Dr. Bill Bradford, President of Flip Electronics, covers the gray market of electronic components and what buyers can do to protect themselves from counterfeit issues in this Executive Perspectives episode. Dr. Bradford also touches on the impact of artificial intelligence and machine learning on the supply chain, a recent acquisition by Flip Electronics and what it means for their customers, and much more.
This interview has been edited and formatted for clarity.
Tyler Fussner, Managing Editor, Supply Chain Connect
Bill, welcome to the show. Could you please introduce yourself to our audience?
Dr. Bill Bradford, President, Flip Electronics
Thanks. Bill Bradford, I'm the president of Flip Electronics. Flip Electronics is an eight-year-old specially authorized distributor of electronic components, namely semiconductors, and very happy to say we're the fastest growing authorized distributor in the U.S. for the past few years, according to Electronic Sourcing. So, very happy to be here.
Fussner 0:46
Well, thank you for joining us. So, can you tell me a little bit about Flip Electronics? Even going back to the naming of Flip Electronics, where did that come from?
Dr. Bradford 0:57
Flip Electronics was started eight years ago by Jason Murphy, our founder, and he actually started the company at his kitchen table. He had a concept to start a distributor that was focusing on this underserved part of the industry; these obsolescence, aged, slow moving parts that weren't getting much attention. And he just felt that the suppliers had this issue where they weren't getting value for this inventory that's just sitting on their shelves, maybe whip that wasn't being developed. And he and his wife who helped him start the company, as they were thinking about it, were saying, “We've got to help these suppliers just flip this stuff into the customers. We know there's customers for this stuff, but we're not connecting the dots.” So, they came up with… Jason jokes, and all the other good URLs were taken. But they're flipping this inventory that suppliers just weren't getting full value on in a way that customers would appreciate. And it solved the problem for both parties. So, that's how the name came up and thought it was catchy. And we have a lot of fun with it.
Our employees… we have an employee-driven initiative that serves a local community. And all our employees get together once a quarter and talk about a specific need; it might be a food drive, or a clothing drive. But we call that that initiative “We give a Flip.” Right. And we call our employees “Flippers.” We have our core values, our stated intention – which is a key driver of our culture – we call our “Flipism.” We have a lot of fun with the name. I think it grows on you.
Fussner 2:37
So, let's dive right into it. One of the things I wanted to ask you about is how Flip has adjusted over the past couple of years. There's definitely been a lot of changes in the industry. Can you tell me a little bit about any changes that Flip has implemented to help navigate any supply chain backlogs or the changes that the industry has faced?
Dr. Bradford 3:03
Having been in this industry for about 35 years now, I've seen a lot of these cycles. We've been through another classic one, where for the last couple of years we could not get enough parts to satisfy our customers. We were in a highly constrained environment. Most of the end markets for computer chips were on fire, and there were a lot of supply chain disruptions that contributed to the difficulties, everything from COVID a couple years ago to other supply chain disruptions, [such as] the activity in Europe, the ongoing geopolitical issues with China resulting in the tariffs, and so many things that have impacted the supply of semiconductors have made it a real challenge.
And, pretty suddenly, as these cycles always do, about mid-Q3 last year in 2022, we suddenly saw a little bit of weakness in demand, particularly for consumer and notebook computer. But at the same time, just enough of a slowdown where supply rapidly caught up and all these customers that were accumulating inventory and trying to get enough product in-house to make their own product suddenly got delusion inventory. And so, again, as often happens, we went from a market of scarcity to one of over-abundance almost overnight. Say, the fourth quarter of 2022, the first quarter of 2023, we've seen a lot of inventory build-up, whether that's with the end customers in the distribution channel or with a supplier base.
And we're just now starting to see, midway through Q2, those inventories at least leveling out. I'm not sure if they're actually improving yet, but they're not growing any longer. So, that's the first sign. Inventories have to stop growing, flatten out, and then start to deplete. And I think we're just on that cusp, which gives me encouragement. I think over the next couple of quarters, we'll start to see a depletion of the inventory. I think the underlying factors driving demand are still relatively healthy. So, I'm still very bullish; by the end of the year, we start to return to some growth and still on a trajectory to be a trillion-dollar industry by the end of the decade.
It's going to be choppy, as our industry always has been, getting to a trillion dollars. But, I think, if you take out all the all these little cyclical headaches that we have to deal with, it's still a very exciting industry to be a part of.
