The electronics distribution industry is undergoing an identity crisis of sorts. "Catalog" no longer accurately describes small-volume online distributors; "non-authorized" and "blended" have replaced "independent"; and "authorized" has supplanted "franchised" in the channel’s lexicon. But do customers see these designations as important?
They should, supply chain experts say. Authorization represents a level of quality, service and protection to customers that is unavailable in non-authorized channels. "An authorized distributor provides a selling channel which represents the same level of quality, reliability, performance and integrity as if the OEM were buying direct from the supplier," says Joel Smejkal, senior vice president for distribution at Vishay Intertechnology. "Authorizing a distributor to represent the manufacturer requires a series of audits and evaluations to be sure that the distributor’s business practices are consistent with the suppliers. Once a distributor is authorized, the OEM can be assured that the distributor provides a selling channel equal to or better than buying direct from the factory."
In turn, authorized distributors are invested in their suppliers’ brands. "[Authorized distributors] have ‘skin in the game,’" explains Kevin Sink, vice president, total quality for TTI. "Authorized distributors can stand behind the products they sell with the support of the manufacturer. If a problem with the part is found, the AD can easily solicit the support of the manufacturer’s management and engineers to resolve the problem. A good authorized distributor makes a supplier look better in the marketplace than they would on their own with inventory and problem support that buffers customers from what they might experience directly. This responsibility, codified in the distribution agreement, is what separates the authorized from the independent distributor and in return what garners the support from the manufacturer."
This seemingly-straightforward arrangement, however, starts to break down in the open market where OEMs and EMS providers often sell their excess component inventory to non-authorized distributors. These distributors, in turn, resell components to their customers. Verifying the authenticity of these parts becomes problematic – most independents don’t have agreements with suppliers - and many suppliers won’t support products that are acquired from non-authorized distributors. "The reason is that proof of authorization is often difficult to verify [in the non-authorized channel]," explains Robin Gray, chief operating officer and general counsel for the Electronic Components Industry Association. "Paper documentation is insufficient, since it is so easily counterfeited. Consequently, customers are seeking proof of authorization and only buying from authorized sources."
Many incidents of counterfeit components have been traced to the open market. Parts may be outright fakes or re-marked as pricier items. This is a particular problem in mission-critical applications in which lives could be at stake. "As a result of recent actions by Congress and the Department of Defense, customers are increasingly aware of the counterfeit electronic components problem," says Gray. "Customers are recognizing that the best way to minimize the risk of buying a counterfeit component is to buy from an authorized source. Buying anywhere else significantly increases the risk of getting a counterfeit part."
The open market remains tempting, however, because prices there are usually discounted. "The independent market is driven by contract manufacturers and OEMs who lose business and have orphaned inventory to liquidate," explains Sink. "A bigger problem for all of us is that this creates a ready source of cheap components that can be remarked as other devices or upgrades, producing counterfeits."
Ultimately, suppliers say, non-authorized channels can harm their brand. "Ensuring supply of authentic products is a top priority for all manufacturers," says Vishay’s Smejkal. "Equally important is brand building and brand preservation of a manufacturer. Counterfeit products tend to thrive in open markets and discounted selling channels. The authorized distributor provides assurance to the OEM that the products they purchase are representative of the product their engineers qualified in their designs."
Solving the Problem
The authorized channel has been working with customers to minimize the level of excess available to open market. Transferring the ownership of parts may be one solution, Sink suggests. "When an OEM terminates production with one contract manufacturer to move to another, it could make provisions to move the inventory to the new CM," he says. "Taking no responsibility for the components pipelined for your production may save some money in the short run, but it does not create good will, nor keep orphaned inventory out of the grey market," he said.
Scrapping unused parts is also a key to shutting off supply: Sink points out many parts that end up as counterfeits are stripped from old printed circuit boards. "Scrap inventories should be disposed of through a recycler that will grind up the boards and melt the material back down to raw materials," he said. "Too often in photos and videos of counterfeit operations we see stacks and stacks of the same board being depopulated. These are not post-consumer recycling, but rather someone’s excess or scrapped production."
Many authorized distributors provide verified scrapping services so they can manage the entire lifecycle of components. "There are a number of advantages to buying from an authorized source," says Gray. "First, the customer can be assured that the component is genuine and not counterfeit. Second, the manufacturer provides full warranty support and failure analysis. Third, the component is new and not used."
It can be painful to write off inventory, Sink adds, but selling it on the open market "feeds the counterfeit beast. At that point the pennies on the dollar you get from recycling are much more valuable than the nickels you get from sales on the open market," he concludes.