Industrial Situation in Arrow Electronics - Case Study Example

17-05-2007 Arrow Electronics Gen. Firm and industrial situation: Arrow electronics is a company, which distributes electronic parts including semiconductors and passive components. It has been franchised be larger suppliers to deal directly with large original equipment manufacturers (OEMs). Arrow's North American operations were headquartered in Melville N.Y. Sales and marketing functions were divided among five operating groups. They are Arrow/Schweber, Anthem electronic and Zeus electronics sold semiconductors to different customer bases, i.e. Zeus to military and aerospace customers, wile, A/S & Anthem to industrial customers. The two other groups were product driven and they are Gates/Arrow distributing and selling primary computer systems, peripherals and software, Capstone electronics passive components. In all the groups Arrow/Schweber (A/S), the largest of Arrow's working groups having higher levels of technological expertise through technical certification of its field sales representatives (FSR). A/S operations were configured by branch, headed by General Manager includes Field sales and inside sales representatives, products managers, field application engineers and others. Overall six VP's oversaw A/S's 39 branch mangers. Arrow electronics was a broad line distribution of electronic parts including semiconductor and passive components, under the leadership of Stephen Kaufman and reached the number one position among electronics distributors by 1992. Most of the distribution companies' worldwide passing through consolidation phase and small number of large companies capturing the top tier of the markets by 1997. Arrow's nearest competitors in 1996 is Avnet Inc. having sales around 20% less than Arrow during the year. Other competitors of Arrow, are Future electronics, Pioneer standard, Wyle and Marshall Industries and all have only quarter size of Arrow in total sales volume and earned less than Arrow's largest operating group. Arrow is making profit and earned more than $6.5 billion in sales in 1996. This situation shows Arrow position is very strong in the market having only one genuine competitor Avnet Inc. Creating more value. Basically distributors like Arrow's relationship and dependence with suppliers are vice-versa where both depend on each other. In an electronic industry where top 10 suppliers controls 80% of products, A/S's suppliers list included 56 companies in 1997 and growing. This shows that A/S is not solely dependent on top suppliers or selected few suppliers but effective management of large number of suppliers is not an easy job and requires better networking which incurs high cost. A/S's largest supplier Altera, the manufacturer of proprietary programmable logic device (PLD's) supplies 80% of its products through two distributors capable of providing value added programming required by individual customers. Large suppliers like Intel, Taxes instruments and Motorola are the other 3 of the big four suppliers for the A/S. Now before analyzing A/S on the basis of value provider, we should first understand what is value chain and how it work What is value: The value chain is a system of interdependent rather than independent activities. The way one activity is performed usually has an impact on the way other activities and undertaken. The ability to coordinate the linkages enhances the scope of cutting costs or increasing differentiation. The first step is to identify all the value chain activities that are relevant to the business. The value chain must be defined broadly enough to include all the activities that influence profitability. Once companies like Arrow's identifies how profits are distributed across the industry value chain, it has a better idea of how to reconstruct the value chain to improve performance. Indeed new business models emerge by virtue of their superior ability to create and deliver value. A company can create a stronger competitive position for itself on the value chain by addressing important issues like: How value is being captured; The gap between revenues and costs; linkages with suppliers and customers; use of information technology in general and Internet in particular. Reconfiguring the value chain is not just about cutting cost; it is about altering the basis for competition in a way that favors a firm's strength. Choosing the value: A/S, which tracked costs, prices and movement of 3,00,000 inventoried part numbers and order patterns (A/S processed more than 10,000 transactions per day) and sales history for each of the company's 50,000 customers. A/S's 300 branch based sales & marketing representative (SMR's) handled daily phone calls for customers checking delivery, availability and price level. This large volume of daily transactions necessitated A/S to develop good long-term relationship with suppliers at one side and customer, mostly original equipment manufacturers on the other side. To maintain long-term reliable relationship with customers, distributors like Arrow Inc. has to develop value chain and add value to their products time to time. A/S has to look at different options to create value for its customers, to provide value for money and different from competitors and suppliers i.e. more than others providing value to their customers at the same Price or for lower price. Providing the value: A/S is providing its customers to receive all products needed for a specific manufacturing run in a single shipment and supplying prepackaged kits to designated customer production facilities JIT (Just in time) to help them to reduce stockouts, inventory carrying cost and other expenses. A/S provides credit facility, discounted price as well as technical support to its customers as value added service. A/S has good relationship with suppliers and suppliers have two ways needs from distributors i.e. distributors sell their products and suppliers provide discounts to them. Most suppliers are not capable of providing tech. service and material management services to their buyers or are not interested in getting into the business. They do not want to take activities that do not have the high margin (Christensen et al., 2001). So customers turn to such type of good distributor who could provide them good value for their money. A/S value added component was about 2% of its sales in 1977 but reached up to 80% in year 2000. This shows that value additional paid for A/S. A/S deputed 400 field sales representatives (FSR's) to visit customers design engineers to learn about current projects and promote new products. FSR's also established relationships