In the Japanese electronics industry having a distributor is a must. No distributor, no sales. The distributor won’t necessarily create demand for your products, but that’s a topic for another post.
In the electronics industry where I do much of my work, in the US low volume, one-off business is handled primarily through distribution. In Japan, however, distributors transact most business regardless of size. The reason is simple: Japanese manufacturers use distributors to reduce their costs and risks. Japanese distributors bear those costs and assume those risks because there’s money in it, although not as much as you’d think.
Japanese distributors serve three primary functions: administrative, logistic, and financial.
1. Administrative
Using local distributors allows a Japanese manufacturer to reduce cost by limiting the number of vendors they must deal with. Distributors have multiple suppliers but the manufacturer only has to deal with one distributor. (Vendors of high value or strategic products may be able to sell directly to a manufacturer, but those are the exceptions that prove the rule.)
Manufacturers have institutionalized this through the koza system. A koza is an account granted by a company to a supplier through which all commercial activity between the two parties is reconciled. Manufacturers further reduce administrative expenses by shifting accounting and inventory management responsibilities to the distributor.
Once a koza is granted, the distributor is instructed how to prepare the paperwork that must accompany each shipment and is given forms specific to that manufacturer which are used in lieu of its own internal accounting and receiving documents.
2. Logistics:
The distributor acts as a logistics hub, warehousing, inspecting, and delivering products to the manufacturer, often on a just-in-time basis. In addition to warehouse space, most distributors have small quality assurance laboratories able to perform incoming inspection and first level failure analysis.
To maximize their profit, distributors operate on a “pass-through” basis, minimizing holding costs by closely timing incoming and outgoing shipments.
3. Financial
Japanese distributors function as their customers’ bank. Most transactions are denominated in Yen which in the case of imported products, transfers the exchange risk to the distributor. Distributors will often sell on consignment with customers pulling material out of stock kept on the manufacturer’s floor. Terms of sale are absurdly long with three to six months being standard. To win a sale, distributors often have to agree to punitive fines for missed shipments, line stoppages, and quality issues.
For American component suppliers targeting Japan not only is working with a distributor absolutely necessary, it's actually preferred. A good distributor will insulate you from some of the craziness inherent to supplying a Japanese manufacturer. Be careful though, that insulation can can be isolating so you’ll need to find ways to stay in front of your customer.
Because no distributor has koza with all buyers, suppliers must use multiple distributors to efficiently penetrate the market. Distributors without a koza for a particular account are forced pay another distributor a fee to use its koza or loose the business. This adds unnecessary cost to the end price of the supplier's product, a cost that most often comes out of the supplier's gross margin in the form of a reduced sales price to the first line distributor.
In the electronics industry where I do much of my work, in the US low volume, one-off business is handled primarily through distribution. In Japan, however, distributors transact most business regardless of size. The reason is simple: Japanese manufacturers use distributors to reduce their costs and risks. Japanese distributors bear those costs and assume those risks because there’s money in it, although not as much as you’d think.
Japanese distributors serve three primary functions: administrative, logistic, and financial.
1. Administrative
Using local distributors allows a Japanese manufacturer to reduce cost by limiting the number of vendors they must deal with. Distributors have multiple suppliers but the manufacturer only has to deal with one distributor. (Vendors of high value or strategic products may be able to sell directly to a manufacturer, but those are the exceptions that prove the rule.)
Manufacturers have institutionalized this through the koza system. A koza is an account granted by a company to a supplier through which all commercial activity between the two parties is reconciled. Manufacturers further reduce administrative expenses by shifting accounting and inventory management responsibilities to the distributor.
Once a koza is granted, the distributor is instructed how to prepare the paperwork that must accompany each shipment and is given forms specific to that manufacturer which are used in lieu of its own internal accounting and receiving documents.
2. Logistics:
The distributor acts as a logistics hub, warehousing, inspecting, and delivering products to the manufacturer, often on a just-in-time basis. In addition to warehouse space, most distributors have small quality assurance laboratories able to perform incoming inspection and first level failure analysis.
To maximize their profit, distributors operate on a “pass-through” basis, minimizing holding costs by closely timing incoming and outgoing shipments.
3. Financial
Japanese distributors function as their customers’ bank. Most transactions are denominated in Yen which in the case of imported products, transfers the exchange risk to the distributor. Distributors will often sell on consignment with customers pulling material out of stock kept on the manufacturer’s floor. Terms of sale are absurdly long with three to six months being standard. To win a sale, distributors often have to agree to punitive fines for missed shipments, line stoppages, and quality issues.
For American component suppliers targeting Japan not only is working with a distributor absolutely necessary, it's actually preferred. A good distributor will insulate you from some of the craziness inherent to supplying a Japanese manufacturer. Be careful though, that insulation can can be isolating so you’ll need to find ways to stay in front of your customer.
Because no distributor has koza with all buyers, suppliers must use multiple distributors to efficiently penetrate the market. Distributors without a koza for a particular account are forced pay another distributor a fee to use its koza or loose the business. This adds unnecessary cost to the end price of the supplier's product, a cost that most often comes out of the supplier's gross margin in the form of a reduced sales price to the first line distributor.