The earthquake in Japan was a wake-up call.
Malcolm Penn, Founder & CEO, Future Horizons, has been expressing concern about the supply chain’s over-dependence on just in time delivery for some time. In a recent article in EBN he writes that, "Cracks first appeared last September when Nissan was forced to shut down car production due to a lack of engine management modules, itself the result of a shortage of ICs.” He continued, “The earthquake and tsunami merely forced the industry's hand. Yet the industry still seems to be in denial; the real implications have yet to sink in, with the issues being treated more as a disaster recovery plan rather than the need to fundamentally rethink the supply chain model.” He adds, “with rare exceptions, the corporate tail is now wagging the dog, with the balance sheet driving the business and not the reverse.”
Most larger distributors, customers and component suppliers are listed companies, and have their figures pored over by analysts. Analysts produce reports looking at return-on-capital employed, stock turn and other figures as evidence of financial health. Excessive stock sitting on the shelf for extended periods is a clear sign of a badly run operation. On the other hand, no stock equals no sale, and for customers no production.
There was a time when companies like mine were known as stocking distributors. This predates the fashion for single European warehouses, in-plant inventory and just-in-time delivery. There is a place for all of these things, but originally one of our functions as a distributor was to hold inventory so that the customer and the component supplier didn’t have to. I actually don’t think that’s changed.
Our stock turn at Anglia is less than half the industry average, which helps our suppliers, helps our customers and, funnily enough, doesn’t do our business any harm either. Some of our leading lines, tell me that we hold more stock per customer than any of their other European distributors – which means that if some demand turns up we’re more likely to be able to support it. For our customers, it means we’re there for that unexpected production order – and we’re a buffer when lead-times lengthen.
It’s hardly rocket science to conclude that Anglia’s above-average industry growth is not unconnected with our greater ability to supply what our customers want when they want it. I call it the ‘stock rich’ model. And before anyone jumps down my throat – that doesn’t mean we stock everything all of the time, but we do hold more inventory in proportion to our sales than almost any other distributor of our size and larger.
If analysts thought for five seconds about the figures of listed distributors in particular, they would realise that too little stock is as unhealthy as too much. Isn’t it time that someone stood up and told them?
Steve’s blog raised old memories and reminded me just how ‘circular’ our industry really is. Old-timers will remember that 40 years ago in the Macro Group our model relied on holding twice as much inventory as other distributors; 2X stock turn was normal at Macro and even holding a year’s worth of inventory was considered OK. The business was a huge success and if you add that the credit policy was also generous with 60 and 90 day terms it was a compelling proposition. However with a firm pricing policy that delivered 35% gross margin and with operating costs around 10% the model made financial sense.
Then came the era of the multi-nationals and I remember at Lex and Jermyn 20+ years ago we introduced the ‘Earns and Turns’ measure based on the assumption of 4x stock turns at 25% margin. 100 or more was good; anything less was a problem. (Incidentally, I was recently in discussion with AFDEC over an apparent inconsistency in their reported statistics – it turned out that multi-nationals with centralised warehouses cannot allocate inventory by region and that means their E&T numbers are skewed)
With an entirely different strategy, Sunrise (the dedicated NEC distributor) was formed on the premise of a ‘zero-stock’ model with the intention that all sales would be the result of ‘design-ins’ and we would ‘pipeline’ inventory to meet customer production plans. Over time this developed into holding dedicated buffer stocks for specific customers. Such stock was underwritten by the customer. Again the model proved a huge success.
In summary I think there is room for different business models to exist and it is even desirable for the health of distribution and the wider electronics market. Success is often about choosing a strategy that sets you apart from your competition and then making it work.
Posted by: Ian Davidson | August 19, 2011 at 10:20 AM