Don Akery, CEO of Waldom Electronics, joins us in this Executive Perspectives episode to break down the master distributor model and what it means for electronic component distributors and their end customers, as well as the substantial environmental benefits Waldom’s excess inventory model provides.
This interview has been edited and formatted for clarity.
Tyler Fussner, Managing Editor, Supply Chain Connect
Don, thank you for joining us. Could you please introduce yourself and tell us a little bit about what you do?
Don Akery, CEO, Waldom Electronics
Well, appreciate you having us on the podcast. I'm Don Akery. I'm the CEO of Waldom Electronics. Waldom is a somewhat unique model in the industry in that we are a master distributor. We do not sell to end customers; we only support the distributors and make inventory available to the authorized distributors in order to help them sell more in their businesses. We lead with that every time because the industry likes to classify us as a distributor. And as a distributor, then we would sell to all end markets, all industries and customers. And that's not our model; that hadn't been our model from day one. And this is our 76th year in business.
Definitely a unique model. And I would love to hear some clarification. Can you tell me what exactly is the master distributor model? What is the Waldom model?
Yeah, great question. It's taken all those years in order for this model to build into what it is today. But the business was set around, and there's a lot of parts in our industry, that distributors really can't inventory the way they like to inventory A and B items. There's a lot of parts that either the supplier, they've got a long tail of parts that they manufacture, they're good parts, but they don't sell broadly in industry. It's very difficult for the distributors to know how to inventory that product.
In some cases, it would be difficult for a distributor to look at a supplier and buy and inventory every product that a supplier produces. There are some suppliers that produce hundreds of thousands of parts. But all of those are not sold to multiple customers. The Waldom model makes that inventory – we work strategically with suppliers. On some of the parts that are not widely used, we put them on the shelf and make them available to the distributors. Makes it much more efficient for the supplier to manufacture the products. But it also helps the distributor [being] that those products are available immediately. Those products are the ones that when distributors place some orders directly with the factory for 1,000 pieces of a part, it's good order, but then the factory gets another order for a million pieces – you can guess which one gets the priority. And so that 1,000-piece order may get pushed out or may not be delivered as quickly as the distributor needs it. If that product is available at Waldom, to all of the authorized distributors, it's on the shelf, the distributors can order it, and we can actually deliver it the same day. And in most cases, we're able to deliver that at a price very similar or almost the same as what they would buy it on a direct basis. That's the classic master distribution service.
One part of our business that really makes us unique is that we've got a part of our business that is excess inventory. Not obsolete, not old inventory, not end of life inventory – excess inventory. In the electronic component world, distributors are given scrap or stock allowances from suppliers. The purpose of that is it's a percentage of what they purchase from a supplier. And they do that, the suppliers offer that, in order to help the distributors with this inventory – them speculating to try to keep their inventory fresh. Now, it's not big numbers; it's anywhere from 1% – 3%, 4% tops. But, if you look at the hundreds of millions, billions of dollars’ worth of components, those numbers add up.
Waldom, about 10 to 12 years ago, went in and started providing a service to manage those rotations for a supplier. It's very costly. Suppliers are set up to manufacture products and to ship them to distributors. And they're not equipped really to take it back. And in many cases, they don't have the space. They don't have the processes in order to make sure that it's good product coming back. Waldom, we've taken over and we manage that for a number of suppliers. Our line card is about 40 IP&E suppliers, not really in the semiconductor world.
And we manage that. And what we do is we take it back; we 100% inspect it and deem everything that is sellable. We check date codes, we log date codes, we inventory by date codes. We make sure that it's in the original packaging, original labels. And then we put it in our inventory, and we make it available to all of the distributors. So, what's excess for one distributor is not excess for the industry.
