time of offering. It occurs at the intersection of supply and demand outside of scheduled or contract deliveries.

This intersection occurs when the buyer and seller are brought together by the time frame of their need. Brokers, the most visible symbol of the market, are not the true counterparties to the transactions but just facilitators. When you have a need to buy or sell in the spot market for immediate delivery, anyone in the supply chain is a viable partner regardless of their position in the greater electronics food chain.

Examples of companies who provide such services include franchise distributors sitting on stock in the channel, semiconductor manufacturers holding excess stock because of over-production, OEMs and contract manufacturers with excess inventory and independent distributors with stock.

What may be surprising to many is that the open market by definition encompasses all of the supply chain including the distribution channel and the factories. In this way it is similar to other spot or cash markets in more traditional commodities — for instance, oil, metals and grains — despite its own very unique differences.

Despite disparaging remarks about the open market, it exists and thrives because there is a demand and a need for the services offered by providers. The market is a natural response to the unavoidable shortage and excess positions that result from inaccurate forecasts and variable product lead times.

These fundamental inefficiencies require active trade in order to restore balance to the system. The open market redistributes material from areas of surplus to areas of high demand. Without it the supply chain would grind to a crawl and be engulfed in chaos and red ink.

The bottom line? All points in the supply chain with ownership positions in components are de facto market participants and potential trading partners. This makes the open market not some isolated issue to be swept under a rug somewhere but a vital junction with universal implications for all participants in the supply chain.

Think about that the next time someone warns you against using the open market. Instead of warning against the use of a necessity, the dialog should be aimed at leveraging the market's benefits while reducing its risks. Indeed, that is the impetus for this ongoing series of articles. Stay tuned.

7 comments on “The Case for Distribution’s Open Market

  1. Taimoor Zubar
    December 28, 2010

    I think a free or an 'open' market is an essential element for ensuring efficiency in the market and making it stay competitive. The acquisition of Converge by Arrow Electronics has reduced one player from the market. This makes Arrow have a stronger position in the market. As the number of players reduce from the market, the competition in the market reduces. That's one major reason why governments should monitor acquisitions and not let these be at the freewill of corporations.

  2. hockeymom
    December 28, 2010

    We all must remain mindful of the issues with counterfeiting in the broker or “open” markets.  The products sold by brokers are not typically supported by the full manufacturer's warranty.  The open market environment is ripe for the counterfeiters and due diligence must be done to ensure these products are legitimate and not from a counterfeit source……Buyers beware!

  3. Anna Young
    December 28, 2010

    Gene, Thank you for taking the time to explore some of the issues related to the “open” or broker market versus the franchise distribution market. I know many would like to pretend the broker market is not acceptable or borders near being illegal but it provides a service and is used by many in the industry. Your explanation, though, creates the impression the “open” market is akin to vultures or hyenas clearning up behind the big cats. I hope that is not the point you aimed to bring out, or is it?

  4. Ms. Daisy
    December 29, 2010

    The concerns raised by some on the acquisition of Converge by Arrow Electronics should not be viewed as just negative propaganda in light of possibility of inaccurate forecasts that could create false shortages and excesses in the supply chain. The merging of these two giants could create opportunites for market forecast manipulation with surplus inventory made available in the open market. The flip side is artificial shortages that will shoot the stock prices higher because of less supply.

    The open market is free to all and counterfeiters will have an easy place to dispose of their wares with no restrictions.

  5. mfbertozzi
    December 30, 2010

    I was thinking a new phenomenoum potentially is raising; any markets in general have to accomplish specific rules according to supply chain and agreements among Govs.  Giving the fact several supply chains are not located in one region but across the globe, are we meaning “Open Market” could bypass Govs' agreements with political impacts too?

  6. Ms. Daisy
    December 30, 2010

    The open market typically tries to work with the rules and regulations of the governments but it is also able to bye pass some of the rules based on demand and supply forces.

    It is often difficult to seperate the goods from the “black market where counterfeits and anything goes” from the open market. 

  7. Backorder
    December 31, 2010

    Excellent article. Though it talks more about how we define an open market and how everyone is a part of it, I think the core message should be to appreciate the inevitable value of the open market. I think it is time to accept the reality and work on it to ensure that no one suffers from fake products rather then refusing to accept the reality and downplaying all the good points about it!

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