ON Semiconductor Inc.'s decision to add a global distributor to help solve its distribution problems has sent the chip maker back to Future Electronics Inc. nearly two years after severing ties with the Montreal company.
Michael Rohleder, ON's senior vice president of sales and marketing, said the resolution of unspecified business issues helped pave the way for the companies' reunion. "The way Future operates its business today is more complementary with the way we want to run our business," Rohleder said. "We've managed to iron out [our] differences."
Rohleder said Future's global infrastructure was one factor in the decision to re-sign the distributor. He noted that as suppliers and customers using the channel become global, they run into a dilemma: the need for a distributor that offers identical services with the same look and feel worldwide.
"Integration is extremely important to customers these days when they look for a distributor that can serve them on a worldwide basis," said Stephen Segal, Future's executive vice president and chief operating officer. "Future's IT structure is fully integrated because we have grown internally vs. through acquisition."
Both parties believe Future's organic growth has given the distributor a strategic advantage. "Beneficial to ON is a distributor with a worldwide infrastructure, not one with joint ventures or affiliations," Rohleder said.
The return of Future, combined with ON's other distribution partners, could enable ON to push roughly 48% of its total business to market through the channel. The Phoenix-based chip supplier expects Future will exceed $100 million in sales during the first year of its return, a number comparable to 1999's.
ON's total sales through distribution in 2000 reached about $950 million. Of the company's anticipated $624 million in sales through distribution this year, 45% is expected to come from the Americas, 25% from the Asia-Pacific region, 22% from Europe, and 8% from Japan.
ON earlier this year changed its accounting practices from point-of-purchase (POP) to point-of-sale (POS), meaning that revenue from sales doesn't appear on the supplier's books until after the distributor sells the product to the end user. POS could help ON in its sales efforts because the company must now engage more deeply with its customer base, something Future can help accomplish on a global basis.
"If the new distributor offers the supplier a better strategy, then the move could be positive," said Mary Olsson, an analyst at Dataquest Inc., San Jose. "Adding one more distributor won't make a difference unless the supplier allows them to handle more of the inventory to help them get the product out the door, or if the distributor offers global capabilities others don't."
ON also uses a market price program with all of its distributors, a "you buy it, you own it" structure under which the supplier and distributor negotiate fixed volume discounts. While ON offers ship-from-stock credit, where distributors receive a credit toward their next purchase if they're forced to sell product at a price below what they paid, it prefers the market price program. Because of this, distributors like Future are responsible for ON's inventory from the moment a price is struck.
Future uses both the market price and ship-from-stock and debit models, but its business for more than 30 years has been based primarily on an ability to move available-to-sell inventory to ease its customers' forecasting pressures. While some other distributors pipeline materials from supplier to customer, often providing product just in time, Future acts as a depository for significant quantities of available-to-sell inventory, which is attractive to suppliers, according to industry analysts.
"Having multiple distribution sources works when a supplier wants to move product out the door faster or if they don't want to carry a lot of inventory because it means having to keep it on the books unsold," Olsson said.
ON's decision to restore Future as a franchise distributor has led the two full circle. Future was dropped in 1999 when Rohleder arrived at ON from component distributor Wyle Electronics and consolidated the company's global distribution roster down to three: Arrow Electronics, Avnet, and Wyle. The following year, Wyle's parent company, VEBA Electronics, was sold piecemeal, landing Wyle in the hands of Arrow and leaving ON with just two global distributors. OR