Mixing up distribution:
A recipe for serving up passive components

BY AIMEE KALNOSKAS

ake one part recovering Asian markets, one part European electronics market (strengthened), and add one part each of a booming U.S. market in communications, computer and automotive electronics sector. Stir in a high demand for passive components to fulfill design requirements. Mix vigorously with national, regional, local and specialty distributors. Simmer for approximately one fiscal quarter. Gently skim off inventory that was removed during the down time to take costs out the supply chain. Gently reduce mixture, stirring constantly until merged or acquired distributors are removed. Serve hot!

According to research firm Electronic Outlook Corp. (San Francisco, Calif.), projected worldwide demand for passive components at the fluctuating exchange rate stands at $82.4 billion for 2000, challenging passive component manufacturers with balancing gross margins against any increase in supply or drop in demand. Aligning themselves with the right mix of distributors that can deliver the components faster than anyone else, is the order of the day. Since passive components seem to be needed just about everywhere these days, manufacturers are forced to develop serious distribution strategies to survive.

Modifying the mix
For a company like Taiyo Yuden, USA (Schaumburg, Ill.), distribution has quickly risen to the top of the bottom line. In the early 1990s, the $2-billion company, with roots in Japan, didn’t see distribution as anything more than a way to sell parts at a lower margin than if they sold directly to an OEM. That view of distribution was fairly typical of most Japanese electronics companies about ten years ago.

"But today, that’s changed quite a bit," said Mike Thompson, vice president of sales and marketing, for Taiyo Yuden USA. In 1996, the company used a master distribution program to get a ‘kick start’ into distribution, but quickly outgrew that model a couple of years later.

The company’s current sales channel includes a mix of direct accounts, manufacturers' reps and distributors. A key goal is to use fewer regional and local distributors and more national ones. In his new role as distribution sales manager, Ken Kwiatkowski is evaluating Taiyo Yuden’s current distribution network, which constitutes about 25 distributors. Only one is a national distributor; the remaining distributors are regional or local resellers.

"It’s a work in progress," Kwiatkowski explained. "We are looking for traditional types of distributors with a sales force to support up and coming accounts." Ken Kwiatkowski, Distribution Sales Manager Taiyo Yuden USA

Currently, Taiyo Yuden serves more than 100 accounts directly. As a result, Thompson believes that they aren't serving their smaller customers as well as they should be. He looks to reduce that number to 60, or 30 percent of its total sales, with the remaining sales going through distribution. "We’ll support the rest of our customers through distribution because distribution can offer much better service, quicker response times and local stock,"

Thompson added. Thompson and his team have already begun serious negotiations with major national distributors. He maintains that a misstep now could send the program into a tailspin, which would send them back to the beginning of the process. "Taiyo Yuden’s future is definitely with distribution," Thompson said. "There is no question about it."

A hint of this, a dash of that
When Vishay Intertechnology, Inc. (Malvern, Pa.) opened its doors in 1962 with a major product line of resistors and measurement strain gages, a strong distribution channel was not necessary. As this leading passive component manufacturer grew and acquired other companies that already had a strong distribution channel in place, Vishay was faced with maintaining relationships with approximately 150 distributors. At that time, a distribution management team was put in place with vice presidents in every major geographical region.

Increasing our use of distribution has been a key factor to the company’s phenomenal growth. Glyndwr Smith, Assistant to the C.E.O. Senior Vice President Marketing Intelligence Vishay Intertechnology Corp.

"We are now down to approximately 50 to 60 distributors," said Glyndwr Smith, assistant to the CEO and senior vice president of marketing intelligence and sales coordination at Vishay. Smith found that sales increased after creating a smaller and more manageable level of distributors.

In the last five years, the percentage of products sold through distribution has climbed from 25 to 40 percent. Vishay has also seen a 60 percent increase in sales since the distribution realignment three years ago. Smith attributes this to not only less fragmented and more focused distributors, but also to the adoption of distributor policies and agreements.

"This involved intense negotiation to develop a single, comprehensive program with one agreement among all distributors," Smith said. "It also involved senior management at Vishay and at the distributors working closely together. If you don’t have good communication and interaction between senior management, it won’t work."

Vishay uses a combination of national, local, regional and specialty distributors including Jaco Electronics Inc. and Pioneer-Standard Electronics, Inc. as well as a host of Japanese and European distributors.

To meet growing demand for passive components in Vishay’s three major markets of wireless telephony, computers and automobile electronics, the company focuses on relationships with strategic distributors and, according to Smith, "simply supplies them first." Programs are also in place to increase manufacturing capacity for passive components by 25 to 45 percent, depending on the product.

Smith maintains that increas-ing their use of distributors has been a key factor to the company’s phenomenal growth. "Where we can sell 1,000 units, the distributor can typically sell 10,000. We can’t be all things to all accounts."

Skimming the fat
Shortly after her arrival at Menlo Park, Calif.-based Raychem Circuit Protection, North American distribution sales manager Carla Mahrt, began to be affectionately known by her colleagues as "The Terminator."

