The sales channel transformation which started in the Electronic Component industry back in the late 1990’s, and into the 2000’s may be coming to the Automation and Control industry next. If so, the Automation and Control companies will be able to adapt much more quickly by understanding how and why the Electronics Component companies transformed their sales channels.
First, I will provide some definitions of what this is all about.
Electronic Component suppliers are companies that design and manufacture technology components that sit on PCB boards such as integrated circuits (IC’s), semiconductors and passive components (connectors, resistors, and diodes). Think Analog Devices, AMD, Nvidia, Texas Instruments, On Semiconductor, Vishay, etc.
Automation and Control suppliers are innovative companies that provide the technology components that are “off the board” such as HMI’s (Human Machine Interface), PLC’s (Programmable Logic Controllers), Drives, Sensors, and Control Relays. Think Siemens, ABB, Phoenix Contact, Rockwell Automation, Schneider, etc.
While there are differences in these 2 industries based on the actual products, together they are a massive industry approaching $1 Trillion (yes a “T”) that is at the forefront of the digitization of everything in our world today and their primary focus is developing innovative products.
The purpose of this article is to explain an opportunity for these industries to learn from each other. Specifically, focusing on how the sales channel of the Electronic Component industry started to transform in the late 1990’s and continues today and how the Automation and Control industry may accelerate the evolution of it’s journey.
Both industries have very similar sales channel foundations. To reach and serve the broader market, the manufacturers of the components sell through distributors that stock products for immediate delivery. To scale their salesforce, they hire regional rep organizations that act as their local salesforce. A typical rep organization will have 10-20 suppliers in their portfolio so when they are meeting with customers, they can offer multiple products. In North America the reps are assigned a regional territory which is typically defined by states, cities, and even more specifically zip codes. These regional territories are controlled by supplier APR (authorized pricing for their region only). Historically the APR was applied to both regional reps and regional distributors.
The impetus for a sales channel transformation was the transition of the catalog model to eCommerce. The change the Electronic Component manufacturers made back in the 2000’s was to eliminate the distributor APRs and provide pricing that enabled the eCommerce distributors to sell nationally and even globally. This was driven by the eCommerce pioneer Digi-Key Electronics and then followed by Mouser Electronics, as well as the large traditional distributors with Arrow Electronics launching Arrow.com in 2014 and Avnet acquiring Premier Farnell in 2016. The success the eCommerce companies quickly achieved increasing the reach and demand for their supplier’s products was incredible. This was driven by the easier access to engineering content and product availability 24 hours a day and 7 days per week which ignited an entirely new customer journey for engineers and buyers to search, research, and purchase components. The other important factor was that since these companies started as catalog distributors, they had the customer service and global logistics capabilities already in place to support eCommerce. It did not make since to prohibit them from selling nationally, and eventually globally. Their worldwide websites sell to 200+ countries and reach millions of engineers annually. Limiting them to regional territories would not make good business sense.
The opportunity for change is currently occurring in the Automation and Control industry as catalog distributors such as Galco and RS have transformed their catalog models into eCommerce, as well as Digi-Key expanding it’s product offering into Automation and Control. They have made significant investments to digitize the customer journey. These investments include Search Engine, digital content management, API capabilities, and ERP systems to allow the business to scale. But the question is whether the suppliers are ready for this. The good news is there is an opportunity for the Automation and Control suppliers to learn from the Electronic Component suppliers. Here are some lessons for them to consider:
- Increase customer reach by decoupling the need to align the regional reps and distributor territories. Work with the distributors for regional point of sale data so the reps can track their regional sales and commissions but don’t limit the distributor from selling products everywhere their websites reach. There is even a company (BuddeMarketing.com) that aggregates distributor point of sale data for the Electronic Component manufacturers and parses it out by region to help the Electronic Component suppliers align their POS reporting with their reps.
- Reduce operating expenses by prioritizing channel efficiency. Having just a few global ecommerce stocking distributors is much more efficient than having many regional distributors with pockets of inventory in multiple regions. The eCommerce distributors have incredibly powerful global logistics capabilities that can be leveraged so the suppliers can stay focused on developing their innovative products instead of managing a complicated sales channel structure.
- Focus on the United States first. This will take time and much change. Global pricing will come next and will have its own issues. In fact, the Electronic Component industry has made great strides globally but is far from perfect yet across all suppliers and continents. This is primarily due to large suppliers with separate global P&Ls and different pricing strategies across North America, EMEA, and APAC. This is currently getting much more streamlined. Today the larger eCommerce distributors have multiple global websites.
- Anticipate the bumps in the road on this transformation journey. An example is some suppliers in the Electronic Component industry have so much faith in their ecommerce distributor’s ability to attract engineers to their websites to sell their products that they have decided to reduce or eliminate the commission on these sales to the reps. While this may make sense it does cause the ecommerce distributors to become more protective of their point-of-sale data since they are concerned it may be in the rep’s best interest to potentially steer production business to the traditional distributors in which they get full commission.
- What about the customer specific pricing that large customers have negotiated with either the supplier or distributor? The eCommerce distributors have solved this challenge and enable these customers to log in and see their negotiated prices.
- Embrace the shifting age demographics. Electronic Component industry surveys year after year have highlighted that engineers prefer researching, searching, and purchasing their components online. The in-person field application engineer visit to present the supplier’s products is becoming less and less important, especially as the age demographics are shifting to younger engineers and buyers who have grown up on mobile devices.
- Data is King! We need the suppliers to continue to drive innovation. Understanding the technology that engineers are searching, researching, and selecting is crucial for future product development. Optimizing how this data is collected and made available is currently work in progress and any blockers (such as #4 above) for sharing data should be eliminated.
There are many lessons learned (and currently being learned) by the Electronic Component industry that the Automation and Control industry can benefit from. I am probably only scratching the surface and would love to hear from others on this topic. Please reach out to me if you’d like to discuss. Thanks for reading!