Arrow Electronics

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

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  • Arrow Electronics

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

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