And again, it's not old inventory. A lot of this inventory is [from when a] distributor had a customer and the customer had demand and that demand went away. So, they ended up with excess inventory. But when you make that available to the entire authorized distribution channel for that supplier, we sell more than 80% of it over the life of the product. Now that takes a few years; typically about five years into it, we've sold 70% of it. And so what we do with that, we get that product back in, we don't pay for it in most cases; in most cases, we take it back in, we do take title of it and make it available and then when we sell it, we give back to the supplier half of the profits that we make on that product selling it to their distributors. And then, we keep the other half in order to cover our costs to ship it back in, the inspection, the storage, and then our profits that are made on it.
And what that allows us to do, over the years, we've built an inventory that is typically broader for a supplier than any distributor has. We've got one supplier that we've got 67,000 part numbers that we have available to sell. Most distributors have less than 30,000 of those same part numbers. We can really help supplement and be an extension of the supplier and help the distributor. That's a really unique part of our business. It allows us to have a very large inventory. We're not afraid of a large inventory, because we're not paying for all of it, and making it available to the distributors. Again, nobody else really does that in the industry, does that service for the suppliers and ultimately for the distributors. It makes that inventory visible and more available to the distribution community.
It's very interesting. How long has that been part of the business model? This excess inventory model?
This excess inventory model really started, managing the suppliers’ stock rotation program, just about 12 years, 13 years [ago] that we started with the first supplier. We've given back hundreds of millions of dollars of recovered money. Because what the suppliers do is accrue for those write offs, or that scrap allowance. It's a hit to their financials. So, any money that comes back in they basically get the opportunity to recover part of that money. And it's tens of millions of dollars on an annual basis for some of the suppliers. It's substantial and shows in their financials over time.
I'm guessing it's been welcomed with open arms with a lot of the suppliers you've been working with, before opening this service to them?
Absolutely. Absolutely. Typically, they have to get through to fully understand it. When they look at it, we're told quite often that, ‘Hey, you'll never sell this. This distributor has had it for a year and a half and hasn't moved any of it.’ And miraculously, we bring it in, and we sell 30% of it within the first 12 months.
With this excess model, how had that adapted with the overarching supply chain issues that the industry was facing, at large, through the pandemic? Were you taking on more? Were you taking on less? Were you able to leverage this through the turmoil that the industry has been facing over the past few years?
Well, it's like everything. Traditionally, that inventory, in many cases, would have been scrapped. It wouldn't have been available to support the industry, support the distributors, or the end customers. Obviously, with a supply chain constraint, we sold a lot more. There was a lot of demand and a number of growths from just about every distributor.
The distributors were doing everything in their power in order to be able to fulfill the orders they had taken from their end customers. Our product is warrantied, authorized, like an extension of the factory, so it was the same as buying. We help the distributors bail out a lot of customers, either if the demand went up or the supplier had materials or supply chain issues and couldn't deliver. That side of the business, over 2020 and 2021, was unbelievable. And the first part of 2022
When it comes to the inventory coming back in, that slowed down a little from some suppliers during that period of time. But I'm not proud to say, this industry generates a lot of excess inventory. There was still some coming back. It has picked up dramatically in the last half of 2022. And year to date, this year, a lot more inventory is out in the distributors and at the factories in excess. A lot of that's been coming in.
I've been with Waldom a little over a year and the inventory has grown almost $100 million. And if I was a distributor that would scare me to death. As Waldom and not having to pay for a lot of that, it doesn't scare me at all. We actually look at this as a good part of the cycle for us is that we build inventory. We expect to have a half a billion [dollars] worth of inventory before the end of 2023 as more of this inventory is coming back.
It seems like a practical and successful resource that partners can leverage and free themselves from those inventory restraints, in a way.
Yeah, and part of the uniqueness of the model is Waldom is set up that we're a neutral party. We don't compete. The distributors don't have to worry that we won't sell to an end customer we can’t. Our contracts with the suppliers forbid us, plus, we wouldn't want to do that to conflict with the relationships that we have with the distributors.
