I've been thinking about component purchasing lately as I talk with folks who use Octopart in their purchasing workflow. These conversations have illuminated some of the less visible corners of the electronic component industry: pricing, purchasing workflows, and excess inventory.

Insight into these areas has come from contract manufacturers, electronic product designers, software makers, component distributors and component manufacturers. I’ve even gone to a conference focused on electronic component purchasing!

What follows is a very high level summary. There are at least a few books waiting to be written on this subject.

Contract Manufacturers

If you’ve designed an electronic product that’s gone to market, chances are you’ve worked with a contract manufacturer. Contract manufacturers have the expensive capital equipment involved with modern electronics assembly: pick and place machines for affixing the components to circuit boards, reflow ovens for soldering, injection molding equipment for manufacturing enclosures, skilled labor, and the experience needed to make the whole process move smoothly. A good contract manufacturer can take your design files and work closely with you so that the finished products are exactly what you expect.

Large electronics companies like Apple work with large contract manufacturers like Foxconn and Pegatron to build their products. But there are many midsize and small contract manufacturers who focus on certain technologies, industries, or constraints associated with specialized products. One thing they all have in common is purchasing.

So who purchases the electronic components that get stuffed onto the printed circuit boards?

The Purchasers

Well, it depends. It’s either the contract manufacturer or the company that designed the product, or a combination of both. Regardless, it’s usually an employee with a title like “purchasing manager” or “procurement specialist”. These folks are responsible for ensuring that at assembly time, 100% of the parts are there, ready to be soldered to the printed circuit boards. If 1 part out of 1000 is missing, it’s a show stopping problem. To say these people must be detail oriented is an understatement.

The BOM (Bill of Materials)

The BOM is the lingua franca that is passed from the engineers who designed the product to the purchaser responsible for sourcing the parts. At the most basic level a BOM is a list of parts, each identified by the manufacturer part number and manufacturer name, along with the quantity required. As the products being manufactured get more sophisticated, so do the BOMs. Additionally, BOMs may include acceptable alternate parts, pricing information, distributor specific part numbers, acceptable date codes, lifecycle data, and more. An entire class of software exists to manage BOMs: Product Lifecycle Management (PLM) Software.

If you’re a purchaser tasked to procure the parts on a BOM, you have a few options, and for different components types, you’ll probably take different approaches.

Buy Online

Buying components online is fast and easy. Most distributors post pricing at multiple price breaks from single pieces to 10,000 pieces or more. The parts are just a credit card number away. But in many cases, buyers can often get substantially better prices than what’s published on the web by submitting an RFQ if they're buying in production quantities.

Submit an RFQ (Request for Quotation)

Typically, RFQs emailed to salespeople at large distributors. The salesperson will quote each item based on many different variables, a few of which are below.

• If you’re buying parts for a product for which there is large future volume, you may get a better price since large distributors are eager to capture orders which offer recurring revenue and large volumes.
• Sometimes you can work out a deal with a semiconductor manufacturer or distributor during the design phase to get better pricing on a key chip. Be sure to include information about what product the parts are going into on the RFQ so you get the special pricing. These deals are called "design registrations".
• If you have a long term relationship with a component distributor you’re more likely to be able to get better payment terms, allowing you to defer payment until many months after delivery.

The downside to submitting an RFQ is that you’ll probably have to wait a few days and sometimes much longer to hear back from everyone you asked. The mechanics are antiquated, lots of emailing around of PDFs and Excel spreadsheets. And after the wait and the effort you may be surprised, pleasantly or unpleasantly.

Another knot to the RFQ system is that since transparency is very low, purchasers may buy more parts than they actually need to avoid the possibility of repeating the process and risking a price increase, or worse, a shortage.

Excess Inventory

A common situation is that a contract manufacturer will buy a reel of 2500 semiconductor chips at a low price, but end up only needing 2000 chips. What happens to the excess inventory of 500 chips? They usually end up on an “excess inventory list” which gets passed along to a broker.

Brokers

Brokers match up excess inventory with demand. The partial reel of 500 semiconductor chips I just mentioned may sit on the contract manufacturer “A”’s shelf for a few years. Contract manufacturer “B” may then get a build order which uses the same chip. When the purchaser at “B” tries to buy, she may discover that the chip has been discontinued and there’s no drop in replacement. This is a major problem! The PCBs have already been fabricated to accept the discontinued chip and a redesign would be prohibitively expensive. At this point the panicked buyer calls up the broker and the negotiation begins. Brokers tend to make most of their money on a small number of highly lucrative sales such as these. Since buyers in this position are willing to pay almost anything for chips, the margins can be huge. And huge margins lead to counterfeits.

Counterfeiting

Counterfeiting has become a serious problem in the electronics industry. Counterfeits range from non-functioning chips filled with lead instead of silicon, to authentic consumer grade chips which are re-labeled to indicate that they are industrial or military grade. An entire industry has emerged to root out counterfeit chips. Samples may be x-rayed or imaged under an electron microscope to verify their authenticity. Counterfeiters have caught on to these types of testing and sometimes include authentic parts in the beginning of a reel and substitute counterfeit parts in the middle of the reel.

If a counterfeit chip ends up in finished products, the results can range from inoperable devices to catastrophic failures.

The best way to avoid counterfeits is to only purchase parts from distributors who are authorized by a component manufacturer to sell their product. Authorized distributors source parts directly from the manufacturer, eliminating the possibility of counterfeits entering their stock. Returns must be kept separated from known good stock to avoid the possibility that returns have been switched for authentic parts. The ECIA (Electronic Component Industry Association) provides good guidelines here, but keep in mind that for a distributor to be considered an “authorized distributor” by the ECIA, they have to be authorized for all manufacturers on their published linecard, but just greater than 50% of their revenues must come from the sale of components from their authorized lines. This means that it’s possible for an “authorized distributor” to sell non-authorized product, as long as it’s not from a manufacturer on their authorized linecard. Be sure that the distributors you buy from are actually authorized by the manufacturer for the components you buy.

Of course there are times where there is no authorized channel to source the required parts. Another organization, the ERAI manages a database of "non-authorized" or "independent" distributors and collects reports of counterfeit part complaints.

Buying Directly

Although buying directly from component manufacturers has traditionally been reserved for ultra-high volume production, we’re seeing a trend of component manufacturers offering products directly to the end users via the web. For example Microchip, Analog Devices and Maxim Integrated all sell directly from their websites. Distributors will always provide the value of keeping a broad range of stock on hand which can’t be replaced by individual manufacturers selling directly. But it’s interesting to see manufacturers sell in quantities traditionally sold through distribution.

Last Words

For such a technologically advanced product category, electronic components are bought and sold using techniques which seem outdated, especially the RFQ system.

If you’re interested in hearing more thoughts on purchasing, please sign up for our newsletter. We’ve only scratched the surface so far.