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VDC EXPECTS FEE-FOR-SERVICE MODELING WILL PROVE SUCCESSFUL - IN TIME
As it is becoming more difficult to bury costs of enhanced services into the price of the component, distributors are changing the historical patterns of pricing. They are offering more fee-based supply chain management services as they yield a high profit margin.
Natick, Massachusetts -- In the recently completed report titled, "Survey and Analysis of U.S. Switch Distributors," volume VIII of VDC's 2002 Global Switch Market Intelligence Service, Venture Development Corporation (VDC) finds that distributors make up a significant portion of the United States switch market, accounting for nearly $450 million of the estimated $1,084 million in total switch sales to the market in 2001. Distributor share of the market has remained steady (41.1% in 1998, compared to a projected 41.2% in 2001). Growth in distributor share, however, is anticipated, attributed to the distributor's expertise in inventory control as well as their increasing service portfolio.
Coinciding with the anticipated increase in shipments to distributors is the rise of value added services they offer. These services, from on-line inventory forecasting to design support, are becoming an essential part of distributors' business, to the point that some distributors are moving towards a fee-for-service model. More than half of some distributors' revenue is generated by value added services and this percentage should increase over the next five years.
Traditionally, distributors have included many of their services in the price of their components in an attempt to gain customers. This is beginning to change, however, as some distributors, led by giants Avnet and Arrow, move to a fee-for-service model. As distributors offer more supply chain management services, it is becoming more difficult to bury the costs of enhanced services into the price of the component, especially in tough economic times when margins are thinning.
VDC believes separating the cost of the distributor's services from the cost of the component makes sense for both the distributor and the OEM. According to VDC analyst John Gordon, "Distributors will no longer have to do more for less, and OEMs will not have to pay for services they do not use. Value-added services typically have a higher profit margin than the resale of components, and as these services become used more, distributors are looking for ways to get paid for providing them."
Unbundling the price of the service from that of the component will allow both distributors and OEMs to get a better understanding of the cost and benefit of each service. By fully understanding what they are paying to receive a service, OEMs will hold distributors accountable for the quality of these services. As a result, distributors will need to add, enhance and improve the levels of services provided.
VDC's Gordon cautions in the report that in a good, strong economy, with much growth (either real or anticipated), programs such as a fee-for-service model could prove very successful for distributors. However, in poorer economic times, slow adoption of new programs is often the norm.
Gordon adds, "If we were to venture an opinion as to the probability of success for fee-for-service programs at this time, we would say that these programs will prove successful, but to a lesser degree than would be possible under a stronger economy."
2001* US Switch Market Purchases by Distributors,
by Industry/Application
Percent of Total US Switch Consumption by US Distributors
Appliances/White Goods - 40.4%
Computers/Peripherals - 41.0%
Consumer Electronics - 43.4%
HVAC & Energy Management - 38.2%
Industrial Automation & Process Control - 42.1%
Instrumentation - 43.2%
Medical - 43.2%
Military/Aerospace - 37.0%
Telecommunications - 44.5%
Transportation - 39.4%
Other - 45.7%
Overall Market - 41.2%
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To view the entire press release including charts go to:
http://www.vdc-corp.com/components/press/02/pr02-14.html
Report Availability:
http://www.vdc-corp.com/components/annual/02/br02-18.html
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ABOUT THE STUDY
VDC's "2002 Global Switch Market Intelligence Service" is a nine-volume report covering all aspects of the switch market. These volumes are packed with exhibits, deep market segmentation, and extensive discussion on the most important issues affecting the industry. Other volumes in the Global Switch Market Intelligence Service explore additional elements of the global switch market in great detail.
The Global Switch Market Intelligence Service includes the following volumes:
- Volume I North American Market Data Report
- Volume II European Market Data Report
- Volume III Asia-Pacific Market Data Report
- Volume IV Global Market Overview
- Volume V Analysis of Buyers and Sellers
- Volume VI Analysis of U.S. Switch Consumption by State
- Volume VII E-Commerce: Opportunities, Pitfalls and Trends for Switch Manufacturers
- Volume VIII Survey and Analysis of U.S. Switch Distributors
- Volume IX Survey and Analysis of Switch Consumption by Contract Manufacturers
For further information regarding the "2002 Global Switch Market Intelligence Service" go to:
www.vdc-corp.com/components/annual/01/br01-27.html
ABOUT VENTURE DEVELOPMENT CORPORATION
VDC is a technology market research and strategy firm. We have over 30 years of experience in providing market research, strategic analysis and consulting services to technology companies worldwide.
VDC offers its clients a wide variety of research solutions tailored to meet their strategic business needs. These include highly customized consulting engagements, ongoing research services and select industry investigations. Through our considerable industry contacts, we also provide services related to acquisitions and the generation of key account leads.
John Gordon, Senior Analyst -
jgordon@vdc-corp.com
Marc Regberg, Senior Vice President -
msr@vdc-corp.com
Venture Development Corporation
One Apple Hill Drive, Box 8190, Natick, MA 01760
Tel: 508-653-9000 Fax: 508-653-9836 Web: http://www.vdc-corp.com
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