10% annual gross profit

12.5 % return on capital employed

10% productivity growth

or years Avnet’s overriding goal has been tobecome the industry’s “premier” global distri-bution and services company. Not only is thatobjective enshrined prominently in its visionstatement, the word premier has becomeshorthand within the company as the very def-inition of success.

But just in case anyone is still unclear about the meaningof premier, and exactly how the company intends toachieve it, Chairman and CEO Roy Vallee has now sup-plied some very specific guidance. In a recent video mes-sage to employees, he outlined three specific targets Avnetneeds to hit in order to attain that lofty status.

The company’s mantra for the coming fiscal year, 10 +10 + 12.5 = Premier, spells it out very simply. The first“10” stands for 10 percent annual gross profit growth.The second “10” stands for 10 percent annual growth inproductivity. And the “12.5” stands for 12.5 percent returnon capital employed (ROCE). Add them together and youget the necessary ingredients for a truly premier company.

To help employees better understand the company’s 2007game plan, Avnet Global Perspective spoke with Valleeand several other senior executives about what they andtheir organizations are doing to help the companyachieve its latest objectives.

The Right Goals

For starters, those goals weren’t just plucked randomlyout of the air. It’s well established, for instance, that thevaluation of a company’s stock, or P/E ratio, is closelylinked to its return on capital. Avnet’s cost of capital isabout 10 percent annually, so its goal of 12.5 percentROCE is intended to generate a reasonable return (on thecapital being used) that can be invested for growth orreturned to the shareholders.

Likewise, the company’s profit and productivity goals arebased on the expectation that, while the markets Avnetserves can expect a long-term growth rate of 7 percent to9 percent, Avnet should be able to achieve double-digitgrowth. “We’re the leader in our field, we have scale andscope advantages over most of our competition, and wefeel that we should grow faster than the markets weserve,” says Vallee.

He reckons that by reaching each of its three key goals,

Avnet can significantly out-perform its rivals, while dou-bling its intrinsic value every five years. That, in turn,should keep the company attractive to investors and, ulti-mately, reflect in a higher share price.

Vallee sees his primary role as helping explain and com-municate the company’s new formula for success. Withthe organization now over $14 billion in sales and justunder 11,000 employees, he says, “It is imperative thatwe’re as clear as possible about our vision, our goals andwhat we’re trying to accomplish. I’m convinced that ifwe’re clear about what we want to achieve, our very tal-ented people will find a way to get it done.”

Chief Financial Officer Ray Sadowski agrees the 10 + 10+ 12.5 goals are not only “critical” to Avnet’s future suc-cess, but absolutely achievable. Yet he concedes the com-pany is reaching considerably higher with these objectivesthan it ever has before. “They certainly are aggressive,and will require the company to step it up a notch,” hesays.

Success Strategies

Obviously, there’s more to success than setting ambitiousgoals. Avnet’s senior leaders realize that, and have beendeveloping a variety of strategies and tools to help thecompany move towards premier status. Major initiativesare underway to increase productivity and improve effec-tiveness in information solutions (GIS), finance, logisticsand human resources, as well as in each of the compa-ny’s major business units.

The leadership structure itself has also been streamlined,with shared services such as logistics, IT, humanresources and finance now reporting directly to globalmanagers in each of those areas. Even the chief execu-tive’s office is getting reinforcement, with TechnologySolutions (TS) veteran Rick Hamada moving into thenewly reinstated job of chief operating officer (COO).Hamada says he intends to keep the company focused on,and accountable for, achieving the new performancegoals. “My mission as COO? I would define it as getting topremier faster,” he says.

For Harley Feldberg, president of Avnet ElectronicsMarketing (EM), the key to consistently higher profits ischoosing business engagements more carefully. “We haveto be much more selective about the business we accept,”he says. In some cases, that may mean turning away

New Initiatives

The EM Americas business is undertaking one of Avnet’smost promising 2007 initiatives by developing a newquoting system called “Quest,” which will eventually beused company-wide. Scheduled for launch late this year,the system uses artificial intelligence techniques to auto-matically interpret customers’ price quote requests,regardless of whether they are received in XML, spread-sheet or even Word documents, or with incorrect orincomplete part numbers.

