Two years ago, the channel had an idea. With margins vanishing andt, effort and time wastage. But it failed to deliver on its promises in the US. The question is, will it fare any better in the UK? top-tier PC manufacturers struggling to compete with direct vendors, something had to be done to cut the cost of delivering the final product to the user. Solving the problem was, in theory, simple - re-engineer the supply chain. The answer was to let distributors assemble product. The name they gave it was channel assembly.
In essence, channel assembly was about making name-brand systems more affordable, more customised and more timely. The aim was, and still is, to shift the responsibility away from the PC manufacturers to the distributors. The thinking behind it - at least from the vendor's point of view is that at the moment, they are producing kit on a fairly standardised basis and pre-loading software onto it. But when a reseller makes a sale to a company, the customer more often than not wants the systems to be tailored to meet their specific needs. The reseller then has to tear the system apart and rebuild it so it can be customised. That essentially means there has been a wasted cost, wasted effort and wasted time all round.
So channel assembly appears to make great business sense. It is the one viable solution where the time between when something is able to be shipped and when it is finally received by the customer can be reduced.
It cuts out that cost, effort and time wastage. And in so doing, it enables the channel to compete more readily with direct giants such as Dell and Gateway.
The process has been put into practice in the US for more than a year.
Unfortunately, the reality has slapped many of the initial channel assembly champions squarely on the face. One of the first distributors to get into channel assembly, Tech Data, explains why. 'We've been carrying out channel assembly extensively and I can truthfully say the outcome has ranged from neutral to negative,' says Steve Raymund, chairman and chief executive.
To execute the channel assembly model, Tech Data US has set up what it refers to as factory direct. Through this initiative, the distributor uses a factory operation within the manufacturer's own site where it adds components and software to the box and ships it to the user. The factory is in Compaq's Houston base.
But, says Raymund: 'The main problem we've had is that the manufacturers don't want us to source any of the components ourselves. They want all the components to be sourced from them. For example, even if I had 50 CD-Roms in my warehouse and the vendor doesn't have any I can get hold of in time, the vendor will not let me use my CD-Roms. They claim it's a quality issue, but it's more like a margin issue for them. We're not getting paid to perform the service either. Channel assembly is certainly not a panacea for distribution in the US.'
Yet despite the mediocre outcome of Tech Data's attempt at this business model, Raymund is still hopeful. 'I think we'll continue in a limited way. The US vendors are enthusiastic about taking product from the factory to users. There's a future, but it's finding a niche.'
So can the problems which have enveloped the US' leap into channel assembly be seen as a blueprint for how the process may fare in the UK? Raymund is quick to discount any such thought. 'Channel assembly will probably have more chance in Europe because of the fragmented nature of the market.
In the US, I don't know if the problem is really down to geography or complexity and design. There's probably not as much pressure in the UK from direct vendors either. Our programme with Hewlett Packard in Spain has been singularly successful and we are looking to set up a channel assembly deal with HP in Germany. But I don't think channel assembly will be the answer to all channel problems that many first thought it would be.'
The big white hope factor has not gone out of the channel assembly theory for distributors here in the UK, regardless of the visible problems our US cousins are facing. A handful of distributors are implementing the idea into their businesses - they just don't want to make a big song and dance about it. 'Everybody dabbles in it. Quite a few distributors have dipped their toes in to test the water and then run a mile,' explains Tony Wand, sales director at distributor Datrontech. 'They haven't fully understood the dynamics, costs and logistics, so it's not surprising there hasn't been much talk about it.
'We see channel assembly as a good business model for us. Over the past three months, we've seen some business come out of it.' Wand believes headway is being made by Datrontech mainly because it does not have to battle with its vendors over sourcing components, unlike the US distributors.
'I suppose we've always been involved in channel assembly really. Over the past two or three years, we've had a couple of false starts but we've learnt some valuable lessons,' he says. 'When you're involved in channel assembly, you have to make sure you have component suppliers you can rely on as well as good support. Building quality is also something you must get right. Anyone can build a desktop and offer it for £599 - but more likely than not, it'll be a very low-quality box. True, the uneducated user won't know the difference, but that's just not what it's about,' he adds.
Wand estimates - there are no hard and fast statistics out yet - that between five and six per cent of Datrontech's business comes from its channel assembly operation.
He predicts that figure will rise to 20 per cent or more very soon, putting the rapid increase down to impending market forces. Wand claims the market is no longer a viable proposition for SME assemblers to make systems themselves.
So it is this part of the market that is bringing in the channel assembly business for Datrontech.
'Every component that goes into a system has to be CE-approved and an average system can cost £1,000 to build to order, which is expensive for the small guys. So assemblers give it to us instead. The cost is not such a big issue for us. We build the boxes and they put their badges on it,' Wand explains.
He adds: 'If you're an assembler watching your business as it grows, and you realise you are good at marketing and sales but not so good at manufacturing, it makes perfect sense to find someone to do the manufacturing for you. It's a two-way partnership. It's especially attractive to component vendors and PC builders that are now becoming more of a sales operation.'