"We are not the ones that focus on maintaining inventory and managing the logistics of getting product to the customer on a timely basis. That's what distributors do well." Carla Mahrt, North American Distribution Sales Manager, Raychem Circuit Protection

Within the first six months at Raychem, Mahrt cut at least a couple of distributors from the roster in an effort to implement a strategic distribution strategy. Her policy entails a carefully controlled balancing act of a fairly limited number of distributors (12 at this time), not all of which serve the same purpose or even the same market.

Raychem, a division of Tyco Electronics and manufacturer of the PolySwitch™ line of reset-table fuses, evolved out of another division involved in heat shrink tubing. Initially, Raychem utilized the division’s existing distributors.

"We didn’t have national distributors at that time, so we included more passive component-focused distributors," Mahrt said. "We found that as the PolySwitch™ fuse offering grew, the distributors that did the best with it were really the ones that were focused on board-level activity, such as a PC-board loaded with resistors, capacitors, inductors, some connectors and maybe even a small transformer."

Mahrt also keeps a keen eye on mergers and acquisitions among distributors. "That is our reason for covering the market with different types of distributors," she explained. "I wouldn’t want a line-up of just 12 national, broadline distributors.

I wouldn’t want all regional and local guys, either. Maintaining that balance is sometimes tricky because, in many cases, national distributors are buying up the local and regional distributors we might have partnered with," Mahrt said.

Raychem also offers a unique design registration program that trains distribution sales reps to recognize design-in opportunities for the resettable fuse line. Once Raychem gets the design-win, they reward the distributor with more money and protect the account for approximately one year.

If another distributor happens to stumble upon the opportunity and gets a quote, there would be a price differential for the distributor that designed it in, versus the guy that happened upon it, Mahrt said.

Mahrt seeks to maintain the current level of distributors. While she continuously reviews the distributors who don't carry the PolySwitch™ line, she is happy with a list that includes Arrow Electronics Inc., TTI, and Sager Electronics. In North America, more than half of the business goes through distribution. Before Mahrt joined the Raychem team five years ago, 30 percent of its sales channeled through distribution.

In many cases, CMs choose specialized distributors, such as TTI Inc., (Ft Worth, Tex.) because they maintain a large breadth of inventory and provide extensive product knowledge to their end customers. TTI, for example, maintains more than 130,000 part numbers in inventory.

Since Raychem's core business is to develop new products to meet their customer's needs and to ensure that it manufactures nearly defect-free products, the company relies on distribution to deal with inventory management and logistics issues.

"We are not the ones that focus on maintaining inventory and managing the logistics of getting product to the customer on a timely basis. That's what distributors do well," Mahrt concluded.

Basic ingredients
For some passive component manufacturers, serious distribution strategies came early. Formed in 1982, NIC Components Corp. (Melville, N.Y.) immediately began to compete head-to-head with major Japanese passive-component suppliers by turning the Japanese policy of limited distribution into an opportunity.

Initially, NIC focused on rela-tionships with mostly local, specialty and regional distributors. "For the first five or six years of our business history, we were probably doing 70 percent through distribution in the U.S.," said Richard Schuster, president for NIC. At the same time, NIC assigned its own in-house sales organization and reps with the task of getting design-ins at major OEMs.

"If it weren't for the local distributors getting an allocation to support the small guys, there would be a real famine out there for the small and middle tier companies." Richard Schuster, President NIC Component Corp.

About five years ago, Schuster saw the growing impact of contract electronic manufacturers (CEMs) on the industry, which resulted in the creation of its Strategic Account Development Unit (SADU) with the goal of developing business at major CEMs.

"We still kept our focus on distribution because it supports the small, mid-tier companies. Plus, they are also involved as back-up or special project suppliers to major CEMs, providing services such as local inventories and inventory replenishment pro-grams,” Schuster explained.

Distribution now accounts for approximately 40 percent of NIC's business. Some of what used to be distribution business now flows through direct sales to large OEMs, but it’s more of an evolution than a revolution.

"We never had the philosophy that a distributor couldn’t take a large order or support a large OEM. Our philosophy is that it's the customer’s choice," stated Schuster. With business at NIC nearly doubling this year from last, Schuster feels that NIC’s commitment to distribution is key in the volatile passive-component marketplace. He maintains that it is critical to partner with distributors at all levels now more than ever to ensure complete attention to the marketplace.

NIC has a strong mix of global, national, regional, local and specialty companies, and Schuster sees this as a key advantage.

"In this market, the big boys tend to push their weight around. And, in a shortage situation, they try to buy out whatever they can. If it weren’t for the local distributors getting an allocation to support the small guys, there would be a real famine out there for the small and middle-tier companies," Schuster said.

While it looks like the good life for passive component manufacturers in the current market dominated by rising average selling prices and higher margins, business can go bad quickly if critical supply issues aren’t dealt with in a timely manner.

Distribution has become the first course for many of these manufacturers today. The unpredicted onslaught of passive component demand, coupled with a decrease in inventory and capital expenditure that caught so many off-guard a couple of years ago, has made the industry aware that a complete, yet flexible distribution program is necessary in order to survive.

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