The Changing Face of Independent Distributors

Independent distributors aren't just for shortages anymore.

By James Carbone

Ten years ago, most electronics buyers would buy parts from nonfranchised independent distributors only when components were in short supply. Today, buyers are more apt to use the independent channel to purchase parts on a regular basis providing the components are competitively priced.

What has changed? For one thing, there have been no long-term shortages since 2000. Periodically, parts go into short supply, but suppliers add capacity and the shortage ends. To compete, many major independent distributors have changed their business models and offer some of the same services that franchised distributors do, such as inventory programs and flexible payment terms. Some have value-added services such as kitting and tape and reeling.

Many independents have successfully developed long-term relationships with OEMs and electronics manufacturing services providers (EMS) and become qualified suppliers to those companies. Some independent distributors have found new customers because of the Restriction of Hazardous Substances law (RoHS). The law bans the use of lead and five other substances from being used in electronics equipment sold in Europe. It went into effect July 1.

Many buyers have looked to independents both for information about RoHS and to purchase compliant parts. In addition, some purchasers are still buying noncompliant parts and are using independents as a source.

“There's no doubt, the business has changed,” says Frank Cavallaro, CEO of Converge in Peabody, Mass. “There is less emphasis on the traditional shortage business and more interest in supply chain solutions development. Yes, there is a shortage business, but it is a niche. It's not the same business it was 10 years ago.”

John Irving, executive vice president of Fusion Inc. in Andover, Mass. says business has changed in a positive way for many independent distributors.

“We used to be referred to as brokers or gray marketers and today we are independent distributors who are a value-added piece of the supply chain and used by OEMs and EMS providers alike as part of purchasing strategy, not just for shortages and allocations and opportunistic buys,” he says.

RoHS is an example. Many buyers have come to independent distributors for advice about RoHS compliance and which parts are compliant and which aren't. It has resulted in tighter relationships between buyers and independent distributors.

“RoHS has not resulted in big shortages and higher prices for many parts,” says Cavallaro. “However, it has allowed us to get closer to buyers who want to understand how the law is going to affect them long-term.”

He says Converge does bill of materials (BOM) scrubbing for customers to make sure parts meet RoHS requirements. “We also give advice on what is going to be coming in terms of compliant products.”

Another opportunity for independents is the fact that more buyers will be looking for noncompliant products because their companies make equipment that is exempt from RoHS or because they don't sell in Europe, according to Cavallaro.

“We have seen a lot of interest from customers who have a six- or 10-year product lifecycle that started before RoHS.” Those customers need non-RoHS parts.

Debra Eggeman, general manager of the Independent Distributors of Electronics Association (IDEA), says that dealing with RoHS and its impact is a work in progress for many independents.

“A lot of independents are still trying to figure out how RoHS will affect the marketplace,” she says. “Some parts that have lead in them continue to be in demand. Independents are trying to decide if they should continue to purchase excess materials that are non-RoHS compliant,” says Eggeman.

She says demand could continue for a while because certain industries such as medical and defense are exempt from RoHS. In addition, there is still a lot of manufacturing in the U.S. for the U.S. market. RoHS applies only to products sold in Europe.

More VA offered

As independent distributors deepen their relationships with OEMs and EMS providers, many are offering more value-added services. Such services include flexibility in delivery and payment terms and traditional VA services such as taping and reeling, lead reforming, repackaging and functionality testing, according to Peter Krauss, president of Pacific Component Exchange in Huntington Beach, Calif. “We are trying to be a one-stop shop for a lot of our customers.

Krauss says value-added services act as a differentiator and help distributors win new business. A buyer may purchase components from one supplier and then have another supplier tape and reel the parts and perform other value-added services, he says. “That may add five days to the leadtime, not to mention extra cost. We do it in-house as a value-added service and can deliver the product in two days rather than five,” says Krauss.

He says about 15% of his business involves some type of value-added service. “It is a growing segment and we are looking to expand our VA services because the reality is the days of real critical shortages have not occurred,” he says. There are spot opportunities and times when a buyer goes to the open market because of long leadtime for a part, but no severe shortages, according to Krauss.

Buyer beware

Buyers who have not purchased parts on the spot market before should be aware of the substandard- or counterfeit-parts problem. The issue is not new and has dogged independent distributors and buyers for years. The bad news is the problem appears to be getting worse as the electronics supply chain spreads and grows in China, India and Eastern Europe.

Buyers who purchase parts on the open market can minimize risk by buying components from only reputable independent brokers rather than sketchy, gray market brokers who do not carry inventory.

Most of the larger, well known independent distributors such as Converge, Smith and Associates, America II, Fusion Trade and Rand Technology take possession and inspect parts and offer money back guarantees. Many of them have joined IDEA, an organization that recently came out with a standard of how parts should be inspected to guarantee the components are genuine and robust. (See story p. 44)

Independent distributors say that while counterfeit or substandard parts is not a new problem, it has gotten worse as more manufacturing moves into China and other low-cost manufacturing areas.

While there are many legitimate component manufacturers and distributors in China, there are also unsavory sources that produce or deal in counterfeit or defective parts. Some parts are just shells and are completely useless, while others may have been re-marked to appear as if they are from a particular manufacturer. Some parts have actually been pulled off boards and sold as new parts.

In many cases, the parts are genuine parts from legitimate component manufacturers, but they don't perform up to specification. These substandard parts are often the most difficult to detect.

“They come in factory boxes, with factory labels and look and act like factory parts,” says Krauss of PCX. “You perform a basic electrical test on them and they pass. But when you put them on the actual board, they fail because they aren't up to snuff.”

He says such parts were tested by the manufacturer and found not to meet the spec and were not shipped to OEMs or EMS customers or franchised distributors by the manufacturer. The parts should have been scrapped or smelted.

In many cases, component manufacturers will hire a firm to destroy the parts, but the parts end up on the gray market.

Independent distributors say they are blamed for the problem but they feel the blame is with the manufacturers who aren't destroying the substandard parts to begin with.

“Semiconductor companies have to police the scrapping and smelting of the product more effectively,” says Krauss. “They have turned a blind eye to it. Plausible deniability has been their rule of thumb.”