As the EMS companies become more involved early in a customer's design and provide design-service capabilities beyond design for manufacturability and testability, EMS companies are beginning to look toward distribution for engineering and technical support.

Today, most of the key value-added services that distributors provide to EMS companies as well as to OEMs center on such supply-chain management services as auto replenishment, in-plant stores, just-in-time delivery and vendor-managed inventory.

Although EMS-or contract electronics manufacturing (CEM) companies, as they are often called-in some instances are starting to encroach on front-end designs, including IC designs, distributors say that their relationships with EMS companies are more synergistic than competitive. In the outsourcing model the service solution that distribution brings is twofold, said Bill Goebes, vice president of strategic marketing for Arrow Electronics Inc.'s Contract Manufacturing Services Group (Melville, N.Y.). "There is the front half, which consists of design-in and technical support; the back half is when a design-in turns into manufacturing, whether it's done by the OEM or CEM. Part of the role we fulfill is supporting a supply chain to augment and support that manufacturing," Goebes said.

While Goebes is starting to see some CEMs gravitate toward taking over the design role, they still look to distribution to support them. "They come to us looking for the same sort of traditional design support that an OEM would," he said.

"They have come to rely on distribution, particularly as we come out of the allocation period of the last year. They have learned very clearly what distribution can bring to the party. Whether they are the largest contract manufacturer, midtier or mom or pop, there is a role that distribution can play to supplement their efforts that is more synergistic than competitive," Goebes said.

The main focus of their requirements is materials management, said Andy Fischer, vice president and global channel director for electronics manufacturing services industry at Avnet Inc. (Phoenix, Ariz.). "The object of taking a diverse group of massive amounts of electronics components and then distributing them out to manufacturers is done best by distribution," Fischer said. "Distribution becomes the better entity for them to buy from simply because it brings efficiencies in the supply chain."

Fischer said that Avnet adds value in four areas: aggregating bill of materials, delayed asset ownership, parts programming and the ability to pipeline inventories that the OEM customer needs as it moves to contract manufacturing.

Distribution also does well in the area of value-added services for products. Those services include parts programming for such products as programmable logic devices, field-programmable gate arrays or microcontrollers, as well as providing kitting services and connector and cable assemblies.

For instance, Avnet's business has boomed in the area of programming parts. Most recently, Avnet opened its sixteenth programming center. Located in Singapore, the programming center is the first to fully integrate sales and production planning modules into its business system. The center has the capacity to program several hundred thousand components per week. Avnet programs more than 100 million programmable devices annually.

Still, distributors are known in the industry as leaders in logistics and materials management, delivering product on time where it's needed. That's why they have developed sophisticated global and integrated logistics and materials-management programs that feed programs such as point-of-use replenishment systems and in-plant stores. In many cases, distributors reserve inventory based upon each customer's forecast at central warehouse facilities and then deliver components to their customers' different sites around the globe. In other cases, inventories are placed in proximity warehouses near large cities or on site at the customer's facility in an in-plant store operation.

Some distributors have implemented sophisticated supply-chain software internally to improve their forecasting abilities so that they can better manage inventories. Insight Electronics (San Diego, Calif.), for example, formed an alliance last year with Manugistics, a supply-chain software vendor, to improve customer-demand forecasts and better manage inventory and assets. Insight Electronics provides traditional logistics programs, including pipeline inventory management through Memec United, the logistics and supply-chain company of the Memec group of companies. The group includes Insight Electronics, Impact Technologies and Unique Technologies. The company provides a single point of contact for its customers across all Memec companies.

Once Memec United has the customer's forecast, the forecast management team, in combination with Manugistics' supply-chain software, provides a statistical analysis of the forecast to adjust the pipeline with the suppliers based on that forecast, said Greg Provenzano, president of Insight Electronics. But Provenzano realizes that there are several different issues that are extremely important to EMS companies, and Memec United has streamlined its processes to deal with those differences.

For example, because a lot of quoting activity occurs in the EMS channel, it's important that the company provide a fast turnaround on those quotes. Memec United approaches the challenge in two ways. It has an internal process that allows the company to quickly turn around a quote and has engaged with supply-chain management solutions provider e-Connections Inc. to use the company's Quotility online quoting service. "That will allow us to be more efficient when working on quotes for the contract manufacturer," Provenzano said.

Other distributors that have signed up for Quotility include All American Semiconductor, Arrow, Avnet, Bell Microproducts, Digi-Key, Jaco Electronics, Kent Electronics, Nu Horizons, Pioneer-Standard Electronics, Projections Unlimited and Reptron Electronics.

The distributor Pioneer-Standard Electronics Inc., through its exclusive relationship with Supplystream Inc., a supply-chain management tools company focused on materials acquisition and decision support, provides tools that can help customers understand how to more aggressively manage their inventories or optimize their assets. The tools help OEM and EMS companies as well as distributors become more efficient in managing their procurement and materials-management processes. "We can work with CEMs to help them migrate from piece-part price buying to buying based on the total cost of ownership, by helping them understand their internal transaction costs. By utilizing those internal transaction costs, we capture the value that we bring in terms of value-added and supply-chain solutions," said Tom Pitera, president of Pioneer-Standard Electronics' Industrial Electronics Division (Cleveland).

Distributors and EMS companies recognize that by working together, they can provide the best and perhaps the lowest-cost solution for their customers.

"We have to build more tightly coupled supply chains with the CEMs," Pitera observed, "and we're certainly well down that path with many of the tier-one and tier-two companies.

