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Cost reduction still reigns in supply chain circles

Oct. 29, 2013
Buyers still want it all from distributors—global support, inventory optimization, supply chain visibility, and more. But partnership is playing an increasingly important role in delivering those services to manufacturing customers.

Engineers and procurement professionals at manufacturing organizations increasingly rely on distributor services to get their jobs done. Getting the parts and solutions they need on time, every time, is vital in the effort to bring end products to market faster. As a result, many customers agree they will rely on distributors for a more mutually supportive relationship in the years ahead.

Connie Wan, vice president global procurement and Asia supply chain for electronics manufacturing services (EMS) provider SMTC, says she will rely on her company’s top-tier distributors for more over the next few years, pointing to service, delivery, cost, and quality as “givens” in today’s economic climate. Looking ahead, she says those distributors that partner with customers to provide inventory management solutions, global support, and supply chain visibility tools aimed at promoting efficiency and cost reduction will be the winners in the fast-paced world of contract manufacturing, in particular.

This year, SMTC will focus 80% of its materials spend on electronic components, with about a 50-50 split between distributor and original component manufacturer (OCM) purchases. SMTC provides contract manufacturing services to customers in the industrial, medical, computing, and communication markets.

“Our first requirement is that we are looking for a partner with global support and regional support,” says Wan, pointing to SMTC’s manufacturing operations in North America and Asia. “In terms of service, delivery, cost—all of this is equally important to us because I believe all these factors come together. I just can’t look at cost without considering delivery, for example. We look at what [distributors] can offer us in terms of service, programs, and supply chain solutions.”

Partners In Success

As evidence that the word “partner” is becoming more important in this equation, a 2012 survey by international consulting group KPMG found that manufacturing organizations are more likely than their peers in other industries to focus on supplier relationship management and other tasks that get at the heart of the customer-supplier partnership. The survey of 585 procurement leaders from across industry sectors showed that 76% of manufacturing and consumer packaged goods companies displayed high maturity levels in supplier performance management and that 82% led in supplier relationship management. Both functions point to how active organizations are in evaluating, managing, and maintaining relationships with their suppliers.

“In the past, [EMS companies and distributors] have always worked as two separate organizations,” adds Tom Reilly, SMTC’s director of marketing. “As time’s gone on and demand for flexibility has played a key role, these two organizations have intertwined and now operate within each other’s organizations to support each other and to be more flexible and more responsive to the customer. Customers really benefit from that synergy that the distributors and contract manufacturers provide.”

Wan points to inventory as a case in point. Helping customers optimize their inventory, improve working capital, and order materials just-in-time are key distributor services that can help make manufacturers more nimble in serving their customers’ needs. There’s no one-size-fits-all solution when it comes to providing such services, however, which is why customization is becoming a key attribute among leading distributors.

“Many distributors can tailor a model to fit your operation,” she explains, noting that in China, in particular, it’s common practice for distributors to place a third party on the customer’s site to manage inventory and ensure a seamless flow of product to the plant floor. “This is something distributors can do—especially global providers.”

Cost Reduction: A Two-Way Street

For many distributors, cost-reduction remains an underlying theme behind the many services they provide. The idea is that they bring important strategies to the table that help customers produce products as efficiently and cost-effectively as possible. A 2013 study by the Hackett Group, a consulting firm, underscores the importance of cost reduction strategies, noting that among procurement organizations, reducing purchased costs remains at the top of the list of performance-related concerns.

The issue has escalated in the last year, the researchers say: “for better or worse, cost reduction is king,” according to results of the firm’s 2013 Key Issues Study—Procurement. Seventy-seven percent of companies surveyed by the Hackett Group listed “reducing supply chain costs” as either an “important” or “extremely important” issue this year, for instance.

SMTC’s Wan agrees with the emphasis on cost reduction strategies and says this is a place where supplier partnership takes on a crucial role. Distributors can bring much to the table, including a strong line card, solid vendor relationships, and negotiating power all wrapped up into their service offering. But she says it’s also incumbent upon the manufacturing organization to do its part to make cost-savings a reality.

“This is something we have to work together on,” she explains, pointing to her company’s efforts to measure and manage distributors as a key part of the process. “We have to do our work. I rely on my global procurement team because they are experts in the marketplace. Our procurement teams in North America and Hong Kong work very closely with our suppliers to bring in cost-reduction actions.

“Usually when you talk about [reducing costs], we develop a plan with our partners. Once a plan is in place, our experience is that we have a pretty good outcome.”

Saving time is important, too. More distributors are investing in technology tools that provide customers greater visibility into the ordering and purchasing process. Wan says this is especially useful when it comes to new product introductions.

“This is very helpful, especially in the design stage,” she explains, pointing to how quickly new products are introduced into the market today. “Visibility is important. If you can log on, refresh your parts, find inventory and pricing, and place your order online—that’s an important tool. It’s definitely an important investment for [distributors].”

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About the Author

Victoria Fraza Kickham | Distribution Editor

Victoria Kickham is the distribution editor for Electronic Design magazine, SourceESB and, where she covers issues related to the electronics supply chain. Victoria started out as a general assignment reporter for several Boston-area newspapers before joining Industrial Distribution magazine, where she spent 14 years covering industrial markets. She served as ID’s managing editor from 2000 to 2010. Victoria has a bachelor’s degree in English from the University of New Hampshire and a master’s degree in English from Northeastern University.