SCM: The key to
distribution's success

Although the "supply" part of supply chain management (SCM) has been impacted lately by ongoing component allocation, franchised distributors continue to expand their SCM offerings to make the "management" part easier.

BY BARBARA JORGENSEN

he goal of such services is twofold: to allow customers to outsource the burden of managing their own purchase, storage and shipment of inventory, while allowing component suppliers to gain more visibility into end-customers’ scheduling forecasts, and thereby, plan their own manufacturing needs.

Automation maximizes these benefits, providing customers with the ability to check inventory/order status 24/7, trigger purchase orders, change orders or scheduling, and generally avoid that extra phone call to their distribution sales rep. And, by eliminating time-consuming paperwork and in-house transactions, OEMs can reduce the overall cost of owning and managing their component inventory.

"Customers are recognizing the power of SCM, and realize they can win [the time-to-market race] on the basis of their supply chain," said Paul Katz, vice president of value-added programs for Arrow Electronics Inc. (Melville, N.Y.) "The stakes are getting higher and are adding complexity to the supply chain," he added.

The Web is playing a large role in the product design phase. Greg Frazier President IMS

There are, of course, a plethora of SCM services and solutions available. Software companies have developed software-based solutions; service providers over-lay software with a hardware infrastructure; dot.coms use the Internet as their customer interface and transaction backbone, and companies, such as Avnet Inc. spin-off eConnections, (El Monte, Calif.), provide the "plumbing" to link a variety of customers, suppliers, contract manufacturers (CMs) and OEMs. An entire cottage industry has grown up around taking time and cost out of the OEM’s supply chain.

But the differentiating factor in franchised distribution now is, and will continue to be, the ownership and warehousing of inventory. Distribution cut its teeth on holding and managing goods as far back as the 1940s. As more OEMs move to just-in-time, build-to-order, auto-replenishment and total bill-of-materials management, the channel’s longterm relationships with suppliers may mean the difference between a cus-tomer halting a manufacturing line and keeping production moving - particularly during allocation. As one industry executive said, it’s hard to be a components distributor without components.

The channel has taken various approaches to providing SCM services. Most have developed some sort of in-house technology and have partnered with a variety of Internet-based operations to target specific customer needs, such as catalog purchasing, engineering assistance, component search and substitution, and end-of-life management. Others have partnered with solutions providers that effectively provide the Internet-service back-bone for distribution SCM services while remaining transparent to the distribution customer. But how does distribution fare in the overall picture? Generally pretty well, said Peter Wietfeldt, director of management consulting for Pittiglio Rabin Todd & McGrath (Waltham, Mass.) - with a few caveats. Customers want to move away from the trend of managing materials through third parties of any type and deal directly with their suppliers, he said. Suppliers, though, have admitted they are not equipped to deal with the changing needs and flexible delivery schedules their customers require. So for awhile look for status quo.

Key influences on distribution’s SCM market position are CMs and the Internet. Top-tier CMs are taking on more SCM tasks and are purchasing the bulk of their components directly from suppliers at volume discounts. If CMs do not use distribution they capture more of the materials portion (and the accompanying dollars) of the board.

OEMs are giving more purchasing power to the CM in order to capitalize on component pricing and one-stop shopping for materials and manufacturing, Wietfeldt said. This is whittling away part of the available market distribution has for SCM, but the channel still plays a significant role supplying the second and third-tier CMs that don’t have as much purchasing clout.

The Internet is also nibbling away at distribution’s former corner in the information market, Wietfeldt said. The Internet allows multiple connections among suppliers, distributors, component exchanges and other price and inventory information sites.

Still, "Distributors are rising to the challenge," Wietfeldt said. "In many ways CMs cannot manage all the components they need to, and the growth of distribution sales to CMs is higher than the growth of CMs themselves."

"Distributors are also making decent headway on the Internet side with the determination being to what extent do you need brick and mortar," Wietfeldt said. If the distributor offers services and capabilities to store and deliver product, that value will be maintained. The dot.coms are a link to support demand, but they don't have the ability to kit, add value and react quickly," he explained.

Brick and mortar is a huge factor for one leading distribution supplier that is contemplating automated SCM relationships. "Holding inventory is a huge differentiator," said Rob Kirk, global sales director, distribution, for ON Semiconductor. (Phoenix, Ariz.) "The easy part [of automation] is electronically acknowledging a purchase order, the other 99% is brick and mortar."

"We want to look at the definition of success from the end customer viewpoint. The supplier, CEM, OEM and distributor all have to be involved in the [customer’s] supply chain. But the only one that looks at inventory as a differentiator is distribution," Kirk said.

Insight, through its sister company Atlas, can also provide the full bill of materials and support for the customer through the manufacturing process. Greg Provenzano, CEO Insight Electronics

One distribution customer has seen benefits from its SCM relationships with two key distributors. Tekelec Inc., a Calabasas, Calif.-based communications equipment maker, has seen its inventory turns for materials and components increase from about 3.5 to the "high teens". Its raw-to-finished goods turnaround time shrunk from 10 to 14 days to five or six days; (from the time the inventory trigger is pulled to completed boards), said Jim Gearhardt, Tekelec’s manager of purchasing and contract manufacturing.

