Arrow Electronics, Inc

A Case Study by
Jasveen Samra Mukund Narasimhan Noppawun Sopee Raiju Neelamkavil Wei Zou

Overview
Founded in 1935 with an initial focus on selling radio equipments and gradually positioned itself into a broad-line distributor of electronic parts, including semiconductors and passive components by aggressive acquisitions. In 1992, it reached #1 position among electronics competitors after a shaky regrouping that coincided with economic recession. With annual sales of $16B, Arrow s North American operations headquartered at Melville, NY serves as a supply channel partner for approximately 700 suppliers and 140,000 original equipment manufacturers, contract manufacturers and commercial customers through a global network of more than 300 locations in 50 countries and territories. Competitors Avnet Inc (1996) trailed behind arrow by 20% in sales even with growth of 14% as compared to arrow s 10% Foreign entrants Rabb Karcher and Future Electronics Long time rivals Pioneer-Standard, Wyle & Marshall Industries

Operations Structure
 Operation Structure based on product & strategy
Zeus Electronics semiconductors to military and aerospace customers Capstone Electronics passive components Anthem Electronics and Arrow/Schweber semiconductors to industrial customers Gates/Arrow Distribution computer systems, peripherals & software

 These operating groups being individually responsible for asset & materials management and P&L

Arrow/Schweber Electronics
subsidiary of Arrow Electronics Arrow s largest working group with sales of around $2b  Headed by Salsgiver, who pushed A/S towards higher level of technological expertise through technical certification of its field sales representatives and dedicated investments in product management.

Organization Structure
Six Regional VP 39 Branch/General Managers

Field Sales Representatives Inside Sales Representatives Product Managers Field Application Engineers Administrative Personnel Additional Managers

Operating Environment
Suppliers
Altera - manufacturer of proprietary programmable logic devices (PLDs) that requires considerable value added programming. Intel - supplied mostly proprietary semiconductor products & x86 chips Texas Instruments & Motorola offered 75/25 mix of standardized & proprietary products. Other electronic parts suppliers

Arrow/Schweber
As a franchised distributor, they have an advantage of selling supplier's standardized & proprietary products. Has a growing supplier base with a count of 56 as of spring 1997. Distributes line card that is comprised of two chip categories
Standarized chips - interchangeable and produced by multiple suppliers Proprietary chips - manufactured by a single supplier

Offer a wide range of comprehensive services

Value-added programming like device programming as required by individual customers Engineering support for PLDs. Credit Management Inventory/Material Management by its Production Kitting, Automated Replenishment, In-Plant Stores & Terminals services. Contract Manufacturer function of selling assembled products, sub assembly components as well as testing/evaluating product runs. Total Cost of Ownership Analysis to help identify costs associated with a particular activity or process. Complete Supply chain management solution with their business needs analysis & custom computer products. Provides faster, accurate information on the availability of various components.

Consumers
Traditional customer base of mid & small sized OEMs Customers who ordered smaller quantities, had shorter leadtime, wanted products on credit. Customers who adopted JIT procurement systems. Customers requiring Contract Manufacturers to outsource prototype production or entire product runs. Customers with requirement of entire systems or sub-assemblies like components inside industrial equipments such as elevators or medical equipment or heart of a blood gas analyzer

Supplier/Distributor Relationship Suppliers rely on distributors (Arrow) for demand, they offer
Arrow price protection and limited return privileges in return.
 Design Win -Work is design by distributors - Must depend on design registration  Jump Ball - No design by distributors - The suppliers create demand

Distributor/Customer Relationship Transactional customers VS. Relational customers

Transactional customers are those that place requests-for-quotes with distributors simultaneously Relational customers are those that distributors use value-added products to build relationship with

