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You Can Put a Price on That

In the current marketplace, every cost is being scrutinized, and every line item justified. Ever since the advent of activity-based costing (ABC) — a process that assigns a dollar value to every activity associated with a business transaction — anything that doesn't add value can be tagged and eliminated. This is a double-edged sword for the supply chain.

Distribution companies seized on ABC early on for a good reason — they were giving stuff away for free. Distributors sold components, but they also broke down lots, repackaged parts, assembled them into kits, provided custom bar-coding, and stored the stuff all over the world. Most of these services were free with your order — customers expected them, and distributors that offered these services were able to differentiate themselves from the pack.

Then two things happened: first, everyone starting providing these services so they weren't differentiating factors anymore; and second, distributors began to realize that providing services comes at a cost. Distributors build and outfit warehouses, hire people to manage them, buy lots of equipment, and spend a lot of money on things that aren't components. ABC gave the channel an opportunity to demonstrate the costs they incur and — at least the theory went — charge appropriately for them.

Here's the downside: suppliers and customers were able to use the same procedure to prove or disprove a distributor was adding value to the supply chain. When the Internet began to permeate the industry, the ability to buy and sell online was supposed to eliminate the need for distribution. The Internet would take out all the overhead and the industry would look like one big Amazon.com or eBay. The catch-phrase at the time was OPI — it stood for “other people's inventory.”

That didn't happen for a lot of reasons that we've explored in past blogs. Still, almost every year, distributors have to prove to both their suppliers and customers that they provide value. Every year, they have to justify their existence.

I'm sure if one sat down and calculated it, you could come up with a figure that measures the channel's value. Michael Long, {complink 453|Arrow Electronics Inc.} CEO, provided a number at last week's ECIA conference: $7 billion. That's how much it would cost the industry to replace the distribution channel. That's less than semiconductor companies spend on a single fab, but it's still a big number.

The distribution channel reaches 90 percent of the global electronics customer base, according to a presentation recently given Harley Feldberg, global president for {complink 577|Avnet Inc.}'s Electronics Marketing business. Here's another number: the global electronics market is estimated at more than $1 trillion. Distribution accounts for 25 percent of those sales, or about $289 billion. That's a lot of inventory.

Managing that inventory continues to be a challenge in the supply chain, and EBN will shed some light on that during our Webinar tomorrow, November 2 at 2:00 p.m. ET, which you can register for here: Highwire Act: Inventory Balancing Between OEMs/EMS Providers & Suppliers. Please join us.

8 comments on “You Can Put a Price on That

  1. FLYINGSCOT
    November 2, 2011

    For smaller suppliers the distribution channel provides coverage that would otherwise be impossible.  ABC would value that (I reckon) a lot less than is actually charged by the distribution channel.

  2. Jay_Bond
    November 2, 2011

    I find it amazing that more companies haven't tried to put price tags on everything they do to maximize their profits. I don't agree with the process, but you can't continue to give things away for free while taking away from items that will make money.  It is amazing how distributors still have to prove themselves worthy every year, even if they are in good standing with the suppliers and customers.

  3. Eldredge
    November 2, 2011

    @Flyingscot  – Exactly right. distribution provides a service for small companies that would be difficult to replace.

  4. Ariella
    November 2, 2011

    That concept is not a new one. In a book I'm reading about the author's mother's life, he describes her job during WWII. It was to use a comptometer to add up every cost factor of production to arrive at a price that included a profit.

  5. Ms. Daisy
    November 2, 2011

    Its is great that the distributors provide this service, but to expect that some of the cost from the ABC is not passed to the small businesses that benefit from the product distribution may be asking too much of them. I believe some of the “free” services is what is referred to as customer service and this is also an indirect service to the the customers which goes a long way in building good business relationships!

  6. Taimoor Zubar
    November 2, 2011

    If we are trying to break down into the activities a distributor typically does and putting a cost to them, how about things like advising your customers and helping them out with ordering, and providing market feedback and consumer insights to the manufacturers? Surely these are important functions and there's a cost (and hence a price) associated with these.

  7. _hm
    November 2, 2011

    ABC is good analysis tool. It can find out many leakages in expenses. But, it should be used pragmatically. Some expenses are desirable. They have hidden and long term advantages. You should not price tag in simplistic manner.

  8. Daniel
    November 2, 2011

    I think online sales can be better alternate for cost reduction and to avoid the third part involvements. The user can select the components from online catalogue and place the order online. These orders can be executed in factories/godowns and they can dispatch the order at the earliest. There are mainly two advantages from such online procedure. First of all pricing is less, when compare with the vendors and secondly speedy delivery of the item.

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