Right-Sizing Channel Partners for Your Newest Products

In the electronic component market today, precious little money is available to invest on inventory that has little chance of moving off the shelf. With operating margins in component distribution under increasing pressure, the battle over bin space and inventory spend is not getting any easier.

While some may argue we are on the upside of recovery after a long and deep recession, distributors are looking forward and seeing many red flags when it comes to doing business in the new year. First, if short- or long-term debt are part of your operating scenario, it seems likely that your cost of capital will be going up soon as interest rates begin to climb from levels they’ve been for the past couple of years. Sure, large distributors can carry lots of inventory, but manufacturers had better be sure it’s going to move if they want distributors to take it. And with distributor margins continuing to get condensed, the decision on which parts go on the shelf becomes a fairly easy one. With new products, not only are manufacturers asking distributors to cover the cost of inventory investment, they have no guarantees that the parts will actually find a home among design engineers looking to develop their own next great product. And what’s that Mr. Customer, you want to EXTEND your payment terms? If I’m going to spend a penny on it, it better have legs.

Consider this situation from the perspective of the supplier. In a rotten economy over a two-year period, component manufacturers have stayed busy, feverishly developing new parts which they hope will sustain them until a solid recovery is under way. As these products begin to come out of development and into the market, the component supplier needs a distribution channel willing to accept new- and possibly unproven- products, as well as to help carry the burden of inventory investment, demand creation, order fulfillment and marketing. After all, he’s the manufacturer. His distributor partner should take all of his parts and put them on the shelf gladly, right?!

Don’t hold your breath Manufacturer. First, consider industry in US history. Look at any mature manufactured product in the US and you quickly find a pattern. You can start at the beginning and look at the paper and textile industries. Follow those with any other industry you choose. Furniture, maybe? How about cars? Calculators, TV, electronics, computer, software, etc. Not convinced. Maybe drill down a bit more then: capacitors, printed circuit boards, fabricated sheet metal, molded plastics. It is starting to happen in earnest with even the stalwart old power connectors which were never on the radar of the consumer products focused Asian manufacturers. The path toward the maturity of the market as well as the broad decline of the domestic market associated with these industries is the same- and they all lead to Asia. Notice, though, our choice of terms: “decline”. Go back to our start. You see, while it has been reported, for example, that the paper business is dead in the US, this industry is actually on a comeback. Why, you may ask? Specialization and focus on specific- and high margin- business. Sure, they took a beating by Asian countries able to manufacture the same product at a much lower cost. But ingenuity, investment and a significant amount of re-tooling has allowed them to refocus their businesses on segments that offer better margins. Segments that, up until a few years ago, didn’t even exist within the paper industry “target customer” profile.

Any product is susceptible to aggressive competition from overseas manufacturers. None is more susceptible, however, than a product which shares a few key similarities: high volume; made using plentiful, well-trained, low-cost labor; being built on well-developed equipment with repetitive processes; can be easily shipped. Despite the hopes of the US in the early part of the 21st century, this is now true for high technology products, medium volume products, as well as medical products. Where it isn’t yet true is on higher margin specialty, niche or new products looking to be designed into, used, or sold to customers here in the US.

Now consider the typical supply chain against this same backdrop and it is remarkably consistent. Large distributors continue to focus on transaction volume as they work to increase their inventory turns on “A” moving parts. Limited resources require sales efforts to focus on the higher volume customers. As EMS business grows exponentially, large Asian distributors are becoming larger and gaining increasing shares of the market. As these Asian distributors grow larger, they continue to pressure margins and gain marketshare, as domestic distributors see the onset of broad declines.

Distributor: Let me get this straight, you have a new part that has never seen the light of day, and you want me to invest in inventory on the chance that it could be a winner?

Supplier: Yes. How many will you take?

As the Manufacturer, you already know how difficult it can be to get the attention and mindshare you need from the large distributors on your latest products. After all, you do have your broad line suppliers. Perhaps they are a national or even an ultra-national or multi-national. Suffice it to say, they are big, they are dependable and they take and move product. But when it comes to new products, you know you have a hole.

What to do? Right-size.

That’s right. You remember right-sizing when it first hit the lexicon during the recession in the late eighties. Back then, companies were adjusting their workforce to match the requirements of the situation and economic times. Well, that’s what we are talking about here as well: match your needs with those distributors who are out there focusing on specific products and specific markets. You wouldn’t hire a municipal salt truck to sprinkle salt on your asparagus. So don’t ask the Big Disty’s to present your product to their customer list. With 500+ suppliers all trying to get the same amount of attention from the large distributors, you are going to get lost in the sludge.

Today’s smaller, regional, specialized and niche distributors are focused in on the social media shift which has suddenly made the playing field surprisingly level. These distributors have the resources available to them now to immediate get your message out to users across multiple social media sites and forums used by engineers, buyers, tech writers and other users. What’s more, you are a big fish to these smaller distributors. A little attention paid to these distributors can go a long way to getting a toehold in the customers where these companies do very well. There are hundreds of these smaller distributors who are willing to share the burden of new products. With parts on the shelf, salespeople on the street and a willingness to move new product for a higher-than-market margin, right-sizing can be exactly what your new products need to get their very own set of legs.