People, Not Platforms: Why Customer Service Still Wins in a Digital Supply Chain

Speaker A: Welcome to Supply Chain Connect, the podcast channel for supply chain industry professionals. Here's your host, managing editor of Supply Chain Connect, Tyler Fustner. Hi, Colin, and welcome back to the show.

Speaker B: Hi, Tyler. Pleasure, uh, to be here.

Speaker A: If you could please introduce yourself to our audience.

Speaker B: Yeah. Um, I'm Colin Strother and I'm executive vice president of Rochester Electronics.

Speaker A: Well, Colin, I want to talk to you today about the state of the electronic component distribution space. What's the industry looking like today? Do you think we are in a recovery, Are we in a reset, or are we in a whole new paradigm altogether?

Speaker B: That's a great question. I would say a combination of all three. I was traveling around Asia recently, and one of the things I did really detect was a sense of optimism. So I think there is, uh, an element of recovery. I would also say that there's something of a reset because I think that the shortage cycle, I would argue the shortage cycle never really was. I think, uh, we've paid a price for that with, uh, overstocking from a component level all the way through to the finished product, really. And we've seen that unwind over the last few years. So I think there's a little bit of a, uh, reset happening there as well. Um, where I would say the paradigm shift, um, I think our industry, Tyler, used to really follow the sine wave, used to follow, uh, the overall economy, but I think it's fundamentally decoupled now. So, uh, much as in the last few years we were trying to predict the recovery and look at all these signals. I think today when, uh, I look at all the signals coming out, some of them are in contradiction to each other. Things are happening so thick and fast. We've got two wars underway at the minute. Um, all the focus is on one. No, uh, one's really talking about the Ukraine war either. So the amount of information and the amount of change that's happening is quite unprecedented. So I think it's a little bit of a combination of all three.

Speaker A: I want to double click on something you just said. When you are looking at the indicators maybe that, uh, so clearly designating how the market is moving right now, what are the indicators that matter today? How do you better understand the supply, demand, balance that we find ourselves in?

Speaker B: It's incredibly difficult and somewhat contradictory as well. Um, one of the first things that really showed, uh, what I believe to, ah, be happening, which was people holding an unnatural level low of inventory, was that Xperia, uh, situation well publicized around October, uh, November last year. I was on a flight to, uh, San Francisco. And I was on the plane, WI fi and my phone started exploding with WhatsApp voice messages. People looking for an Xperia product. Rochester. At the time, as an authorised distributor, we believe we were sitting on approximately 60% of the inventory visible to the market. Our inquiries and our sales just went literally linear for two to three weeks before it calmed down a little bit again. And what that really told me was that people had been holding really, really low inventory levels, really working just in time. And the moment that there was a little, uh, a little ripple, it created a little bit of a panic. So, you know, you're seeing these type of signals when. On the other hand, when I was in Asia, I heard about some um, EMS plants in Vietnam who were actually um, having to close because they couldn't build the end product due to shortages in memory. So there's all these types of things happening. But fundamentally I think what we're seeing is, I think we're seeing the inventory levels start to return to normal levels. But any sort of disruption can create incredible volatility. I don't believe we're into the full blown shortages and allocations that we've seen in the past. The question would be, are we going to or not? I think there's a big unknown there.

Speaker A: Well, have we learned any lessons? Has the industry made any corrections coming out of that last inventory cycle that we found ourselves in?

Speaker B: That's a great question and I'll answer it twofold. One, I don't believe there's been any broad brush lessons learned. I think if you go back to the shortages, you know, everyone at that point said we're no longer going to hold the minimum inventory levels, we're not going to have direct line feeds, we're going to hold buffer stock. The Nixperia situation there showed that that just wasn't the case. We had global tier one automotive companies looking to fly jets into our facility in New Hampshire, which is, uh, at the end of a Runway to pick up parts because they're on line. Stop. So there was no flex within that supply chain. When I look at it more fundamentally, I googled last night, how many buyers are there of electronic components in the world? Um, there's no single data point in that clearly, but I think the response I got was 100,000. So that's 100,000 people potentially buying electronic components, working for a multitude of companies. There's no one unified way that the industry has came together and changed. What we've done though is, is got a lot closer to our customer. So you know, we're trying to anticipate our customers needs and if there is any disruption we're trying to be there quickly for our customer. So it's knowing your customer and also in the back end. Last few years we've really spent a lot of time trying to uh, improve our supply chain efficiency. So that situation I mentioned with Experia, ah, our shipments went through the roof but our on time delivery remained constant because we had the flex in place there with our supply chain.

Speaker A: And speaking of customer engagement, how is Rochester implementing any AI or advanced analytics digital tools to help with that customer engagement or forecasting or pricing, inventory management? Can you tell me about the technological integrations your company is going through?