Gearhardt uses two key distributors that assign material on Tekelec’s behalf to a chosen CM in a pull-through method.

The relationship benefits the distributors, too. They share the business formerly divided among 10 or 15 suppliers. Eighty percent of Tekelec’s business goes through distribution, totaling $60 million to $70 million a year.

For the most part, each distributor’s SCM offerings allow customers to manage their inventory within that distributor. But industry leaders and other channel players are backing a number of initiatives that will expedite some standard processes and allow numerous windows on inventory - or as much as a customer wants to see with any or all of its suppliers, distributors and CMs.

Supply chain process service provider Viacore Inc. (Orange, Calif.), which is a RosettaNet spin-off, will support RosettaNet-standard transactions without requiring every company to download translation software themselves. And Econnections, a supply-chain solution provider, provides the plumbing through which participating members can communicate and interface with chosen partners from design concept to production manufacturing. (Other third-party providers are also aiming to accomplish the same.)

Among leading channel players, each company has developed its own in-house programs that cater to its customer base. Arrow for example, has linked all its various value-added services through its e-commerce capabilities. The distributor has developed Pro-Series, an information management tool which allows for spot buying, and checking status of inventory and orders through a "a real time online supply chain window," Katz said.

Arrow looks at electronic commerce as a tool for two major areas. One is on-spot solutions, en-compassing such investments as Chip-Center, QuestLink, and the Virtual Chip Exchange.

The second area is the capability to deal with complex supply-chain management. Arrow Electronics Inc. has developed the eCompass tool, a machine-to-machine tool that downloads MRPs and ERPs to Arrow’s system. Customers can use electronic data interchange (EDI) or the Internet to access eCompass. The tool tracks and analyzes customer buying habits to help Arrow plan its own inventory needs. "If the MRP shows a huge spike it will be flagged," Katz said. It also sends this analysis back to suppliers for forecast use. Arrow has translator software that decodes most of the methods its suppliers and customers use to transmit their needs and forecasts.

Avnet Inc. offers various SCM services throughout it units - and through numerous alliances - but its Integrated Materials Services (IMS) unit has long been the cornerstone of its materials engage-ments. The bulk of its SCM communications are carried over dedicated EDI links, but the company is moving toward the Internet to personalize the management of orders. The Web is also playing a large role in the product design phase, said Greg Frazier, president of IMS (Phoenix, Ariz.)

Frazier sees franchised distribution to be the most natural fit for SCM. "When the customer engages us, they buy the franchise," he said. "This gives our suppliers the leg up in knowledge, and increased visibility into their customer base.

The Internet also plays a role in Avnet’s strategy to provide the same services at the same level throughout the world, Frazier said. IMS was the first Avnet brand to be established internationally. "OEMs or CMs may shift their manufacturing from one locale to another. This is one main concern of Avnet customers, as well as issues such as meeting local content laws. That’s a huge differntiator for us in the industry."

San Diego-based Insight Electronics LLC, a unit of the VEBA Electronics group of distributors, focuses its business and SCM efforts on design and demand creation. Insight has seen an increase in customers’ needs in the design process and become more integrated [with customers] in that area over the past two years. The additional integration factors into time-to-market, said Insight CEO Greg Provenzano.

When specialty components handled by Insight get designed into a product, its sister company Atlas can also provide the full bill of materials and support through the manufacturing process.

Future Electronics Inc.’s core SCM business is built around a program called FIRST e-Supply Chain solutions which is comprised of auto-replenishment and data sharing. Both can send and receive EDI signals over the Internet, said Ron Schroeder, vice president of FIRST and e-supply chain solutions. Purchase orders used to be handled purely through EDI links. Today, Future’s systems have an added capabilty that directs its partners to the Internet.

An order management program is in development, which Future plans to rollout in third quarter 2000.

In May, Pioneer-Standard Electronics Inc., (Cleveland, Ohio), launched www.mypioneer.com, a tool that has integrated a number of Pioneer’s previous Web-based capabilities. The site has added a personalization feature based on a user's workflow and specific needs, said Tom Pitera, president of Pioneer’s Industrial Electronics Division (IED). Most transactions are still handled by extranets. Previously, Pioneer had about 1,000 customers hooked up by extranets. Within 60 days after the launch of www.mypioneer.com, it had added 500 new extranet sites.

Pioneer’s goal is to move to even more personalization. "We will have bill of materials (BOM) load and analysis shortly," Pitera added.

Another key SCM strategy is Pioneer’s partnership with the software company SupplyStream who’s software analyzes the impact a customer’s SCM has on overall cost, helps identify internal transaction costs, inventory assets and then profiles the BOM with the customer’s supply base, and compares responses quote for quote.

In the end, PRTM’s Wietfeldt sees the channel’s SCM offerings as effective and competitive. He sees no threat to the channel over the next five years, but warns that OEMs want to deal more direct with its suppliers. "They want to eliminate the middleman, but still need brick and mortar. And, for managing demand and supply, distribution still is the best means," he added.

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