with customers purchasing personnel negotiating major contracts and resolved problems with the flow of orders and deliverers. FSR's worked with engineers to provide technical support to the sales force, assisting problem solving and product design visual. All these value added service has been provided by A/S to its customers. This large field force of A/S developed good relationship with its customers and maintain it through providing value added services. As the 20% of the A/S business comes from contract manufacturing (CM) and increasing at the rate of 30% per year between 1992 and 1996. They are the multi billion-dollar business put price sensitive. They selectively used value added services such as programming and supply chain management in addition to quick deliver service. So providing credit and short delivery lead-time on small orders to contact manufacturers, which they cannot receive either from the suppliers or from the non-franchised distributors, is adding value to distributors services. Direct-access to A/S on-line, real-time computer system through computer staffed terminals supports on-site material management for customers with high-levels of order processing. On-site staff in A/S in plant stores significantly reduced customers' inventory carrying costs. A/S provided complete management of customers' printed circuit board assembly requirements and turnkey services. Automated replenishment system deployed in customer stockrooms or at point of use dramatically reduced the inventory and associated carrying costs. Providing customers the complete supply chain management system custom computer products help customers to remain competitive in the market. Communicating the value: Arrow's 25% sales come from transactional customers, which are of the Book and Ship (BAS) type. This segment is potential segment for long-term relationship keeping direct communication with customers improves the value of the services and product. Arrow's approach is to use value added products as the first step to building a relationship and provide customers with the best in class support. Once customers get a chance to interact with Arrow/S they are able to see the true benefit of doing business with A/S rather than other distributors communicating the value to customers continuously through various ways build a relationship virtually unbreakable because in the present scenario, where internet and other communication technologies opened up various avenues for customers. Through using these technologies customer has options to sort out for lowest price with alternate distributors, the same products. So building relationship through communicating values to customers continuously and consistently, motivate them to involve in product related system and processes and this counter balances the high price sensitivity of customers value addition to the services and products and proper communication with the customers develops long term relationship with distributors. Issues: But recent changes in information and communication technologies developed different types of challenges and opportunities to distributors. Customers get all the information about products suppliers and distributors and it cost, features etc. on the Internet, which ultimately improve his/her negotiability. No organization whether supplier or distributor could ignore this development. A/S is also facing similar sort of situation. Express part Inc. a new independent distributor based on Internet based trading posing greater challenges. Customer & OEM's have free access of all product range with cost effectiveness. With out intermediate field force and direct communication with customers, personalized communication through e-mails etc. is proving major challenge to A/S using this effective and viable option to provide better value to its customers. A/S has several options to counter this competitive situation. A/S may take the rout of Internet selling using its website and home page which already exists. Though relationship with customers is at best developed by A/S but its costs more and time taking whereas express inc. channel is price effective. So to counter these competitive challenges A/S to adopt certain well-thought and properly defined plan. Recommendations: As we have seen A/S has problems with its older value chain. So A/S can look at a new distribution channel or a new selling approach through adopting Internet and communicate directly to customers. A/S can develops its own full-fledged website which includes all the product, price information and online ordering facilities. By improving this channel A/S can directly communicate with customers and in a phased manner withdraw large number of FSR, which ultimately cut down operational cost. Different segments of the value chain may not be equally attractive from a value creation point view. So A/ S must cross position its products with more valued addition so that loss in one product category could be compensated by other products category. Reconstruction of value chain demands an outward looking rather than in ward looking orientation. So waiting to see the results of Express Inc. and them implementing the alternative channel and value addition could have negative impact on the A/S profits. Where appropriate, distributors must also help suppliers to innovate in such a way that the suppliers themselves do not become a threat and this can be done only if distributor has superior ability to coordinate the activities of different value adding entities. Meaningful value chain restructuring calls for a greater focus on effectiveness rather than efficiency. Anticipating tomorrows customer needs and modifying the existing operations to be better positioned to meet the emerging demand. The Internet has broken down the traditional barriers that held competitors and even customer at arms length. To succeed in this cheaper, faster more convenient and customized environment, A/S has to partner with their competitors and depend more on outsourcing. A/S must render its cost structure more transparent to customers and together with suppliers from the beginning of the development process to craft customer solution instead of imposing their specification.Value drivers evolve over time as changes takes place in underlying technologies, market and regulatory environment. Anticipating and taking advantage of these changes holds the key to establishing a sustainable leadership position in any industry. References: Christensen, Clayton M.; Raynor, Micheal E. and Verlinden, Mathew (2001) "Stake to where the money will be", Harvard Business Review, November, pp. 72-80. Read More