Speaker B: Sure. So we launched our first generative AI agent in the summer of 2023 and we launched our first agentic agent, uh, to add context, uh, to the content, uh, electronica. Ah. Um, and that would be 2024. So we dipped our toe in the water early and we've got a kind of end to end stack with the same vendor. Um, so we've got all the tools and we've got the data warehouse and the connections to our ERP and it's all in real time. But what we've really looked at is the data. There's no point even talking about AI unless you have clean data and then the process, truly understanding the existing process and what you're looking to improve. Uh, I think AI is a little bit of a buzzword and I think of other things in recent few years such as the Metaverse NFTS blockchain which is more now a functional backend system. Um, so I think it's easy to get carried away with the hype. During my recent trip in Asia, there's AI billboards everywhere. It was really interesting to see the China versions and the South Asian versions where here in the US clearly uh, we focus on a different range of tools. But I think it's important not to get this carried away with this because otherwise you can go down, I guess the AI rabbit hole. Um, so we have the tools and we're going to roll it out carefully. There's a cost associated with this. Um, so it's not a matter of just replacing human work with AI work at no cost. It's a consumption based model. So every prompt, every query you're going to pay for. What I would say is that uh, we're looking for how it can help but we're really always focused on keeping the customer front of mind, driving customer success. That was one of the other big takeaways around my m recent trip to Asia. Um, those that seem to be doing better in the market were those that are focused on genuine customer service. There was others who maybe had kind of uh, really reduced some of that in the downturn. And I think they're paying a price for it because at the end of the day in my view, people buy from people they trust. You can't influence people without trust and you're not going to build trust through a digital platform. There's always going to be a place for that over the phone or uh, uh, face to face engagement.

Speaker A: Now uncertainty and disruption are nothing new to the distribution industry. But I'm curious if you can tell me how recent geopolitical tensions, trade fragmentation, tariffs are influencing the industry today and maybe even your supplier base or network design.

Speaker B: It's incredible. There was a time where uh, it felt like most days you were waking up to some other geopolitical challenge, whether it was a conflict, disruption, tariff related. So again, keep the customer in mind and do everything you can to better engage with the customer and to better serve the customer. And really that's our mindset at Rochester and everything else comes around that. So for example we have an FTZ in place for our inventory to try to mitigate the tariff impacts in terms of the way that we engage with customers as well. I think communication is key, I think transparency is key. One of the big things that I really recognized was the need to be there for your customer in a multitude of different ways at uh, the same time. So today for our customers I think that they want to be met face to face. So uh, we're really big on building up our team globally. We can't be there all the time face to face. So if we're not there face to face, they want to pick up the phone. So again we've invested in a lot of resources in a lot of locations as well so that someone can pick up the phone and have that conversation in their normal language. If you can't be in person and you're not available on the phone or someone wants to just do something quickly digitally. We've invested heavily in our digital platform. So our websites with international storefronts where customers can log in and they can see all of their information and they can ask questions in natural language, that's where we have AI agents running. And what that's really done for us is that uh, from an E comm perspective, our average order value now is about 6x where it was maybe one or two years ago. But over two thirds of that revenue is customers coming on and placing an order online on terms on their own account and using their courier number. Those same customers are equally likely to be placing orders on the phone or on an email and they're equally likely to be meeting with us in person. So you know, again it's just being there for your customer, how they want to be met, when they want to be met. And I don't think it's one thing anymore. It's providing all avenues whether it's face to face on the phone or that digital engagement.

Speaker A: Colin, in your opinion, what are the end markets that are driving the most growth today and maybe into the near future? Where do you see the positive momentum continuing to gain traction as an overall industry?

Speaker B: The natural answer to that question AI in data centers. And yeah you look at the top line numbers and they're driving a lot of that. We where we tend to fall is in the more traditional industries. I would say for us it's the regulated industries um, that we focus on most and that's where we're seeing more organic traditional growth. Some of that again as I say is more demand supply catching up after the over inventory period. For unfortunate reasons we do see a lot of growth at the moment in our defense and aerospace sector. Uh, Rochester in the mid-90s took over the manufacturing of intel military devices and we continue to serve those markets um today. So due to the conflicts we are seeing growth in that area. Um but I think overall what we are seeing is the more traditional industrial type of marketplace picking up as well. Automotive is an interesting one. When I went to China after Covid in 2023 when it first opened up, I was completely shocked at the number of EVs on the road and I was also shocked at the switch away from more westernized products to China China content. So I think for some of the particularly the European automakers that were really servicing that market, I think there was a knock on effect. I think what I'm seeing now as well as I'm seeing that kind of come come back. We're seeing automotive come back in Europe, Middle east and Africa, predominantly Germany. So I think all of the markets are starting to come back. What's really interesting is that if you look at the economic backdrop around the world, I don't think anybody really thinks that we're going through a period of strong economic growth. So again my question is is this more supply demand versus true growth?