Express The new Distribution System

Express Parts, inc, a new independent distributor developed an internet-based trading system around a multi-distributor bulletin board enables distributors to post inventories and prices to bulletin board providing customers large and small an opportunity to shop for prices. Estimated 50,000 OEMs through out the US having access to the service. Express would allow customers to compare prices and to bargain for the best price among competitors in the market All the limited distributors will transmit the full list of available inventory and corresponding prices every night. Registered Express customers could then sign onto the service via internet and could search by part numbers or description. Its search engine could quickly cross reference equivalent parts from multiple manufacturers based either on part number or technical description On making a selection, customers could view relevant returned results containing product details, price and available quantities for shipment. Customer could select any supplier/distributor combination, enter the desired quantity and click to place order. Express would review the order, perform credit check and acknowledge accepted orders to customers and simultaneously route them electronically to the appropriate distributor. Express appointed shippers would pick parts from the distributors and ship orders directly to customers and notifying Express electronically once the shipment has been made. Express then billed customers, then after deducting a fee of 6%, made payments to the distributors 30 days after orders were shipped.

SWOT Analysis
Imminent introduction of Express Express Inc s request to join this invite only limited distributors network that could potentially help them to cater to a larger market and increase sales at less than half the cost of doing so via its branch network. The reduction in the overall gross margin and slashing of prices due to competitive market place, And since prices are open to the public, bargain of lower prices by existing customers may occur. Time constraint at the A/S end in deciding on the pros and cons on signing up for this system Signing up for Express could create a potential trade-off between gaining new customers and affecting arrow's relationship with existing customers who may drift away to pick products from different channels. Risk losing franchise distribution or distribution due to removal of their channel member status by the suppliers, with suppliers using Express. Difficulty in deciding on association between commodity products and transactional behaviour on one hand and value added products and relational behaviour on the other. Resulting in optimistic cannibalization of $293b and a pessimistic cannibalization of $601b Express ability to create better value for the customers at a lower price, with a noticeable reduction in cost Evaluate, adapt and adjust the existing business model to the changes Express may create. Bright side being reaching out to the additional business and selling to those customers that are out of reach of the current business model Reduction in the time and effort of trying to build new customers. Standardized price offering over internet leads to minimizing time and efforts and significant reduction in costs to serve customers shopping for low prices. Express may bring Arrow additional business from potential customers that Arrow has not been able to reach with its current business model Express may make reduce the effort in building new relationship with new customers Express exists only to respond to demands but not to create Arrow s profit may be cut down due to an existence of Express as intermediary Existing customers may bypass Arrow and go directly to Arrow s competitors Express may be used as a bargaining tool

Available Options
Sign up for Express system with an optimism that it will gain in terms of getting additional business and selling to those customers that are out of reach of the current business model. Sign up would expose A/S to estimated 50,000+ OEMs throughout the US and increasing sales at less than half the cost of doing so via its branch network. Cost, time and effort savings in serving and converting low price shoppers into potential customers. Maintain strong relationships with suppliers by creating demand for their products, could translate into getting better competitive prices to sell. Continue with providing value added services to retain relationship customers who are either customers going in for modified rebuy or straight rebuy. Still retain those customers who get financed by A/S or those who rely on value added services like A/S inventory and material management systems. 70% of the commodity product sales to transactional customers are of products manufactured by major suppliers who wouldn t want to see their commodity margins shrink which would keep them away from offering same price to other distributors. This is a blessing in disguise for A/S to continue with being the exclusive franchise of big four the suppliers. A/S exposure to technology and internet could provide a sort of leverage over Express by incorporating an internet model for commodity projects so that low price shoppers could use the information and perform transactions. Scan the environment for other possible Value added & customization services that could be added to existing core business. Build relationship with customers by creating supply chain system that will provide value-added services

Recommended Option(s)
Value Added Service Engineering support Supply chain solutions Credit Management Inventory/Material Management

Standardized Products/Commodity Reduction of costs/efforts/time serving customers who are shopping for low prices

Environmental Scanning for new value added products/services Loss of 6% on sales via Express + Loss in booking & shipping revenue

Internet & interactive voice response

Express

Customers