EM currently uses less-effective rules-based techniques tomatch orders with the millions of parts in its database.But the new system is expected to significantly increasethe number of parts that can be matched without manualintervention. “At the end of the day it will make our salespeople’s lives easier and more productive,” says Feldberg,by helping them respond faster to customers, with moreaccurate and complete quotes.

The Quest project is part of a larger strategy, led by ChiefOperational Excellence Officer Ed Kamins, to instill a cul-ture of continuous improvement across the company.Kamins’ staff is training an initial group of 100 in-houseexperts in six-sigma techniques for improving the qualityand execution of Avnet’s existing services. Those effortswill be supplemented, where needed, by a more funda-mental reengineering of the underlying business processes.

orders from low-margin customers or suppliers. It alsocould mean demanding assurance that products designedwith Avnet’s help in North America will actually be pro-duced in Asia with Avnet-supplied components.

Avnet will continue serving the industry’s biggest electron-ics manufacturers wherever it’s possible, and profitable,says Feldberg. But considering their tendency to frequent-ly bypass the distribution channel, he expects the compa-ny’s sales staff to increasingly focus on developing higher-margin business with smaller customers.

Memec Group’s 2 billion in sales significantly expandedAvnet’s components business globally, giving the companyits first presence in Japan. The EM group plans to contin-ue investing in these high growth regions. “We’ll contin-ue to use our services and supplier relationships in themature regions to drive accelerated growth and learningin newer markets,” says Feldberg. For example, Avnet hasbeen offering supply-chain services such as in-plantstores, and just-in-time inventory management in theU.S. for 20 years. Now it aims to accelerate growth in Asiaby introducing some of those same successful servicesthere. “It’s all about using areas where we have a com-petitive advantage,” he says.

Avnet’s TS group also is focusing on international expan-sion. In April it acquired European radio frequency iden-tification (RFID) distributor Printex, and plans to expandits distribution of Symbol, Intermec and other wirelessproducts to resellers and integrators across the continent.In July it acquired Zeta Computer, a German value-adddistributor of Hewlett-Packard technologies and open-storage systems, which added 300 new resellers to the cus-tomer base. In late 2006 TS aquired Sun’s leading distrib-uter Access, with 2 billion in sales in the US and EMEA.

In Asia, the group is diversifying its product lines withnew suppliers. It recently added AMD-based motherboardsand notebook PCs from ASUSTeK Computer, as well asAMD Opteron(tm)-based servers from Newisys. In China,Avnet is working with AMD to pursue the boomingInternet café market. Hamada says the TS group is look-ing for additional expansion opportunities in China,India and other fast-growing Asian markets, but it is pro-ceeding cautiously. “We are taking our time to learnabout the region and business practices so that we can beassured of our long-term success there,” he says.

Pursuing Productivity

One of Avnet’s main productivity strategies for 2007 is toimprove the process of evaluating and compensatingemployees. “Employees are asking us to do a better job ofperformance management,” says Vallee. “They want us toidentify which people are not getting the job done andimplement corrective actions. They also want us toacknowledge those who are performing and assure thatthey’re properly rewarded, and have opportunities toadvance.”

Performance management has been a weak point onrecent employee surveys, but Steve Church, Avnet’s chiefhuman resources development officer, says improvementsare coming. “We heard them, and we’re going to deliveron that,” he asserts. Church says that managers areexpected to provide every employee with a timely perform-ance appraisal, including a personal development planand goals review, around the start of each fiscal year.

To ease the burden on managers, he’s gotten approval fora new human resource information system that withintwo years should become the company’s first worldwideemployee database. Avnet also will be installing new per-formance-management software to help managers moni-tor their employees’ training, goals and personal-develop-ment plans. “My philosophy is to make it as easy as pos-sible,” says Church, who also plans to increase both mid-dle-management and individual training programs.

