Searching for stability

Components is an inherently risky product area for distributors and resellers to operate in. High-value small products, frequently bought in bulk and subject to sudden price fluctuation is a recipe for financial disaster unless the proper checks and processes are put in place.

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By  Stuart Wilson Published  August 25, 2004

Components is an inherently risky product area for distributors and resellers to operate in. High-value small products, frequently bought in bulk and subject to sudden price fluctuation is a recipe for financial disaster unless the proper checks and processes are put in place.

While these are the negative aspects to the components channel, they are also the factors that enable quick thinking savvy components whizzkids the opportunity to spot a pricing pattern or demand peak in the market and reap the financial rewards of exploiting it accordingly. For some, the buzz and the risk are part of the charm that attracts them to components dealing.

While some sales guys will enjoy the buzz that the sheer unpredictability of the sector brings, the potential for racking up huge losses also leaves the team down in the finance department — the bean counters — tearing their hair out. After all, with low margins on components, distributors need to do huge volumes to turn a decent profit and a couple of deals turned bad can quickly move the bank balance from the black into the red.

It is no surprise — especially in the Middle East — that many distributors and resellers with a history of selling components are starting to branch out and balance their business by taking on more stable products with predictable demand and less price fluctuation. It is all about balancing the business and having the flexibility to accommodate a components arm without the risk of it destroying the entire business should something go horrendously wrong.

And things can go horrendously wrong. Stories about drivers sent out to deliver a vanload of CPUs and apparently disappearing into the desert (taking the van and the chips with them) have become almost legendary in the Middle East market.

There is also the constant worry about the large credit lines that have to be extended to the resellers and sub-distis buying components because, unlike with finished goods, these customers do like to buy in bulk. If customers hit financial problems it can leave a massive dent in the finances of the company that sold the components to them.

Components is also a very spiky business in terms of sales. The competitive pricing environment, the practice of bulk buying and customers' propensity to delay purchasing and hold out for a better price conspires to create a situation where predictable cashflow is something many can only dream about.

Against this backdrop of risk, it is natural that some distributors and resellers are looking to stabilise their business. Typically, this involves adding to the product portfolio and taking on some finished goods. Rather than selling to sub-distributors, assemblers or dealers, these companies can look further down the channel and get closer to the end-user.

For many, this means selling to retailers in small quantities on a regular basis. By getting closer to the end-user, some of the risk is taken out of the transaction. The retailer buys in small regular quantities so will not be left holding huge quantities of depreciating stock. The distributor in turn benefits by not having to extend huge credit lines because of the nature of the transactions.

The more steps there are in the channel the riskier it becomes for all those involved. If the product moves from vendor to distributor to reseller to end-user that is fairly healthy: a nice clean two-tier channel with fairly rapid movement of the product from source to destination.

Problems occur when this clean model gets compromised and complicated. In the Middle East, this channel complication typically happens below the authorised distributor at a second tier reseller level. This is where you will find the sub-distributors, brokers and traders doing their deals. Even though vendors and authorised distributors are loath to admit it, some of these companies are actually doing a great job helping product flow to places and countries that the official channels just cannot reach.

But they also trade between themselves at a second tier level and frequently get caught up in cashflow issues. If anyone does get into serious difficulties, the reverberations are felt right up the channel. There’s been a couple of cases in Dubai recently with companies hitting financial problems. Some distributors have held their hands up and admitted financial exposure while others claim to have not been hit at all.

I don’t buy that. While they may not have been directly liable, indirectly everyone is hit. Those distributors claiming not to have been hit directly probably sell to the reseller that had in turn been selling to the afflicted company. The financial repercussions work their way back up the channel.

All the channel can do is tread cautiously and balance their business activities to try and bring a semblance of stability to their operations. Stable businesses tend to stick around for a long time. Those living on the edge and taking risks may find it an exhilarating ride but it is all too frequently a short-lived one.

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