"Because the distribution and CEM industries are narrow-margin businesses, the focus that we bring to the marketplace has to be how we can collectively take cost out of our businesses."

One key reason distributors have done so well in the EMS industry is that the majority of parts, unless they are custom or semicustom, are purchased by hundreds of customers, Fischer said. "Although some contract manufacturers as large as Avnet have the same amount of material content in their revenue as we have, they deal with about two dozen customers that make up about 90 percent of their business," Fischer said.

"The commonality of parts among a smaller group of customers doesn't allow them to have more liquid inventories," Fischer added. "They have the volume but not the customer base. If the demand of one major customer disappears, that inventory now becomes a liability, unlike in the distribution channel."

As demand weakens in the electronics industry, EMS and OEM companies are trying to work off huge inventories that in some cases were caused by double-booking components in an effort to procure parts that had long lead times last year.

Clearly, supply-chain management services are critical. CEMs traditionally have looked for inventory programs that included replenishment, in-plant stores and consignment inventory, Pitera said. But the biggest shift, which has occurred over the past few years and is changing some of their requirements, is their involvement in the design process.

Distributors generally agree that until last year, most of the design activity with which EMS companies were involved was aimed at design-for-manufacturability aspects.

Over the past 12 to 18 months, however, some of the larger EMS companies have become involved in circuit selection and design recommendations, which may prompt some changes in the technical and engineering support services that distributors provide to businesses in that channel.

"Several years ago, design-for-manufacturability was the CEMs' key involvement in design," Pitera said. "While it still is a key focus area, they are now asking themselves, 'How do we improve the design in conjunction with the OEM to make it more easily and more efficiently manufactured?'

"There's a shift in the market where they are working in conjunction with the OEM to do the design," Pitera said. "Several large contract manufacturers have large design organizations today, where they are working hand-in-hand with the OEMs to do the actual design, [and that] is moving them further up the value chain.

"At that point, they start to look like an OEM because they are doing it all-design, procurement and manufacturing. The only difference is that it's being done as a third party for another company."

Brian Brown, vice president of product marketing and business development for Sager Electronics (Hingham, Mass.) agrees that the partnership between OEMs and CEMs is changing, which is affecting the relationship between the two.

"In the past we worked exclusively with OEMs in an OEM environment to look at their applications and their specific technologies to determine how we could best support them," Brown said.

"If a design is already laid out and suppliers are already designated for each of those sockets, they can't always be filled because of allocations, delivery issues and even sometimes quality issues. What's happening now is that the CEM's engineering organizations instead of the OEM are allowed to make those changes, which wasn't done in the past," Brown said.

"If you designed a certain product into a particular OEM application, the CEM was pretty much stuck with that and only in cases where they really had some serious delivery issues were they given the opportunity to make those adjustments or changes. And by doing that they'd have to go back to the OEM," Brown said.

"Today, many CEMs have real strong engineering support services and they're able to look at different solutions for their OEM customers and make those kinds of changes on a daily basis," he said.

There are a variety of tools available from distributors to help CEMs: account managers, online service tools that help them select components and technical hotlines.

Sager has just begun to roll out what it calls its Synergistics Sales Tool to help OEM and CEM engineers with their designs. The tool will be available to external customers in the latter part of 2001. "We're leading them to the right products they need to satisfy their specific design step by step," Brown said. "For example, if they are manufacturing a hub, we will show them exactly what's needed to build the unit from logic to memory, including all of the active, electromechanical and passive componentry. It will show them not only the products they need to fulfill the application but pricing as well. It's a complete solution that thinks like an engineer," Brown said.

"We're still at the infant stages of real true designs being done at EMS companies," Fischer said of electronics manufacturing services suppliers. "It's not that it's not happening, but as a percentage of their overall business it's still less than one percent of their total revenue, but where that activity takes place we're there to support it," he said.

Quite frankly, said some distributors, they are providing a lot more engineering services at second-tier CEMs, which allow them to reduce their inventories, maximize volume buys and reduce costs. "What we offer them are services that they don't have to go out and spend money on," Brown said.

Distribution benefits also. "By engaging with them [second-tier CEMs] it's an opportunity and an advantage for us to get our products designed in or redesigned into their applications," Brown said.

Realizing that EMS companies have special needs, top distributors such as Arrow, Avnet and Pioneer-Standard have organized business units or segments that cater to their needs.

The process to meet the EMS channel's special requirements is ongoing and continues to drive internal technology and system processes. For example, Pioneer-Standard continues to update its automated quoting to support EMS companies.

"CEMs have to bid every job so the ability to quickly turn around quotes and to give them accurate real-time info about pricing and availability is critical for them to win future jobs and obviously to keep their pipeline of business going," Pitera said.

Tracking and reporting a design back to the respective vendor or supplier is a big challenge for distributors. To handle the challenge, Sager, for example, recently implemented a new database system that allows the distributor to electronically track the design-ins internally throughout the entire corporation, from start to finish. "We're now able to track the design-in from where the opportunity began all the way through to the contract manufacturer's database," Brown said.

COMPANY CONTACTS

Arrow Electronics Inc.
(516) 391-1300
www.arrow.com
EETInfo No. 601

Avnet Inc.
(602) 282-5422
www.avnet.com
EETInfo No. 602

Insight Electronics
(562) 597-8086
www.insight-electronics.com
EETInfo No. 603

Pioneer-Standard
Electronics Inc.
Industrial Electronics
Division
(512) 615-1607
www.pios.com
EETInfo No. 604

Sager Electronics
(781) 740-2300
www.sager.com
EETInfo No. 605