The Value of Distribution:A Framework for Market

Access and Development

Dr. Barry LawrenceLeonard & Valerie Bruce Chair Professor Program Coordinator Director of Thomas & Joan Read Center for Distribution Research & Education

Dr. Bharani NagarathnamInstructional Assistant Professor

Associate Director, Master of Industrial Distribution Program

Agenda

Welcome Remarks Mr. Bill Bradford Summary of the Value of Authorized

Distribution Study (2003) Texas A&M Team Changes in the Market Value Study: Market Access and Texas A&M Team

Development Focus Area (2020) 2020 Value Study Deliverables and Timeline Comments & Questions Closing Remarks Mr. Bill Bradford

Quantifying the Value of Authorized Distribution An Outlook of Electronics Industry Authorized Distribution Channel

NEDA Value Study

Phase I: Identification of Perceived Value of DistributionStructured survey conducted in the year 2000 to identify the perceptions of the value that distributors bring to the electronics industry supply chain.

Phase II: Quantification of Distribution ValuesTo identify and measure the value created byelectronic distributors for their customers and suppliers

Study Period: Started : June 2000Completion : May 2003

Phase I: Findings

Manufacturer Perception of Distributor Value1. Sales Effort2. Inventory Management3. Extending Credit to Customers4. Technical Support

Customer Perception of Distributor Value1. Inventory Management & Local Presence2. On-time Delivery3. Multiple Product Lines4. Long-term Relationships

Phase I: Findings (cont.)

Distributor Perception of VALUE ADD to Manufacturers

1. Sales Effort2. Inventory Management3. Product Knowledge & Enhancement

Distributor Perception of VALUE ADD to Customers

1. Local Inventory & Inventory Management2. Customized Solutions3. Long-term Relationships4. Product Enhancements

Phase II: Quantification of Distribution Values

Objectives

• Identification of Value Provided by Distributors • Empirical Quantification of the Value• Cost Savings / Cost Avoidance to Customers & Suppliers

Study to focus on • Customers• Manufacturers/Suppliers• Inputs/Suggestions from Distributors

Distribution Value Calculator

Developed by Texas A&M Research Team The value calculations are divided into Customer and

Manufacturer calculators.NEDA Value Calculator

Customer Value Calculator

Manufacturer Value Calculator

Customer Value Calculator

Inventory Management costs Convenience costs

Cost of capital Transportation

Warehousing Planning

Shrinkage Purchasing

Obsolescence Receiving and Inspecting

Inventory Insurance Accounting/ finance cost

Property Tax Negotiation/Switching cost

Warehousing Labor Product Availability

Expediting cost Value Added Services

Cost of line shut down Technical Support - Field Application Engineer

Kitting & Assembly services

Information Technology services

Design Services

Training & Educational Services

Manufacturer/Supplier Value Calculator

Sales Effort Extending Credit

Manufacturer Outside Sales Accounting/Finances

Manufacturer Inside Sales Bad Debt Expenses

Annual Inside Sales Savings Opportunity Cost/Cash Cycle

Picking and Packing Orders

Inventory Management Value Added Services

Cost of Capital Sales Force

Warehousing Cost Demand Identification

Obsolescence Manufacturer Customer Service

Insurance Technical Seminars

Property Tax

Labor

Customers (Total of 24)Contract Manufacturers <$1 billion >$1 billion

4 4

OEM <500 Million > 500 MillionIndustrial 2 2

Medical 2 2

Military 2 2

Telecom 2 2

Manufacturers/Suppliers (Total of 14)Technology Broadline NicheSemiconductor 3 3

Interconnect 1 2

Passive 2 1

Electro-Mechanical 2 0

Participant Matrix

Customer Value Quantification

Major Categories:

Inventory Management Convenience Cost Value Added Services

Savings are quantified as a reduction in inventory, cost savings due to increase in convenience when using a distributor

Data is collected on different variables such as purchase volumes, lot sizes, fill rates, lead times and expediting costs, transportation, negotiation & switching cost

Customer Type and VolumeInventory Savings

Convenience Savings

Total Savings

> 1 Billion, Contract Manufacturer Low 10.22 8.66 18.88

High 17.32 9.23 26.55

< 1 Billion Contract Manufacturer Low 9.15 6.78 15.93

High 11.93 13.72 25.65

> 500 Million OEM Customer Low 9.43 8.14 17.57

High 12.45 13.58 26.03

< 500 Million OEM Customer Low 10.61 7.49 18.10

High 15.03 12.56 27.59

Customer Savings

Scenario Analysis

Various scenarios of customers yield different total savings

Savings depend on the size of the customer, purchasing methods, lot sizes, lead times, holding costs, etc.,

Value added services savings are calculated as cost to outsource or cost to build in-house expertise

Distribution Savings to customers ranges from 15% - 50%

The report will contain a detailed analysis of several customer scenarios

Analysis

As the customers move from distribution to manufacturer direct:

Inventory increases Holding cost increases Turns decreases Expediting cost increases Probability of line shut down increases Convenience cost increases

All the above leads to distraction of the customer from “core competency” of manufacturing into other activities such as inventory management, planning etc.,

Supplier Value Quantification

Major Categories: Sales Effort Inventory Management Extending Credit Value Added Services

Savings are quantified as increase in sales effort, increase in inventory and its associated cost, increase in cost of managing credit with large number of customers as opposed to small number of distributors

Data is collected on different variables such as purchase volumes, lot sizes, fill rates, lead times and expediting costs

Supplier Savings

Supplier Type and Volume

Sales Effort Savings

Inventory Savings

Extending Credit Savings Total

Savings

Semiconductor Low 8.57 5.31 2.63 16.51

High 21.43 14.81 4.15 40.39

Interconnect Low 8.04 5.31 2.06 15.41

High 15.18 12.99 5.09 33.26

Passive Low 10.00 5.51 2.78 18.29

High 18.33 12.60 3.57 34.50

Electro-mechanical Low 7.39 5.43 2.51 15.33

High 18.75 13.71 4.67 37.13

Scenario Analysis

Various scenarios yield different total savings to the suppliers

Savings depend on the size of the supplier, distribution methods, holding costs, number of customers etc.