But Wand doesn't believe that the bigger distribution players can really provide the type of partnership distributors such as Datrontech can: 'The likes of CHS Electronics and Ingram Micro have been predominantly hardware distributors. They haven't had any specialisation. I don't think they really understand the idiosyncrasies you have to cope with - that you have to buy multiple parts to build up one part number. Market dynamics are forcing us to be a better distributor which means you must have really slick logistics as well as a good price point.'
But Wand's comments about bigger distributors not having quite the right blend to deal with channel assembly for the smaller assemblers falls on deaf ears. Peter Rigby, marketing director at CHS, says it sees channel assembly as a definite growth model. He claims CHS did look to carry channel assembly out with its acquisition of Metrologie, but it didn't quite work out. Although Metrologie has been doing channel assembly for almost three years, it is limited to the Alpha Digital platform. CHS is now in the process of finding a third party it can work with.
'What we are doing today is supplying components to small business builders,' says Rigby. 'We are looking at supplying a configured platform. We're selling millions of pounds worth of product, so we need to find a third party and use our brand to bring it all together. But I have no indication of who the third party will be as it is all being driven by Europe.'
Although CHS already has a local configuration centre based in Banbury, Oxford, Rigby is unsure how many of its 120-strong workforce are involved in channel assembly.
But he points out that CHS is looking to carry out channel assembly as a local-level, low-scale business. 'We sell to a lot of non-branded assemblers, but we do have to be cautious with our customers. We don't want them to think we are attacking their market, because we're not. It is more the low-end system builders we're working with. It's a complex area, but it's gathering momentum now. And we definitely see it as an opportunity for potential growth in the market.'
Chris Webb, managing director of Unisolve, part of InterX, and effectively its configuration centre, explains that the distributor has taken part in channel assembly for some time to get the 'necessary focus both internally and externally'. The distributor decided to undertake full-scale channel assembly from the beginning of this year, armed with a team of 50 people focused on the project.
However, Webb dislikes the name tag of channel assembler. 'It sounds as if we're just bolting hardware together,' he says. 'We are also putting on the operating system and the storage sub-system. We're doing those things all in one go, which is a very cost-effective and tailored service and also means customers are less likely to obtain product that is dead-on-arrival. And the reseller is not losing a day or two doing it themselves.
Webb adds: 'On the response front, for example, the Compaq Alpha factory gives resellers a 21-day lead time - resellers can source the system in 48 hours from us. We do charge, but it is still configured at a lower price than Vars would do themselves. There is still a margin on our services of between 20 to 40 per cent. It's not a bad deal for overseas manufacturers which have a UK operation as we can hold their component stock.'
Although Webb is in no doubt that channel assembly is a market growth area, one hurdle he believes must be overcome is convincing those that don't understand channel assembly of its benefits. He says: 'Once Vars begin to understand what we are doing, we have some very happy people.
They say, thank God you're here. We are having a good response from the big-name companies and software Vars, but it is a matter of spreading the word.'
Wand agrees: 'We're in a maturing market. The channel assembly market is going to follow a growth curve, where you'll find us doing more for less as soon as the mystique goes away.'
Unisolve has already received Compaq Integration Partner (CIP) accreditation which Webb describes as 'strict and rigorous'. Three other companies are putting together their own accreditation programmes, which again Unisolve hopes to join. Webb could not divulge who the three companies were, but did state they were in the server, disk and tape markets.
'I would hope Vars would look at whether whoever they are working with is part of a manufacturer's assembly programme,' says Webb. 'Obviously, you can take the server and drives and configure them without accreditation for certain products, but I think it is important that some sort of standard is brought in.'
Webb believes that although there are logistical and quality advantages in terms of flexibility and response times, the channel dynamics we see today will not change in the future.
He says: 'The two-tier channel will still be there, it's just that we are shifting part of the operation to where it can be completed in a more cost-effective and possibly better quality fashion.'
So is there anything that isn't positive about channel assembly?
Mike Poeckling, sales director of Ingram Micro's channel assembly division Frameworks, based in Holland, believes that channel assembly has very few negative aspects for the channel. Not surprisingly, he claims the only negative aspect will be for competitors of Frameworks - namely Dell and any other distributor involved in channel assembly. As Poeckling says: 'They see us as a serious threat. There is no bitter battle ahead, because we already have our channel assembly factory in motion and are way ahead of any other distributor. With our Frameworks factory, we are set for the next 10 years.'
Frameworks has been up and running for a year now, with a workforce ranging from between 110 and 160. It already has HP and Compaq on board.
Aiden Fitzgerald, UK external sales manager at Ingram Micro, says: 'Configuration is rapidly changing, so you have to invest big time if you're going into this area seriously. We have made a lot of investment. For example, we have burn-in tests to provide customers with qualification - smaller distributors can't do that. We can differentiate ourselves with the relationships we have with our customers.'
Poeckling also points out that Frameworks has already geared up its build-to-order division to go online. There have apparently been some drawbacks to the system (PC Dealer, 14 April), which Poeckling shrugs off as untruths.
Instead, he states Frameworks will be able to go online this October, or before if necessary.
He adds: 'Most of the contacts we are working with now we approached last year. We are doing a lot of channel assembly business in the UK and are very close to showing you just how much. There are exciting times ahead.'
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