But the way this model has been so successful is we do inventory feeds into most of the distributors’ ERP systems to where they have easy visibility of our inventory, just like it was factory stock, so that their people know how to use it; they use it as an extension of their own inventory, knowing that it's good inventory, warrantied, and they use us as an option. In some cases, if you look at it, if a supplier, they've got a customer wanting to buy $20,000 worth of a component, they don't have inventory, the supplier is quoting 18 weeks, and Waldom has the inventory on the shelf, they can place an order, have it next day and ship it to the customer very, very quickly, and that helps them win more orders.
Looking ahead, what does the future of this model look like? Do you see any expansions into different programs like with the excess program? Or is there opportunity for any technological integrations, maybe AI or machine learning, into your processes? Can you tell me a little bit about what the future of this model looks like?
If you look at it, the model, we expect the model to grow. We're going to stay within the IP&E technologies. But the line card is still somewhat limited. And we don't plan to go into the semiconductor side of the space. There are some nuances of shelf life and product storage is a little different on some of those products. Shelf life on some of those products is much shorter.
We've actually signed quite a few new lines that we've announced recently: Samtec, Bourns, Recom. We're adding to the line card at a pretty fast rate. And we've got quite a few new ones. You'll see us make announcements; typically, we make the announcements after we've gotten product back in to where we add value for the distributors. It's not when we sign the contract; it's when we have enough that we can be of value.
Technology wise, this business, probably one of the big surprises that I had joining the company, is the integrations into the distributors’ ERP systems and straight through to their websites also. I wish I could say it was all through API, that's where we want it all to go. The truth is a lot of the distributors have set up their suppliers to EDI connections. I won't call that high-tech or leading technology, but going APIs, the industry needs to go that route so we can get real time interface, real time visibility. We've got a group of people we can implement quickly from an API and take orders via API. We'll go down that path.
Again, this model is a little less complicated since we're only selling to distributors. And we're selling to people that know what they need because they have demand from their end customers. It's definitely less complex, easier, than a distributor having to anticipate what inventory is needed.
I definitely believe the industry, from a technology standpoint, has to go [toward] the interface, the visibility. Our inventory that we have, with all the feeds that we put out there, we get close to 15 million views a month on our inventory that is shown on our distributor partners’ websites. And in most cases, it is designated as partner inventory to where that the end customer knows that is coming from an authorized partner of the distributor. And in some cases, we fulfill that product directly for the distributor with their paperwork. We don't know anything other than to us it is a transaction selling it to a distributor. And then they just tell us, ‘Don't ship this to our warehouse, ship this to this customer at this end address.’ We don't know what price they sold it to them and do not care. We just know the price that we sold the product to them at. And we know that it needs to ship same day; it needs to get to the customer very, very quickly.
I think you'll see more technology in that end of the business for Waldom. You'll see more technology in our distribution centers’ warehouses, like every distributor. When it comes to robotics, you'll see robots moving a lot more around in all of the distributors’ warehouses over the next years.
I think the distribution and the supply chain of electronic components, using the data that we have, I think this last upturn and then downturn has shown us we haven't learned a whole lot over the past years. The data is there. But I don't think we're using the data as well as we could. We're getting better at inventory, historically analyzing the inventory and knowing what sells. Distributors are all pretty good at that. And with us, we get to see that across a much broader range. So, our data becomes really valuable. Understanding the trends that we're seeing on components, that helps anticipate what needs to be inventoried, but it's all historical. The forecasting, looking forward, which the industry grapples with, everybody does, we've got to get better using the data to anticipate what the future is.
I agree. I think it is an exciting future to look forward to and there's a lot of unanswered questions, but it seems like the target has already been painted. It's just understanding what integrations are going to work and how to deploy them successfully to get to those end goals.
I think the industry, what we did learn during the COVID period of time and then as we, I'll say partially came out of it, was that the industry has to work more together.
Obviously, Waldom the neutral party, it is a little easier for the distributors to work with us, but even distributors working amongst themselves with the end goal of, ‘How do we get product to the end customers who need it?’ Because as you said, it's a pretty exciting time. There's not going to be less electronics in anything that any of us use on a day-to-day basis, there's only going to be more.
