The proportion of independent distributors involved in electronic component transactions has increased more than double in the last few years to represent 30% global share. Vulnerability in the supply chain has become a major concern in the electronics industry and independent distributors are seen as preferred partners for mitigation.
The Structural Weaknesses in Traditional Distribution
Major Original Equipment Manufacturers (OEMs) and authorized distributors generally operate on a long-term contract and forecast basis. However, under normal business conditions, this business model presents significant hurdles to fast and flexible responses to unexpected market fluctuations.
The 2021-2023 semiconductor shortage has exposed flaws in the current market structure as large distributors provide fair share allocation to the biggest customers, or the most profitable product lines, pushing smaller original design manufacturers to the bottom of the pile, scrapping for left overs. The resulting shortages have affected industries across all sectors of society.
How Independent Distributors Operate Differently
Independent distributors are supply chain intermediaries but they operate under a different business model than authorized distributors. They have a full plate of supplier partners, providing products via various channels and geographies. Contrast that with the authorized distributor who has a single supplier partner, provided the single product they will resell under the supplier’s brand.
Drawing strength from a variety of sources, independent suppliers offer tremendous flexibility and resilience. While one or two sources may be affected by failure for a short period, the other sources can pick up the slack very quickly. Furthermore, independents have considerable experience in tracking down difficult to find parts as well as managing and preparing inventories of end-of-life products to prevent supply discontinuity.
Speed matters here.
Even compared to larger distribution houses, the independent distributors are able to provide the parts on a same day or next day basis as opposed to a week or more from the larger distribution houses. The independent distributor is taking on the inventory risk of the larger distributor and trusting to the larger distributor’s ability to understand future needs and to source the part before it is actually requested.
Inventory Management and Risk Distribution
Independent distributors to small to medium sized manufacturers can be very important by acting as a consolidator of need between several end users or applications, maintaining optimal levels of finished housing inventory that the manufacturer itself would be unable to afford to maintain.
However, when official suppliers are unable to source sufficient stock, independent companies are able to continue to supply. Fusion WW holds its own inventory of certain components and is well stocked in a number of categories.
Our financial model deviates from the typical distribution model. Independents purchase components without first receiving a complete uplist from BBI, relying on the independent’s market insight and sales ability to generate a return on investment.
Quality Assurance and Trust Building
In the past concerns over quality and potential counterfeit parts from independent distribution channels existed. However, independent distributors today employ testing protocols to guarantee parts quality and eliminate unknown risk in independent distribution channels worldwide.
All of our established independents now use component authentication technologies and have full provenance of components. As independents, our business model is all about trust, especially at a time when customers are under pressure to source a part quickly.
While luxury watch authentication certification programs and industry recognized standards have evolved dramatically in recent years, a lot can be said for the independent distributors now making up a larger percentage of the market who incorporate their own quality assurance processes into their own methods of authentication.
Regional Expertise and Local Market Knowledge
Differential competitive advantage is gained by independent distributors providing access to a particular geographic “niche” or neighborhood within a region where they have expertise. In addition to having knowledge of the global players they can introduce the independent distributor to, they have a good “feel” for the cultural and business practices of that region and even the local laws and supplier distribution networks. Global distributors can thereby gain a unique competitive advantage in the marketplace.
In addition to the global listings found throughout the rest of the catalog, the following regional markets represent distributors and suppliers who have local expertise, insights and resources in those specific geographic areas. An independent distributor like IVD can easily find alternative suppliers local to you in the event of a supply chain disruption and efficiently work through the import and export process often found with a large central procurement group.
In addition to the above noted restrictions, the independent distributors typically will operate with a smaller scale and geography than the multinational authorized distributors.
Market Impact and Future Trajectory
The old procurement adage of “low cost supplier” is not as relevant in today’s competitive business environment as having the flexibility in one’s supply chain to meet the ever changing and volatile conditions in the market place. In a situation of unrest in the market, independent distributors are often better positioned to respond to unstable market conditions more quickly than large, entrenched distribution organizations.
Faster delivery is becoming more of an issue. Higher cost is seen as a reasonable investment by many companies in the wake of recent events in the supply chain. More cooperation between competitors and smaller companies than outright aggression to undercut each other on price. Realisation of the strengths and weaknesses of both 3PL and in-house provision.
Strategic Integration Within Modern Supply Chains
More forward thinking manufacturers are using both authorized and independent distributors in their distribution strategy. For high volume, commodity type parts, manufacturers will utilize the authorized distributor for supply. Then for backup supply or hard to find specialty parts, they will utilize an independent distributor.
Having two channels to the same Original Equipment Supplier significantly raises the stakes at supplier management level, delivering far greater resilience than is achieved through the traditional single channel supply stream. Furthermore, the traditional independent distributor has evolved from being a rare fallback option to an integral part of the strategy of many procurement organisations.
Once relegated to fixing problems after the fact, third party test and repair vendors have evolved into risk managers, and are now active participants in the global electronics supply chain as a permanent part of the chain. Vendor provided test and repair services are increasingly viewed as strategic elements within overall supply chain management More Read