The Strategy That Distributors Built

Electronic News, Dec 18, 2000 by Jennifer Read

Finding the White Spaces Midtier broadlines carve their own niche

Editor's Note: This is Part Three in a series of stories that examine different distribution strategies including the regional distributor, national distributor and specialty distributor. Each article in the series will define the given business model and talk to executives and industry analysts about how it works and what it takes to succeed in that category.

When my college-age children call me for an advance on their living allowance, I ask them what did they spent too much money on to cause them to run short? I remind them of the obvious: They won't run out of money if their income is equal to or greater than expenditures. Similarly, business strategy can be summed up very simply: Customers must be willing to pay more for your products or services than they cost you to produce.

Yet often this simple fact gets lost in management jargon. Innovation, in and of itself, is not the issue. Business strategist Gary Hamel explains in his book, Leading the Revolution, that a company's definition of its market or product scope can be a source of innovation when it is different from that of its competitors. He noted, "To create wealth, a business model must be efficient in the sense that the value customers place on the benefits delivered exceeds the cost of producing those benefits."

For midtier distributors, consolidation activities at the top of the food chain have created some gaps in customer and supplier service coverage that represent tremendous opportunities for this type of innovation. According to the National Electronic Distributors Association (NEDA), there are 800 North American-based authorized distributors, down from 1,400 in 1994. Suppliers have responded to the dwindling number of distributor companies by adding midtier distributors to avoid having too much of their product line in too few channels.

Smaller OEM customers are searching for alternatives also. Analyst Clarke Walser, principal with Walser & Associates, Arlington Heights, Ill., said it comes down to mind-share. "I believe that Arrow (Electronics Inc.) and Avnet Inc., and to a lesser extent, Pioneer-Standard Electronics, are not paying as much attention to the traditional distributor business. They will argue with me about this, but I think they are mainly concentrating on the high-volume, logistics support services for the biggest OEMs. This gives the midtier distributors the opportunity to pay attention to the customer that buys a couple-hundred-thousand-dollars worth of parts. For a distributor with revenues around $500 million, that is a big customer."

Analyst Matt Sheerin of Thomas Weisel Partners LLC in San Francisco agreed that there is a void in the marketplace. "The midtiers are adding lines they never would have been able to add before (the consolidation). ON Semiconductor just signed with All American Semiconductor Inc. Some smaller suppliers are just not getting the attention they expect from the big distributors," he said.

But just because there is an opportunity, that doesn't mean companies automatically profit from it. How can these smaller organizations, without the resources and economies-of-scale of the big guys, provide that level of service and support to these unhappy customers and suppliers, and still make money? It is a cinch that distributors at every level are looking at their financial performance more critically. A 1998 report published by NEDA indicated distributors were concerned about "margin myopia" inhibiting profitability. Member distributors were urged to look at other financial measurements including total return on assets rather than simply focusing on profit margins alone. Distributors have taken this advice and are responding to industry demands with caution.

Sheerin described the reaction in his white paper, e-Distribution: The Creation and Fulfillment of Demand in Today's Electronics Marketplace. "The demand for services is part of the outsourcing wave taking place throughout the supply chain as OEMs hand over noncore tasks to third parties. A growing concern for distributors, however, is that customers often take these services for granted and expect them to be bundled into the cost of a component. Some distributors -- most notable Arrow -- have cited this trend as one reason for a decline in operating margins," the report said.

Bruce Goldberg, All American president and chief executive officer, believes his company has found the right formula. "Consolidation has enabled the mega-distributors to serve the bigger account base. The opportunity for All American is to service more of the top-tier accounts by focusing on product lines the mega-distributors don't carry or don't support. We complement what the large distributors do at the big accounts. We give the customer alternatives."

All American has taken steps to expand geographic coverage by opening new sales offices and expanding distribution centers. It has also increased its capabilities in demand-creation by adding field-application engineering (FAE) staff. Weisel's Sheerin said such activity is important for the segment.