So, Flip, how we've dealt with this, we really tend to thrive in both types of markets because of how our whole model has been focused on solving industry challenges in the supply chain. Whether that's end-of-life product, product that's been obsoleted, product that's maybe aged or slow moving on the supplier side, but from a customer standpoint, these parts that are just hard to get. They're not found in the traditional channel; they might be hidden inventory; they might have been parts that have been obsoleted a couple of years ago and customers still desperately need them. And so, we focus really heavily on that end-of-life, long-tail support of semiconductor products. And when the market starts to shift, while maybe the customer demands aren't the same, all of a sudden, we tend to get better exposure to some of the supply of critical elements that other customers may need. So, we definitely have to shift when this happens, but we've got a model that works in both environments.
Fussner 6:34
And like you said, it can definitely seem cyclical. These fluctuations come and go. And it seems like it's paramount to be set up to be able to react to those and stay fluid to be able to move with the industry as it does. We're hearing a lot of talk about the integration of technology from a distributor’s perspective being able to help with that. And so, I was just curious if you can touch on some integration of technology from Flip’s perspective. Are you guys tying in any AI or machine learning? And, if so, how has that been integrated to help you address any supply chain challenges?
Dr. Bradford 7:16
It's interesting you mentioned AI because it's also one of the key drivers of our industry, just from chip usage; all the computing, all the networking infrastructure that has to go into supporting the massive computing power to enable the AI. So, we focus very heavily on analytics. When we're buying inventory, that is by nature inventory that may be very aged or may have to support customers for multiple years and possibly even decades, we've got to be very careful about how we're tying up working capital. So, we leverage a lot of analytics – market demand, inventory that's in the channel, pricing trends, inventory velocity – from a variety of sources to both the authorized channel but also the broker market, because that really impacts, ultimately, what customers are going to end up doing to keep a system running.
We're just now beginning to look at machine learning and AI to try to both speed up that process of analyzing inventory, which, again, really informs what we buy and to whom and for how much we can sell product. The more data we have, and the quicker we can process that data, the better. And so we are, interestingly, now this summer working with interns to help from an AI-perspective to try to automate some of these business processes that have driven Flip to this point.
Fussner 8:49
That's exciting. When you're using this technology and automating a lot of these processes, are you seeing or hearing any feedback from your customers? Has the customers' perspective changed? Are there different expectations with the availability of this technology? Do they have a different expectation of their distributors? Are they asking different questions?
Dr. Bradford 9:21
I don't know if I've seen a change in behavior that I could pinpoint to an AI-approach or machine learning-approach. Certainly, the buying community continues to get more and more sophisticated. But I think their need for creative solutions continues to grow as well.
The danger of the gray market… if customers can't find computer chips, and as a last resort, go to the grey market, the implications of that are pretty significant to their business. The amount of counterfeit activity that goes on in the gray market… And when we say counterfeit, that's not just producers of fake chips, something that looks like an Intel chip. By counterfeiting, when we talk semiconductors, that can be everything from genuine parts that have been mishandled or maybe reclaimed and refurbished and sold as new, maybe just mishandled, but anything that can destroy the integrity, or the quality or long-term reliability of that product is lumped into this classification of counterfeit product. But if you introduce a counterfeit risk into a product, it's one thing if it goes into your electric toothbrush, but if it's going into navigation for an aircraft or a critical military defense missile system, obviously the implications are life threatening.
And so, having a truly traceable product, having an authorized model of supply chain partners, really helps to alleviate any of those concerns. Because, at the end of the day, for all the analytics the customer can do, if they're not 100% assured that they're getting authorized product, they're going to put their supply chain and therefore their end product and their end customers at risk.
Fussner 11:17
And speaking to the customers, they're looking for these partnerships and they're looking for these solutions that you can offer. In working with your customers, are you hearing any trending pain-points across the industry? Are customers struggling with the same things? We're coming out of the ongoing pandemic, and certainly that was something… What are they struggling with today? Is it inflation focused? Maybe other [concerns]? What are you hearing from your customers?
Dr. Bradford 11:48
I'd say a variety of things that are challenging in this environment. On the economic side, certainly the rise in interest rates has an effect on our customers, as well as our ourselves, when your cost of carrying inventory increases dramatically, when the cost of capital increases as dramatically as it has over the past several quarters, particularly in Flip’s case, where we're focused on holding inventory for long periods of time to support long life, obsolete requirements of our customers. It gets more and more expensive to put that kind of inventory on our shelves, so, that definitely is a challenge.
Fussner 12:27
You were talking about customers going into what you refer to as the gray market. Is that [the instance in which] the customers are going out and finding their own avenues for purchase? And how has that changed the role of suppliers or distributors, knowing that customers can go out there, pick and choose, maybe find their own path? How does that change what you can offer, what problems you can solve for people that are trying to find what they're looking for?
