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As a buyer of electronic components, I've taken for granted just how many terms are used on a daily basis during the procurement process. This only really became apparent when I was asked recently to give a new member of staff from accounts an overview of our purchasing department and what a typical day might look like—whatever one of those is!
After stopping and explaining a number of terms in more detail, I realized just how confusing some of this language can be to staff outside of the purchasing team. So, I thought I'd write a quick guide explaining what some of the more common terms I use when buying electronic components actually mean.
Allocation refers to products that are in short supply as a result of excessive demand within the marketplace. When manufacturers put product onto allocation, any available stock they have is shipped to a certain number of distributors (often in much smaller quantities to what they ordered) and the distributor then has to try and fulfill as much end user demand as possible. Unfortunately, not all orders will be fulfilled and, as a result, it is very hard to determine accurate lead-times when products are on allocation, often forcing buyers to considering using the grey market (see below).
2. Extended Lead Time
When production capacity is short, or raw materials become scarce, it is harder for manufacturers to produce enough components for the marketplace. This situation is not as severe as allocation, but if it continues for long periods of time it can drive, and ultimately lead to, an allocation situation. It’s not uncommon for certain lead times—which may be 12 weeks as standard—extending up to 26 weeks and beyond.
3. Authorized Distributor
This term relates to distributors in the marketplace that are authorized to sell specific manufacturers product. These distributors will have a close relationship with the manufacturer and buy their product directly from them. Authorized distributors can use these direct relationships to offer end users design and technical support while also ensuring traceability and warranties are passed down through the supply chain.
4. Design Registration
Product that is design registered with an authorized distributor is usually the result of an end user and distributor working together with the manufacturer to design a component into the end product. When a design is supported, the manufacturer will give the distributor a preferential buy price so that they can pass this saving onto their customers for that particular application. As a result, cost savings can be realized, which is why it is important to share when possible the application and end customer information with the distributor on projects that have made use of design engineers’ help.
5. Supported Pricing
When authorized distributors buy large volumes of product direct from a manufacturer, discounted pricing can sometimes exist. The authorized distributor may then choose to pass these savings down to the end user. If the distributor works hard with a manufacturer to maintain a better buy price than their competition, this can lead to an increase in orders for them.
6. Letter of Intent (LOI)
An LOI is an agreed price that has been negotiated by an EMS provider or end user with the supplier based on an estimated annual usage—typically a period of 12 months. Of course, any pricing they have negotiated is subject to change; for instance, exchange rate fluctuations as a result of Brexit, raw material increases, natural disasters leading to an allocation scenario, etc. As a buyer of electronic components, LOIs can be an effective way to secure pricing for common items over a long period and provide a level of stability to the end user.
7. Buffer Stock
Some LOIs might also have protected buffer stock. These protected quantities help mitigate lengthy lead-times and can help towards ensuring continuity of supply. Buffer stocks are typically held at the distributor and can then be called off when needed. When the buffer quantity has been ordered by the EMS provider or end user, the distributor is responsible for replenishing the stock.
8. Grey Market Stock
This is also known as broker stock or non-franchised and relates to components that are bought via an approved vendor, but not one that is franchised for the stock they are selling. Grey market stock can become available as a result of OEM, factory or re-seller excess. The key thing to remember when it comes to grey market stock are the risks associated with buying which can increase as the direct link between manufacturer and franchised distributor is removed. Buyers are often forced to the grey market when market conditions work against them, for example when a part is made obsolete or the product goes on allocation. When buying via the grey market, it’s important to have the necessary inspection equipment, processes and controls in place internally to check authenticity to mitigate the risk of counterfeit or suspect devices entering the supply chain.
I hope that these explanations have helped in some way. This list is certainly not exhaustive, and it would be good to understand what other terms buyers of electronic components are using and what they mean to you and your own organization.
This article originally appeared on the JJS Manufacturing blog, which can be found here.