The 80/20 Rule Of Electronic Component Distribution. Distribution channels for most electronic components are broadly grouped into two channels: the ‘channel distributors’ (i.e. the authorized distributors for specific components, also referred to as the component manufacturers’ sales routes – their ‘authorized distribution channels’); and the ‘independent distributors’ or ‘open market distributors’. This latter group of distributors do not restrict themselves to the component manufacturers’ official sales routes. A very large percentage of active component ‘shortages’ can be resolved by purchasing from the independent distribution network — but 80%+ or more of such components are not purchased from the independent distribution network. In practice, the vast majority of organizations purchase their required electronic components 100% from the component manufacturers’ ‘official’ distribution channels.
The Reality of Component Scarcity
Even the best electronics manufacturers cannot guarantee the availability of required electronic components at the authorized distributors. Items like popular 32-bit Microcontrollers can disappear from the catalogs of the major distributors in a matter of weeks. Lead times that were previously measured in weeks or months are now measured in quarters and are driving production lines to a standstill. Procurement departments are struggling to find alternative sources.
As contrast, open-market distributors stock and track an extremely wide variety of components across a very large number of supply channels. They can easily and very rapidly identify alternative components for a part that has been discontinued or which is currently not available. To date, there are hundreds of component manufacturers from around the world that Fusion Worldwide has established a relationship with in order to stock and resell their parts.
How Independent Networks Operate
An open-market independent distributor holds in inventory for resale excess components, end-of-life components, and components from alternative manufacturing runs. To verify the authenticity of a component to guarantee its quality and to safeguard against the risk of possible counterfeiting the independent distributor carries out the most sophisticated verification process. This verification process includes a detailed and complex verification of the electrical characteristics of the component, a thorough physical verification of the component’s packaging and a detailed verification of all relevant documentation to confirm the component’s Manufacturer and the component’s documentation trail to verify handling history prior to return to point of origin as required.
In addition to checking components for possible signs of tampering, open-market distributors use a variety of verification tests including electrical tests of component performance against published manufacturer specifications. Package and component inspections are also performed to check for signs of obvious manufacturing defects or tampering. Some components such as ICs can also be verified using X-ray inspection of the internal component structure to check for signs of tampering or substandard manufacturing. Each of the tests used verification tests are recorded and stored to create a verification trail that provides proof of a component’s origin, its complete manufacturing history, and a detailed account of all handling of the component. In meeting or exceeding the highest quality verification processes in the industry, an open-market distributor protects his/her or the company’s reputation by ensuring that all components that are sold are of the highest possible quality for the customer.
There is much more than just buying and selling of excess electronic components on the open market. It takes skill, lots of time, a great deal of knowledge and the ability to negotiate. Top independent distributors of excess and obsolete electronics are better than most at forecasting where there will be a future shortage of electronic components. Many of the best supply chain forecasters in the industry are independent distributors of excess and obsolete electronics components. They often have more knowledge about future shortages than the OEMs that use the components. Their skills include: 1. Where to look for excess and obsolete electronic components. 2. How to establish a great relationship with a manufacturer to obtain run-out components or other specialty components.
Risk Mitigation Through Diversification
It is the smart procurement team who recognize that creating a resilient supply chain involves having many options open to them to procure the required components.
Open-market sourcing of components enable the end-user to have a back up of sources when the main supplier is not able to meet demand. Independent distributors of open market goods specialize in sourcing and procurement of ‘hard to find’ components for the OEM, contract manufacturer or electronics repair facility. Many independent distributors of open market components have a wide knowledge of the components which they sell and have a range of techniques and resources to confirm the authenticity of each component. These may include the use of specialized inspection equipment and software, an independent inspection prior to despatch, the verification of documentation, and in-depth component knowledge. Many independent distributors hold relevant ISO accreditation(s) and are able to provide a high level of assurance of the quality of the open market components that they supply.
Cost Dynamics and Market Efficiency
Stock is purchased in an open market and therefore purchased based on true supply and demand. Whilst stock may be available via the ‘official’ distribution channels of supply during the time of shortage, this will typically be at a premium to what you would pay for the same item in the open market. Often indeed the independent distributor will be the only other source of supply for hard to the customer and therefore the true market value will be charged for the item.
Excess inventory of current parts for which no longer are being produced as well as End-of-Life (EOL) components (e.g. recently discontinued ICs) are typically also held in inventory by open market distributors. Additionally, components are sometimes even being produced by alternative manufacturers. Components that are sourced from the open market of course require verification of the electrical, package and package related characteristics of the components as well as documentation aspects of the components to ensure that the components are authentic. This verification process typically involves several different layers of verification as shown below.
Quality Assurance in Alternative Channels
Components purchased in the open market need to be verified to ensure that they are genuine. There is a growing trend in the supply of counterfeit parts and these can cause serious problems for the end user of the part. The parts can cause failures of products and also cause serious problems for companies as the parts can affect the reputation of the company.
A physical inspection of a component can reveal obvious irregularities in packaging and marking. An electrical test on the component can verify that it is performing as specified by the manufacturer. In some cases an X-ray can be used to verify the internal construction of a component in order to confirm its authenticity.
The documentation verification process provides independent verification that a component, supplied by an independent distributor, is a genuine article. This process verifies the component’s documentation, obtained from the distributor, which contains detailed records of where the component was obtained from and the component’s origin, through to where it was stored and handled by subsequent individuals and organizations prior to being supplied to the end customer. In addition to provenance records the documentation may also contain, where applicable, certificates of authenticity. It is also common for independent distributors to provide end customers with complete component traceability back to the original manufacturer.
Strategic Integration Into Supply Planning
Most sophisticated procurement organizations however integrate the open market into their standard purchase process. As a result, independent distributors in many cases even form their own network, which is of interest to the procurement manager. He has to establish and maintain good relationships with several independent distributors in order to be able to procure the required components successfully on the open market.
Qualifying independent distributors for a specific component is part of the process for these procurement teams. The list of independent suppliers that have been qualified for a specific component has to be included in the procurement process for this component as soon as possible and as effectively as possible. The best way to do this is by setting up a framework agreement with the independent distributors that have been selected. This framework agreement has to specify the required quality, the agreed-upon price and the agreed-upon delivery terms.
The most mature organizations will incorporate the open-market into their standard procurement processes, building relationships with a number of independent distributors, gathering market intelligence and qualifying suppliers in advance of potential shortages. The procurement organization would then negotiate a framework agreement with the selected supplier (or suppliers) in advance of an actual shortage, which would detail the terms and conditions (i.e. quality, price and delivery terms) for the required components. A dual-sourcing strategy can also be put in place where a percentage of required components are procured on the open-market with the goal of cost minimization and risk management.
The independent distributors of open market sources have evolved to become strategic supply chain partners to the large manufacturers and contract manufacturers. As a service provider, they will go out and acquire the hard to find components and hold the inventory on their customer’s behalf until it is required for production. Navigating the various sources to find what you need can sometimes be akin to a bazaar, with much chaos and sometimes frustrating experiences, but the end result is well worth the means.
