Integrated Circuit Distribution

Problem:
The leading manufacturer of high-performance linear integrated circuits historically had sold only through a direct sales organization, believing the use of electronics distribution would negatively impact its margins.  By contrast, the company's competitors relied on distribution for a majority of their sales, and were profitable.  The client wanted to re-evaluate its assumptions regarding the use of distribution channels to augment its sales force.

Process:
The process to determine the impact of using distribution required five steps:
 
The first two steps focused on modeling the cost of sales and order fulfillment, thereby identifying the true profitability in selling to customers at different revenue thresholds. We analyzed:

1. The client's customer orders in terms of revenues, number of sales orders and shipments; and
2. The cost structure of the client's order fulfillment and sales organization.

The next two steps involved an analysis to determine the total distribution market available for the client's products.  The Synxronos team:

1. Benchmarked various segments of the integrated circuit industry and other electronic components to understand distribution's share of these segments; and
2. Analyzed the client's competitors’ sales sold direct and through distribution, in order to quantify the total share of distribution for the client's segment of the market.

The final step was geared to understanding how the major distributors of linear integrated circuits would react to the client's use of distribution and involved:

1. Discussions with the major distributors of linear integrated circuits to determine their willingness to carry the client's products as well as the impact of doing so on their current principals - the client's competitors.

Result:
Our work revealed that the major electronic distributors wanted to have the client as a principal.  The distributors indicated that they would end their relationships with several of their current principals if they obtained the client's products.  The benefit to the distributors were that approximately 20% of the client's current revenue would be brought to distribution, while the benefit to the client was that it would be able to eliminate nearly 80% of its sales and order-fulfillment costs by passing lower-revenue customers through distribution. 

While the client would see an average 30% decline in margins on the 20% of revenue passed to distribution, the order costs more than offset this.  In addition, the client would be able to increase its revenue by displacing the existing competitors at the distributor.  The next effect was a 15% increase in revenues due to share gain, with over 50% of this increase dropping to the bottom line.