The Value of Distribution: A Framework for Market Access and - PowerPoint PPT Presentation

The Value of Distribution: A Framework for Market Access and Development Dr. Barry Lawrence Dr. Bharani Nagarathnam Leonard & Valerie Bruce Chair Instructional Assistant Professor Professor Associate Director, Master of Program Coordinator Industrial Distribution Program Director of Thomas & Joan Read Center for Distribution Research & Education

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

Quantifyin g the Value of Authorized Distribution An Outlook o f Electronics Industry Authorized Distribution Channel

NEDA Value Study Phase I: Identification of Perceived Value of Distribution Structured 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 Values To identify and measure the value created by electronic distributors for their customers and suppliers Study Period: Started : June 2000 Completion : May 2003

Phase I: Findings Manufacturer Perception of Distributor Value 1. Sales Effort 2. Inventory Management 3. Extending Credit to Customers 4. Technical Support Customer Perception of Distributor Value 1. Inventory Management & Local Presence 2. On-time Delivery 3. Multiple Product Lines 4. Long-term Relationships

Phase I: Findings (cont.) Distributor Perception of VALUE ADD to Manufacturers 1. Sales Effort 2. Inventory Management 3. Product Knowledge & Enhancement Distributor Perception of VALUE ADD to Customers 1. Local Inventory & Inventory Management 2. Customized Solutions 3. Long-term Relationships 4. 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 Manufacturer Value Calculator 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 Value Added Services Expediting cost 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

Participant Matrix Customers (Total of 24) Contract Manufacturers <$1 billion >$1 billion 4 4 OEM <500 Million > 500 Million Industrial 2 2 Medical 2 2 Military 2 2 Telecom 2 2 Manufacturers/Suppliers (Total of 14) Technology Broadline Niche Semiconductor 3 3 Interconnect 1 2 Passive 2 1 Electro-Mechanical 2 0

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 Savings Inventory Convenience Total Customer Type and Volume Savings Savings 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

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 Extending Supplier Type and Sales Effort Inventory Credit Savings Total Volume Savings Savings 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 following elements:  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 suppliers 15 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