Arrow Electronics is a major electronics distributor. It was considering a new "Express Parts Internet Distribution Service" that would allow customers to purchase parts directly online. This could both gain Arrow new customers but also cause existing customers to bypass Arrow. Key questions were around how many current customers might switch to using Express and what impact it could have on Arrow's sales and profits. Arrow's business model relied both on selling standardized parts at low prices as well as providing value-added services to build relationships with customers. Express posed both threats and opportunities to Arrow's business.

1. Arrow Electronics Presentation by Wesley Shu, Ph.D.

2. 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

3. Event Background A/S was discussing the proposal “Express Parts Internet Distribution Service” ( Express ) Express : an Internet-based trading system

4. Pros Gain new customers

5. Cons Existing customers may bypass A/S. A/S may be dis-intermediated. Will Express destroy A/S’ low-price business model?

6. 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 ?

7. 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

8. 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

9. 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.

10. 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.

11. 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

12. 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

13. 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.

14. 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

15. Arrow’s selling effort B ook and ship (BAS) P ricing authority O btaining discount levels Value added

16. 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

17. Phantom inventory S uppliers provide inventory at high book value S o, sale prices usually below it.

18. 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

19. 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

20. F inding the right customers with which to develop long-term relationships was extremely important! And, help them in their times of need.

21. 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

22. 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

23. 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

24. 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.

25. 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.