Speaker A: What role do digital marketplaces, E comm platforms and direct to Customer models play in the Rochester strategy.

Speaker B: Great question. So for us, over the last few years we've really drove our direct to customer engagement. We've opened up in many new countries in the last year. Vietnam, India, we've opened, just opened our first office in Canada in Toronto. We've got hiring underway in Malaysia, Thailand and Korea. We've opened new uh, facilities across Europe and in uh, Latin America. So in some ways it feels like we're maybe swimming against the tide a little bit where people are closing locations and we're opening. So I really feel that going a little old school, people do want to engage with people even in this really, uh, technology AI driven world. From an E Comm perspective, we clearly list our products with the major aggregators and what we're trying to do there is drive that click through to Rocketlike.com and our other international storefronts and then try to provide meaningful content and a reason for the customer to engage with us, uh, digitally in terms of third parties and marketplaces. High 90% of our revenue today is generated directly, whether it's coming to us more traditionally or through our own platform. And really to provide that more personalized experience for the customer, I think we need that. The other thing that really ties into that is supply chain security. So um, I think we made the right decision many years ago. But all of our inventory is housed in the US on the east coast. And all of our manufacturing, uh, assembly and test is also done, uh, on the east coast in house. And when people talk about reshoring, we never left. And the reason we never left was the origin of how we got into manufacturing in the first place. When intel looked to get out of military products in the 90s, uh, they needed a partner to continue to support the customers, but they needed a trusted partner that was based in the US So they looked at the distributors at that time. And the one company that stood out as the company that continued to support ongoing legacy production was Rochester. So that's really how we got into manufacturing as well. Today really started with the war in Ukraine and now the, the incidents in Iran. Supply, um, chain security is critical. We've spent a lot of time and energy on compliance. We've automated all of our trade compliance, um, a huge amount of due diligence to make sure that the parts that are bought are bought by the real customer and being sold to that real customer. I would say on a weekly basis we have at least one fraud attempt of someone looking to, to get components from us. Now when you look at the value of components they're looking to get and the length they go to try to get them. If it was for money, they'd be as well to smash in the window of a jeweller shop and taking some watches. They're not looking to buy to get these components because of their value. They're looking to get them to go to a place they should not go. So I think our whole know your customer, engage with your customer. I think that uh, really helps us from a customer engagement experience point perspective. But I think it's really, really important from a supply chain security perspective as well.

Speaker A: Colin, I want to conclude our conversation by asking you to take a look ahead and maybe tell me what the future holds. Now I know that's not an easy question, but if you could give me your opinion, uh, what's Rochester's insight telling you? That uh, this is going to be the future of electronic component distribution in, say, the next 12 to 18 months?

Speaker B: I've been in component distribution for over 25 years and um, I think that people have called the end of component distribution more times than I can count. People come to the distributor to buy a range of components from the same place. And yes, I'm sure we'll continue to go through consolidation and ups and downs, but I think that our industry is durable. But I think those that will thrive rather than just survive or not survive are the ones that truly keep the customer in mind. I really think that the, um, customer service levels are key. Uh, again, the ability to engage in customers and um, how they want to be met is pretty fundamental for Rochester. I view it as a product company. And uh, during the downturn we invested heavily in a range of product families, uh, inventory. So, you know, fundamentally we've got the products to take to market. Uh, so I think for Rochester, I'm hoping for multiple years of sequential growth. Clearly, I think that's achievable. And for our broader industry, I, uh, do think that it will pick up. The question is going to be is again, is the pickup that we're seeing at the minute, is this the equalization of supply and demand, or are we seeing genuine growth or due to disruption, are we going to go into periods of allocation and shortages? Again, people thought that we would never see the type of growth that we saw during the pandemic, but we don't know that could happen again. In one way that's positive because we want to sell electronic components. We want to meet that demand. On the other hand, it's like I said, I'm not sure we learnt many lessons from that the last time. Uh, I don't think any of us want to necessarily endure the kind of cycle that we've just had with the enormous sugar rush high followed by traditional distribution, arguably three or four years of a downturn. So, um, I'm not sure. What I do know is that we'll be here for our customers and, um, keeping the customer in mind, I hope, will be successful.

Speaker A: Colin, as always, it's been a pleasure. Thank you for taking the time to join the show today and discuss the state of the electronic component distribution space. And, uh, we really appreciate you having shared your experience and insight.

Speaker B: Great. Thank you.

Speaker A: Thank you for listening to this episode of the Supply Chain Connect podcast produced by Endeavor Business Media, a Division of Endeavor B2B. Follow us online at supplychainconnect.com or find us on LinkedIn, Facebook and X to stay up to date on the latest supply chain industry news. Do you have have any questions or is there a topic you would like us to cover in a future episode? Please contact us at, uh, editors at, uh, supplychainconnect. Com. That's edit o R s at supplychainconnect. Com.