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Arrow Electronics

Arrow Electronics



A Harvard Business case, get students acquainted with electronics industry dynamics

A Harvard Business case, get students acquainted with electronics industry dynamics



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Arrow Electronics Arrow Electronics Presentation Transcript

  • Arrow Electronics Presentation by Wesley Shu, Ph.D.
  • Company Background
    • Arrow/Schweber (A/S) group is a subsidiary of Arrow Electronics
    • A franchised distributor by large suppliers who sells their products to OEM.
    • It was common for large suppliers to sell directly but 30% chose to use distributors.
    • #1 electronics distributor
  • Event Background
    • A/S was discussing the proposal “Express Parts Internet Distribution Service” ( Express )
    • Express : an Internet-based trading system
  • Pros
    • Gain new customers
  • Cons
    • Existing customers may bypass A/S.
    • A/S may be dis-intermediated.
    • Will Express destroy A/S’ low-price business model?
  • Questions about Express
    • How many of A/S customers were likely to switch some of their purchases to Express ?
    • How would this affect A/S ’ sales and profitability?
    • How would A/S’ suppliers react to Express ?
    • Was Express a threat to or an opportunity for A/S ?
  • Customers
    • Original equipment manufacturer (OEM)
    • C ontract manufacturer (CM)
      • Served as the factor of an OEM, which outsource its production of prototypes of entire production runs
      • Originally only worked on overflows or testing demand
      • Use AE’s value-added services and SCM
  • Why not sold directly?
    • Extensive service requirement
    • Ex., Altera sold its 80% proprietary programmable logic devices (PLD) to its two distributors who provided value-added programming required by individual customers
  • Why not sold directly?
    • Diminutive sale size
    • Ex., AE had OEM customers who often ordered with short lead time or in small quantity.
    • No credit management offered by some suppliers. So, it became distributors’ service
    • OEM sometimes required packages of products in a shipment.
  • Why not sold directly?
    • OEM sometimes ordered by forecast, not by previously ordered quantity record.
    • Distributors have up-to-the-minute knowledge of available products.
    • Distributors provide material management. This even attracted large OEM.
    • Suppliers need distributors to win business in standardized products, and
    • to represent their new technologies and proprietary products.
  • Supplier/Distributor Relationship
    • Suppliers reply on distributors to generate demand. In return, they offer AE:
    • Price protection & limited return privileges
    • Warranties not available to others
    • Control prices by providing discounts
  • Suppliers’ discount decision
    • D esign win
      • D istributors did design work
      • H igher discounts
      • D epended on the design work, assigned by “design registration”
    • J ump ball
      • N o design by distributors
      • T he suppliers created demand
  • S uppliers’ distributor lists
    • O rder of names
    • T he order in which suppliers inform the distributors about an sales opportunity.
    • S uppliers manage the time they take in responding to a distributor’s request for prices.
  • Arrow ’ balancing power
    • D esign wins and competitive standardized products
    • K nowledge about customers to create demand for suppliers
    • K nowledge about growth opportunity, including watching small companies
  • Arrow’s selling effort
    • B ook and ship (BAS)
      • P ricing authority
      • O btaining discount levels
    • Value added
  • E volution of value added
    • I nventory buffer
    • A ltering components to meet customer needs by programming or kitting parts
    • V irtual organization
    • O rder cycle management
  • Phantom inventory
    • S uppliers provide inventory at high book value
    • S o, sale prices usually below it.
  • Relationships with Customers
    • T ransactional vs. relational customers
    • Transactional: P lace requests-for-quotes (RFQ) with a number of distributors simultaneously
    • R elational: use value-added products to build a relationship
  • V alue-added services
    • V alued-added services keep relationship but not gaining profit premium
    • B ut they help AE maintain profit by cross-selling BAS products
    • H owever, some customers may change their mind, since BAS are “jump balls” – standardized products
    • F inding the right customers with which to develop long-term relationships was extremely important!
    • And, help them in their times of need.
  • M ake unbreakable relationship
    • G et customers to invest in the supply chain (systems & processes) which provides value-added services.
    • and then customers will even tend to buy our standardized products
  • Internet – Express Parts
    • A ble to cross-reference equivalent parts from multiple manufacturers
    • L arge pool of 50,000 OEMs
    • U sers can select any supplier/distributor combination
  • Express – SWOT
    • A ll transactional customers would switch to Express
    • S ome (about 40%) relational would switch too
    • M ay have additional business – those whom AE cannot sell to using its current business model
    • M ay cut cost on building new customer relationship – an inefficient and often failed effort
  • Express – SWOT
    • E xpress only responds to demand, not to create. AE creates demand by design wins.
    • AE has ability to get the lowest prices for standardized products – even more business than without the Internet
    • C ommodity products = transactional behavior? V alue-added products = relational behavior? Relational customers may use Express as bargaining tool.
  • Express – SWOT
    • C ommodity products – AE’s (and its suppliers’) primary profit source will fall down.
    • S uppliers’ reaction? T hey will lose control if the Internet commences.