When Should Buyers Approach Semiconductor Manufacturers Directly?

We’re in the age of digital and there are very few technologies that go untouched by the semiconductor supply chain. As computers (and devices in general) become smarter, a concrete supply of semiconductors is required to accelerate digitalization in a number of industries. Considering 2023 is yet to close, the industry is set to grow despite a recent dip in supply.

Semiconductor industry sales growth with projection into 2024.

As more demand is placed on semiconductor manufacturers—predominantly based in Asia and the US, and crucial in the production of more than 1.15 trillion units in 2021—distributors have a critical, customer-facing presence in a much wider network of component production. While Octopart is committed to delivering a simple solution for individual designers and larger EMS companies or OEMs, when comes the need to build a purchasing relationship directly with a semiconductor manufacturer? 

Semiconductor Distributor Versus Manufacturer: Who Are You Dealing With?

Companies who are producing on behalf of a client or if they have smaller production runs are generally procuring components from global distributors. These distributors do a very good job of holding inventory around the world and can supply parts to many purchasers in reasonable timeframes. At some point, a company might grow to the point that they require significant volume of certain components, and there may be a need to bypass distributors and approach the manufacturer directly.

First, let’s look at the pros and cons of working direct with the manufacturer versus purchasing from distributors.

Pros of Procuring Directly from Manufacturer:

• Lower Costs: Buying directly from the manufacturer can often result in cost savings as it eliminates the markup that distributors charge for their services. 
• Allocation: Direct relationships with manufacturers provide an opportunity for periodic allocation of chips into your supply chain.
• Quality Assurance: You can have more direct oversight of product quality and specifications when dealing directly with the manufacturer.

Cons of Procuring Directly from Manufacturer:

• Minimum Order Quantities (MOQs): Unless a manufacturer is running their own eCommerce section on their website, they engage with customers who need large order quantities. As semiconductor makers operate in a high-volume industry, they are less likely to accommodate smaller orders. Meanwhile, distributors function as the ‘one-off’ for small orders.
• Complex Ordering Process: Dealing with manufacturers can involve more complex negotiations and processes compared to distributor transactions, which are generally made via an eCommerce portal.
• Non-cancelable non-refundable (NCNR): A side effect of the 2020 COVID period is that more manufacturers were experiencing double ordering from customers, followed by refund requests. Many manufacturers mark component orders as NCNR to cut down on this practice.

Pros of Procuring through a Distributor:

• Convenience: Distributors offer more than just semiconductors, but also a variety of component choices, often drawing supplies from a number of different vendors.
• Lower MOQs: Distributors allow smaller orders, even down to QTY 1. This is why they are normally the first stop for individual designers, small teams of engineers, and EMS companies.
• Faster Delivery: Distributors maintain stock levels and relationships with shipping carriers to ensure timely delivery of products.
• Expertise: Some distributors are also contracted as field application engineers (FAE) for some manufacturers and they will be the point-of-contact for technical questions.

Cons of Procuring through a Distributor:

• Higher Costs: The markup on product price from distributors can make components more expensive compared to buying directly from a manufacturer. 
• Lower volume availability: Some components (ASICs, processors, etc.) might only be available in the approximately 10k volume range from distributors.

Traditional Procurement Through Distributors

One-off orders: A company will buy from the authorized distributors at low to mid volume for prototypes or one-off moderate volume runs. Even big one-off runs of 10k units or more will still use the same distributor channels as a hobbyist. Approaching the manufacturer is possible for one-off orders, but the production volume would need to be in excess of typical inventories held by distributors (100k units or 1M units).

Repeated orders: With annual scheduled runs, you might still be using distributors, unless you're a large OEM like GM or Apple. This is probably under a preferred pricing/delivery model and extension of credit to the buyer. This is how some EMS companies and mid-cap OEMs will operate.

eCommerce orders: Sometimes a component manufacturer will engage with smaller buyers directly, but this is not done via a CM or EMS company that produces the end product. Component manufacturers that are willing to do this can fill larger one-off orders without requiring an MOU for periodic purchases.

High volume: Eventually, when volumes are high and sustained, a buyer can go to the semiconductor manufacturer when they want regular allocation. The buyer will be required to sign an MOU where the company agrees to accept periodic deliveries and provide payments under a regular schedule. Those parts might be consigned to a CM/EMS or the buyer’s captive factory operations.

Direct Procurement From Semiconductor Manufacturers: What Are the Reasons?

From the above discussion, we can see the main reasons a buyer might need to approach a manufacturer directly:

• Moderate-to-high volume of components are required for sustained production runs
• A buyer needs parts for a large one-off run and distributors cannot fill the parts order

Aside from the need to reduce unit costs, an organization may want to meet certain requirements in order to justify purchasing chips directly from the manufacturer. Capacity for inventory will determine how the supply of semiconductors is managed. Inability to keep inventory could present difficulties with much larger MOQs. Stock and inventory management systems must be equipped with real-time visibility to effectively manage longer lead times. 

Time is also a key factor. How big is your procurement team? Does the team have time to undergo extensive processes pre-agreement? Generally manufacturers can present very complex systems for new buyers and negotiation will be a key part of the process—necessary to obtain the best prices for components, but difficult for an ill-experienced or ill-equipped procurement team. 

Leveraging a Hybrid Procurement Strategy

Some of the key things to consider that will determine suitability for a manufacturer or distributor relationship:

• The experience of the procurement and its time and capacity for negotiations 
• Risk management - Form an approach that will result in the lowest costs, but also the least complicated processes, in the event of disruption or supply chain shortage
• The systems - What digital platforms or solutions are available to support your procurement strategy
• A blended approach or ‘hybrid relationship’ - This can provide the benefits of both procurement strategies

The latter creates an opening for exploration. Navigating shifts in semiconductor supply chains presents a requirement, and an opportunity, for procurement teams to better inform their purchasing decisions. Leveraging the pros of both supplier relationship types acts as a holistic means of future-proofing. If a manufacturer is unable to meet the requirements due to disruptions from their position in the chain, buyers can tap into the middle suppliers with inventories available for short-term, one-off purchases.