If you look at it, just the evolution of what's in your house or what's sitting in this room with us today, the amount of electronic components that are around us, that number is going up exponentially – feels like every month, but at least every year for sure.
I want to understand the environmental impact that this Waldom model has. Managing this much inventory, what is the outcome of that in terms of environmental impact?
Well, think about it: This excess inventory, how it's been dealt with for years, some of it has been rotated back to the suppliers, back to their factories (and I talked earlier about how inefficient that process was). Many suppliers over the years of managing and looking at the return on the investment of even taking it back, they no longer even made the distributors return it. They issued a scrap allowance. And the distributors were instructed to destroy the product and get a certificate of destruction.
And I ran one of those distributors, and it always used to bother me that I had to pay… and that product was good. Again, it's not old product, it's just excess. But you get this allowance. You want to keep your warehouses as clean and your inventory as clean as possible. So, I threw away tens of millions of dollars worth of components that ended up in landfills. And this model, that excess inventory model, think about it: that same inventory that was going into landfills, if we can sell 80-plus percent of it, we're keeping it out of landfills.
We've kept many, many tons out of the landfills. We're really trying to get it down, it's pretty difficult to with the weights of the product. We've kept 3.8 billion components out of landfills by selling it through this model. We've had some of the latest suppliers that we've signed to our line card, we've had two in particular that their final decision was not about them recouping money that they had taken a hit to their P&Ls on, it was the environmental aspect of it. We hope to be able to convert the tonnage into carbon emissions and be able to help and give both the distributors and the suppliers data that they can actually add to their ESG reporting, long term. We're not close on that, because we need the suppliers help; they need to be able to tell us the carbon emissions from having to tool up and actually manufacture a specific product, and they're not there yet. We think they'll get there shortly and when we get there, then we can really convert it to carbon credit.
It's a powerful, powerful model to be able to make an impact on more than one front. It is a business win-win, it seems, for all those involved.
Absolutely. One other piece to touch on, a big part of our business for these distributors, is the MOQ. We sell at smaller minimum order quantities and that's a lot of our value to the distributors. If you look at it, in addition to making the inventory available, many suppliers have put minimum order quantities on distributors in order to try to make their manufacturing as efficient as possible. Well, the Waldom model, we are equipped to sell at smaller MOQs. A lot of the distributors take us up, and instead of having to order a MOQ that may be 50,000 pieces, with Waldom, we can sell it in what we call a standard pack and an inner pack quantity that may be 1,000 pieces, or 10,000. So, the distributor can afford to inventory a broader range of product; they can also afford to make an investment in inventory that doesn't break the bank for them. I think a good portion of this value prop from a distribution side is just making that MOQ available.
We just did one with a supplier not too long ago, and it happened to be a new product that had never sold in the distribution channel, it had been sold directly. They felt very positive that if the distribution channel had access to it, that it would be designed in and would be used by a broad audience. And with that, they came up but it was a four part solution. And the MOQ would have cost the distributor – for this one never-sold product through the channel – it would have cost $60,000. They came to Waldom and we invested in the MOQ quantity. We broke it down into much smaller, more manageable [sizes]. And for a few thousand dollars, the distributors could invest in this new product and put it on their shelf, and they didn't have to cough up $60,000 in order to do it. For a few thousand, they made those parts available. We made them available to all of the authorized distributors.
And it seems to offer a great deal of flexibility for those distributors in what they're able to afford and pursue.
It's a great strategy for a distributor. A lot of distributors look at us and there's some lines that… we have one line that 70% of the products that we sell to distributors are sold in quantities less than the supplier’s MOQ. It's big numbers.
Don, thank you for joining us. And thank you for your expertise offered today. It was a very insightful conversation. I appreciate you taking the time.
Well, I appreciate the opportunity. I always like talking about the Waldom model.