Gaining perspective
Lessons can be learned from past recessions.
By Barbara Jorgensen, Contributing Writer -- EDN, November 6, 2009
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On a global scale, economists have been comparing the current downturn to the Great Depression. The electronics industry's last worst downturn was in 2000–2001. Industry experts say the current recession will certainly distinguish itself from the rest—and drive further change in the supply chain.
"If we compare this with 2001," says Michael Long, CEO of Arrow Electronics Inc., Melville, NY, "that downturn didn't affect banking to the level it has this time. There was still access to capital—it was easier to borrow so you could continue to run your business. This time banking led the downturn and money has dried up. This effect has moved into the supply chain—people are buying only what they need to manufacture. Back in the tech wreck, [demand] dropped off a cliff."
Executives point out that the supply chain itself contributed to the 2001 downturn by vastly overestimating demand. This time, however, the industry is part of the collateral damage caused by a meltdown in global finance as well as overinflated real estate values. All this has trickled down to consumers as well as businesses. "In this downturn, this industry has been somewhat of a spectator—watching the impact to our business due to economics beyond our control," says Jennifer Bleakney, vice president for Santa Clara, Calif.-based National Semiconductor Corp. Worldwide Distribution and Customer Support. "We aren't passive spectators in the sense we are sitting back and watching a game being played that we have no control over—the industry is managing through the downturn. Collateral damage is what's left behind and what we have to put back together, and that will require a significant amount of collaboration."
Every downturn has prompted changes in the supply chain—some of them painful, says Bleakney. The channel has gone through massive consolidation and nobody expects that trend will cease. "Consolidation in the supply chain has driven cost models to where everyone in the supply chain has to identify their core competencies and not be all things to all people," she says. National Semiconductor, for example, used to supply a broad base of semiconductor products but is now focusing on analog technology. Distribution has gone through a similar evolution. "Not that long ago, distribution had inventory near every customer locale—now there's aggregated inventory and global hubs. [The channel] has evolved with the service model the industry needs."
To manage through the downturn, companies in the supply chain have shuttered factories, cut staff and implemented other cost-saving measures such as hiring freezes and furloughs. But past recessions have also taught electronics companies to selectively invest in their core competencies—even in a downturn. For distribution, core competency includes the ability to move a massive amount of products to widely dispersed locations throughout the world. "We have continued to make investment in ERP systems to make us more efficient and in vertical and emerging markets such as solid-state lighting," says Long. "We have always invested in down markets—we are the companies that take products to market in a cost-effective manner. If you stop investing, that ability goes down also."
Another core competency in the channel is support of suppliers' sales efforts. Cost pressures are moving suppliers away from a broad-based product offering and into specific technologies and markets. "Suppliers are channeling more resources toward the technology they are trying to sell and becoming a lot more specialized," says Long. This is changing the way suppliers go to market. "With a narrower product portfolio there are a smaller number of customers that suppliers can cost-effectively call on themselves," says Roy Vallee, CEO of Avnet Inc., Phoenix. "Vendors are relying more on distributors to cover the majority of their other accounts." Increasingly, channel executives say, this means providing technical—as well as sales—support. Broadline suppliers used to offer a suite of products designed to work together. Designers could therefore go to one vendor for all their technical support. "Now if you have a question you have to call the FPGA vendor or the analog vendor—it's a lot more complex," says Vallee. "Customers can choose to deal with a bucket of vendors—or they can come to us." Distributors have invested in engineering personnel, programming centers and training to increase their technical acumen. "We are doing reference designs, applications-based support, designing ASICs—overall, we've become more technically competent," says Vallee.
Customers have also been feeling cost pressure to do more with less. As suppliers tighten their belts, fewer resources are available to customers that need technical assistance. "Customers are trying to design better, longer lifecycle products because the consumer is expecting more for their dollar," says Long. Designers are turning to the channel for design solutions as well as component selection and logistics. "Customers are coming to us and saying 'this is the problem—what will help me get across the goal line?'" says Vallee. "With a broad-based product offering, we can provide design support across the board."
"More and more we are being called upon to be a solutions provider," says Alisha Mowbray, senior vice president, marketing, for Chicago-based catalog distributor Newark. "Customers are looking for our ability to provide technical support and other information—not only are we getting 'you have to have the product in stock,' we are getting 'what can you do for me to help me do my job better?'" Increasingly, this includes guaranteeing the performance of the product. "Customers are becoming more aware of counterfeits and the fact that one counterfeit in a design can create all kinds of problems for a builder," says Arrow's Long.
Distributors increasingly see their role as making the complex seem simple. "Customers are managing more information than they ever have before," says Long. "There are design issues, environmental mandates, end-of-life issues, the risk associated with counterfeits—the list goes on and on." The channel has a long history of dealing with multiple vendors and hundreds or thousands of customers, he points out. "We're equipped to do this," says Long.
Information flow hasn't always been easy in the channel. Every company in the supply chain has proprietary information it wants to protect. Past recessions have taught distributors and suppliers they have to work together. In the 2001 downturn, a lack of communication between suppliers, distributors and customers led to excess inventory that glutted the supply chain. Customers wanted to push it back through the channel but nobody wanted excess inventory on their books. Working in tandem, some suppliers and distributors were able to successfully disperse inventory back through the customer base. Cooperation is now enabling suppliers and distributors to avoid another inventory glut. Customers are updating their forecasts more frequently. Suppliers and distributors are reality checking customer orders with one another and against actual consumption. "All of the issues we have dealt with in this cycle and in the 2001 cycle have taught us lessons that we will use from this day forward," says Bleakney. "Collaboration and transparency are the two things that will drive change in the supply chain."
Executives are confident the industry will come out of this recession and electronics will continue to drive better products and services. "I can't imagine anything that does not bode well for the future of electronics," says Craig Conrad, senior vice president for TTI Inc., Fort Worth, Texas. "Electronics content in everything is so pervasive. I don't see anything that will dim that."
Despite the current economic environment, he says, the value of distribution is on the increase for both suppliers and customers. "I feel the distribution value proposition has never been brighter," he says.
Industry trends will continue to play themselves out regardless of the economy, executives say. OEMs will continue to move offshore; suppliers will pare their distributor rosters; and forecasting will continue to be imperfect. New technologies will evolve and designers will push the price/performance envelope. But many of the trends that have influenced the evolution of the channel will remain.
"Consolidation will continue to be a factor," says Vallee. "When you go through periods of extreme stress like the one we are coming out of—that will accelerate consolidation." Globalization, and the channel's need to serve suppliers and customers globally as well as regionally, will also increase. "Distribution involvement in engineering is another rising trend," Vallee adds. "Consolidation, a global supply chain and technical competence are the things that are going to shape the future of electronics distribution."