Dr. Bradford 12:58
The gray market for electronic components has always existed. It serves a legitimate need when customers can no longer get a product through an authorized channel. But as I mentioned earlier, it comes at a risk and customers will always prefer to eliminate or diminish that risk. You eliminate or diminish that risk by either buying direct from the manufacturer or only buying through their authorized sources, their authorized distributors.
What happens in the gray market with distributors that may not be authorized is that [the question arises as to] where they got their product. If not from the authorized suppliers, they'll get it from customer excess; which might be perfectly fine product, but it might not be. And without that traceability, it's hard to be sure. It might be product that was reclaimed from a board and refurbished, and it might, again, truly be from counterfeit product.
These counterfeit products get more and more sophisticated. Some of the bad actors will produce a chip package with markings on it that looks exactly like a microprocessor, but there's no dye in it. Or maybe there's a nonfunctioning dye, maybe there's even a copycat dye, but it's not going to contain the same reliability.
Their methods get more and more sophisticated. For example, if you have a tape and reel of electronic components with 1,000 parts on the reel, typically, a customer – if they haven't bought those from an authorized source – will want to test some of the product to make sure it's good. They might take the first three or four parts off that reel, decapsulate them, look inside, make sure there's a chip there, make sure it looks like an authentic chip, do some testing on the product. And then, if that's good, they assume the reel is correct. Well, the counterfeiters now will put the first 10 parts as genuine parts and then counterfeit parts on the rest of the reel so that it gets by that initial test.
Whatever testing methods that the customers put in place to try to protect themselves, the bad actors are always trying to keep up or get one step ahead. It's a real issue. There are reports that it's a $17 billion issue. This isn't a little one-off; it's a major issue for our industry and really can put critical systems at risk if it's not addressed.
Fussner 15:26
I wanted to pivot here and hear a little bit more from Flip and what you guys are doing. As distributors at large in the industry are developing and offering new capabilities and new services, how are you using any of this to manage your internal projects? How are you integrating, not so much customer-focused but Flip-focused, new capabilities in your processes?
Dr. Bradford 16:00
One of the most exciting things Flip has done, very recently, is we made our first acquisition of a company called Resurgent Semiconductors. It's now a wholly owned subsidiary of Flip called Resurgent Manufacturing Services, or RMS. And Resurgent has the capability to extend the life of a semiconductor device. Up until very recently, our solution for our customers was to find ways to stockpile obsolete inventory to serve their long-term needs. But once that material ran out, we didn't really have a good solution for them.
Now, with Resurgent, we can work with our supplier partners to license a manufacturing flow and continue to supply a part well past its last time buy date, which solves tremendous problems for customers that may need to support a system requirement for another several years to even several decades. And with the arrangements we make with our supplier partners, that allows them to continue to profit from that engagement as well. So, that's one way in which we looked, in this case through acquisition, to come up with a new capability that would build on our traditional support of customers and their end-of-lifes with a brand-new capability that can really solve immensely greater and more complex problems for them.
Fussner 17:30
How do you feel that the distribution space and its customers are going to evolve? What's coming down the road in the next six, 12, 24 months? What does the future of the industry look like?
Dr. Bradford 17:43
I think the role of distributors continues to be critical because the pervasiveness of chips in our global economy just continues to grow. We're no longer driven by one or two sectors, by PCs or by cell phones, but literally anything you can think of now has a chip in it. And EVs, for example, have more than 10 times the amount of chips that a normal car has. And so, as the EVs come out, it's just… chips are literally everywhere now. So, with this ubiquitous nature of chips, it means that it's more and more impossible for the suppliers to serve all their customers, because literally any company now that produces a product is likely a chip consumer. They're likely putting electronics into their systems. So, companies rely more and more on distributors to be able to do this outreach for this long tail of customers.
And I think for distributors to be successful in managing that long tail into these trends, they've got to get better and better at understanding significant big data problems. When you've got such a long tail of customers that are using this myriad level of chips in a variety of applications, they've got to use big data; they've got to use analytics and, increasingly, machine learning, increasingly, AI, to try to get ahead of the game. I think that companies that can adopt machine learning and AI quickly in terms of how they think about analyzing the market, how they think about defining products and solutions and how they think about pricing their products and serving their customers, those are going to be the winners in the economy.
This technology is evolving so rapidly that companies have to invest now to make sure they're not going to be left behind by that revolution. And you're seeing it not just in what we need to use to be better at what we do in supplying semiconductors into the critical needs, but it's a massive consumer of chips, as I mentioned earlier, all the compute power that's needed for AI, and you see all the many customers that are springing up in the AI field right now. It's a very exciting place to be in the electronics and technology space.
