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Building a More Secure Supply Chain Strategy
Order picking critical components.
By Mark Ellsworth, Director of Strategic Accounts and Todd Ballew, Executive Vice President and General Manager, World Micro, Inc., Roswell, GA
Manufacturers that depend on electronic components are finding it difficult to acquire some of the quality parts they need in a timely, reliable manner. Changes in the business models of franchise distributors and an influx of counterfeit and substandard parts are creating new challenges that impact product development and manufacturing cycles and, ultimately, product integrity.
Many of the franchise distributors that manufacturers traditionally have relied on for electronic components are changing their business models in an effort to shorten cash cycles and improve cash reserves. They have eliminated regional hubs in favor of centralized distribution and reduced the number and variety of in-stock components, maintaining volume inventories only on those parts for which they have contracts with component manufacturers or for which there is the greatest demand from their largest, most profitable customers.
Franchise distributors can still be counted on to provide 70 to 80 percent of the electronic components most manufacturers of all sizes require. Finding a source for that remaining 20 to 30 percent can be problematic, especially for Tier-2 and Tier-3 manufacturers. Virtually every organization's supply chain requires assistance that simply isn't available from their traditional franchise distributor:
Obsolete, factory-allocated or custom parts.
Parts without a distribution channel.
Third-party logistics (3PL) stocking.
Management of excess inventory.
Filling the Gaps
So, where can one turn to fill the gaps? Cautionary tales of suppliers that don't deliver goods and services as promised, don't have the processes in place to support customer needs or that provide counterfeit and substandard parts abound. And as procurement officers know from first-hand experience, searching the open market for key components can be a daunting experience at best.
But the open market is, in fact, the source for those components. Given this reality, what can you, the manufacturer, do to minimize your exposure and ensure that the components you purchase arrive as scheduled and are genuine, quality parts? How can you be sure that your supplier is in a position to provide the level of support your business needs?
Filling the Void
In recent years, the answer for many manufacturers has been to add "independent distributors" to their preferred supplier lists. For these manufacturers, incorporating independent distributors into their supply chains is a viable way to resolve the issues created by the reduced number of in-stock SKUs available from franchise distributors. In fact, as franchise distributors have reduced their inventories, many independent distributors have increased the number of SKUs they maintain in stock. Their choices of components to carry typically are based on the needs of their customers, not on contractual agreements with component manufacturers.
A well-organized warehouse is designed to meet customer needs.
Independent distributors focus on providing parts and services that traditional franchise distribution is currently unable to meet. It's important to note that independent suppliers can in some instances still carry a number of franchised lines of supplier authorized components.
Independent distributors can add value to the supply chain in a number of important ways:
Since they are (generally) not contractually bound to specific manufacturers, they are free to evaluate multiple suppliers to ensure that customers receive the best combination of quality, timeliness and cost.
They can help their customer locate and verify the authenticity of obsolete components.
As intrinsic component experts, they can often recommend alternative solutions when specified parts are not available.
They can help avoid having to set up one-time vendors that can be costly both in terms of components and management of the relationship.
Those independents who also carry some franchised lines can offer these when necessary.
Because of this added value, any business that finds itself in need of hard-to-find electronic components that are not stocked by their traditional distributors can benefit from the addition of independent distributors to the supply chain. The challenge is ensuring that the independent distributors they select can, and will deliver the quality of components and service they require.
What should you look for in an independent distributor to be sure you select the right one for your business? Any company you consider for the role of "preferred independent," should be able to provide you with evidence of most of the following:
ISO9001 Certification, AS9120 Certification, ANSI10-10A Certification, AS13485 Certification, ITAR Compliance.
A well-documented quality control process.
Membership in professional organizations such as ERAI, a global information services organization that monitors, investigates and reports issues affecting the global supply chain of electronics; IDEA, the Independent Distributors of Electronics Association, a non-profit trade association representing quality and ethical standards for independent distributors; or NEDA, the National Electronic Distributors Association, which primarily represents authorized distribution channels.
Certified component inspectors.
A proactive counterfeit abatement program.
Staffing levels that can support your firm's requirements.
Technological proficiency to interface via portals, EDI or other technology-based data sharing methods.
Ability to support worldwide requirements
Conducting an on-site audit of each potential preferred independent distributor prior to approval can help you ensure that the supplier you select meets your requirements.
An on-site visit by a senior quality manager or procurement officer lets you:
Validate the initial information provided.
Monitor the inspection process.
Check for ESD certification.
Meet with management and key staff such as QC personnel.
Review the continuous improvement program.
Determine whether the supplier can support your firm's needs. Depending on your company's revenues and the number of active components used in your production process, you may need to add more than one preferred independent to your provider list. A general rule of thumb is one preferred independent for every one to three million dollars of non-franchise spending.
Getting the Buy-In
Often, the most difficult challenge in bringing an independent distributor on board is getting internal buy-in needed to make the program effective. Using an internal champion to communicate the program details throughout the organization is a good way to expedite this process. This individual can promote the value of working with a specified independent to internal stakeholders and ensure that the supplier meets the key people in the organization with whom they will work.
The effort required to integrate independent distributors into the supply chain can vary dramatically, depending on a number of factors such as the number of locations involved, whether contract manufacturers are used and the target implementation schedule.
A Best Practices Plan
The process of adding independent distributors has been undertaken by many companies with much success. Following the recommendations in this check list can help you ensure that your implementation is equally successful.
Mandate that all spot-market buys be directed through the preferred channel. This assures the same process is followed whether it is in China, Mexico, or a local facility
Provide a "preferred independent" letter signed by a senior company official to all people affected by this new program: procurement staff, program managers (internally and externally), and the appropriate engineering teams.
Create a "deviation" form that must be submitted and approved when anyone in the supply chain seeks to use alternate channels.
Require that your preferred independent distributors document on a quarterly basis: their activity levels, revenue, RMA (return material authorization) rate, on-time delivery, and other programs they are engaged in.
Have one individual in each distributor's organization designated as the point person with whom you can address issues. While you may have a team of people supporting your company's account, it is important that you have just one point of accountability.
Take the time to determine your supply chain needs and see if a hybrid approach is right for you. Carefully evaluate potential independent distributors. Then, the right partner will help you improve the efficiency of your supply chain and ensure that in most cases, the quality parts your franchise distributor can't supply at a given time, are in-fact available when you need them.
Contact: World Micro, Inc., 205 Hembree Park Drive, Suite 105, Roswell, GA 30076
800-400-5026 or 770-698-1900 fax: 770-698-1901 E-mail: firstname.lastname@example.org Web:
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