Value added services savings are calculated as cost to outsource or cost to build in-house expertise

Distribution Savings to Suppliers ranges from 20%-70% The report contains a detailed analysis of several

scenarios

Analysis

As the suppliers move from distribution to customer direct: Inventory increases Holding cost increases Turns decreases Sales effort increases Number of orders processed increases Departmental cost of sales, accounting and finance

increases Days outstanding increases Cash cycle increases

And Profits decrease!!!

Conclusions

The value of authorized distributors can be traced to the followingelements:

Inventory Management Sales Efforts Information Management Convenience Credit for Small Customers Value Added Services

The quantification found that the savings from using an authorized distributor (expressed as a percentage of total volume) equaled:

20 to 70% for suppliers15 to 50% for customers

Value to Customers and Suppliers

This tool was used by distributors, customers and suppliers to understand different operational cost structures

Determine the best case scenario of cost of holding inventory vs service levels to maximize customer service and profitability

Determine the value of the services that distributors provide

Understand when distribution makes sense as opposed to direct

Properly assign who should do what in the supply chain.

From 2003 to 2020

What has changed in the last 15+ Years?

Digitization of Sales / Operations / Service Some Value Added Services has become Standard New Value Added Services Increasing trend towards outsourcing

Innovation – Design – Engineering Customer Insights – Application – Analytics Sales – Marketing – eCommerce – Customer

Experience

What has changed in the last 15+ Years?

Expanded - Value Added Services Advancements in Training, Education & Support Expanded Distributor Capability & Functions Light manufacturing / Custom Design & Assembly New Markets / New Applications / Software

Development Customer Experience / Engagement / Training

The Role of Millennials / Gen Z in the workforce

2020 THE VALUE OF DISTRIBUTION:

A FRAMEWORK FOR MARKET ACCESS AND DEVELOPMENT

Objective of the Study

Document the value of services electronic distributorsand manufacturers representatives provide in the electronics distribution supply chain.

This study will identify cost structures related to current and new services.

Quantify new areas such digitization of sales processes, focus on customer experience, new value-added services, development of analytics, software platforms & services, and demand creation.

The study will also develop an analytical framework for electronics market access and development.

Focus AreasSales Effort Manufacturer Salesforce Sales Support Savings Picking and Packing Orders Customer Service Inventory Management Cost of Capital Labor Costs Warehousing Cost Obsolescence & Shrinkage Insurance & Taxes

Extending Credit Accounting/Finances Bad Debt Expenses Opportunity Cost/Cash Cycle

Focus Areas (Cont.)

The increasing trend towards outsourcing has led to distributors taking more supply chain functions for both manufacturers and customers.

Supply Chain Services Light manufacturing Custom design and assembly Design and technical services Continuity guidance End-of-life management

Value Added Services Demand Identification &

Creation Market analytics Customer engagement Brand building Technical Seminars

Study Design The study will evaluate small and large manufacturers and

manufacturer representatives to understand their perception of their role in the supply chain, perceived value and seek to quantify it.

The Texas A&M Research team will work with four distributors, 12 manufacturers and four manufacturer representatives to participate in the research study.

Both manufacturers and distributors will participate in the selection of companies.

Study Design

Each of the companies studied will include an analysis of the distributor or manufacturer representative's value proposition based on select manufacturers.

All interviews will be conducted via telephone and data exchange in emails.

The results will be presented to the ECIA board, industry conference and published as a white paper, report, and trade articles.

Deliverables Project Presentation to ECIA Leadership and Board

The Value of Distribution: A Framework for Market Access and Development - White Paper for Industry Executives

Final Report for ECIA and Study Participants

Presentation at Conferences [Two Event Travel Included]

Webinars – Results presentation [2 Online Events]

Two Articles for Publication in Trade Magazines

Project Timeline

The proposed timeline for this project is 7 Months. Project updates and / or preliminary results can be

presented 4-6 months into the project. The project will involve four stages:

– Design: Input gathering from distributors, manufacturers, and manufacturer representatives.

– Data Collection: Distributor, manufacturers, and manufacturer representatives online surveys and phone calls.

– Analysis: Analyzing the data collected, calculator development, interpreting the results, documenting savings.

– Results: Publication / Dissemination: Final Report and Presentations.

Value & Benefit of the Study The study can help manufacturers, manufacturer

representatives and distributors understand, quantify, collaborate and create efficiencies and value for customers.

The Framework will provide definition, description and quantification of market access through distributors and the value of services that distributors provide.

The methods & tools can be used by to understand different operational cost structures of going to market through distributors and manufacturer representatives.

Manufacturers can unlock significant value from distribution by building sales-channel strategy and execution.

Comments & QuestionsThank you!