Whether it’s developing new software, or installing off-the-shelf management systems for human resources orfinance, many of Avnet’s strategic projects for 2007involve information technology. Several of those projects,in fact, are likely to help determine whether or not thecompany meets its new performance goals. Yet StevePhillips, Avnet’s chief information officer, says he can’tafford to neglect the smaller challenges, such as gettinghis help-desk staff to respond faster to inquiries.

His outlook speaks volumes about the challenges andopportunities that lie ahead for Avnet. Says Phillips: “It’scertainly about big breakthough initiatives, but it’s alsoabout everyone playing their part and doing the smallthings well.”

Business-process reengineering typically occurs on a largescale. The Quest system, for instance, has involved morethan 70 people and will cost millions of dollars whencomplete. Another ambitious project is underway at TS.The operating group’s Americas business is developing animproved order-handling process for industry-standardcomputer components. Meanwhile, Avnet Logistics isworking on a “lean logistics” program aiming to reduceexcess costs in services, transportation and warehouseoperations. “We’re going to eliminate waste to the tune of$66 million over the next three years,” vows Jim Smith,president of Avnet Logistics.

Kamins notes, however, that even seemingly smallchanges also can pay big dividends. For example, a recentemployee suggestion to eliminate just four unnecessarykeystrokes on orders received at Avnet’s warehouses short-ened the data-entry process by perhaps five seconds. Nobig deal, right? But when multiplied by thousands oforders daily, a slight change like that can potentially savehundreds of hours of labor.

To encourage similar acts of ingenuity, Avnet is rollingout Avnet Results to solicit more employee suggestionsand to spread the resulting improvements across thecompany. More than 4,000 Avnet employees have beentrained. Now it’s up to their employees to speak up.Remember, says Kamins: “No matter where you are in thecompany, nobody knows your job better than you.”

Everything's Coming UpROCE

Over the next three issues of Avnet GlobalPerspective, we're going to delve into a termyou've heard quite often but may not truly under-stand: return on capital employed, or ROCE.Hopefully, by the end of the series you’ll not onlyhave a better handle on this very importantconcept, you'll discover exactly whatyou can do to influence it.Here's the basic equation:

Earns x Turns = ROCE

Short. Simple. Flows nicelyoff the tongue when you

In this issue, we'll take a look at the first part of the equa-tion, earns. When we talk about earns, we're referring tohow well we manage our income statement, also calledour profit and loss statement, or P&L. What goes into aP&L, you may ask? Sales. How much it cost to make thosesales. Expenses. Taxes. Hopefully, when you get to the bot-tom of the P&L you have a profit, not a loss. The biggerthe profit the better.

In the July/August issue of Avnet Global Perspective, we'llwalk through the turns side of the calculation, which is

all about the balance sheet. That's where you'll find ouraccounts receivable (how quickly our customers pay

us), accounts payable (how quickly we pay oursuppliers), inventory and debt. We'll pull it alltogether after that.

So, what's the big deal with ROCEanyway?

In the past, Avnet focused on improvingthe P&L. We cared about how muchmoney we made, not how much we had

to invest to do so. We acquired an averageof four companies a year in the 1990s and

revenue was rising accordingly. Our stock price,however, was not. Why?

Consider this: Suppose someone cameup to you with a surefire way tomake a quick $100. What wouldyou say? Well, what if you had toinvest $10,000 to make that $100?That's only a 1 percent return onthe capital (cash, to put it simply)you invested. Need a magnifying

pronounce the acronym "ro-see." But unless you're afinance junkie or have a performance incentive builtaround it, that equation probably doesn't mean a thing. Itshould. ROCE is an indicator of financial performance,and a financially healthy company is one that providesthe best career, training and advancement opportunities.Fatter paychecks, too.

glass to find it. But what if you had to invest only $1,000?Now, we're talking a 10 percent return on the investment.Much better.

That's the math behind the ROCE magic, and it's oneway we determine how successful we are. It's also one ofthe key things investors look at when they're figuring outwhere to put their money. Avnet has changed from acompany that measured profit as a percent of sales to onethat measures profit as a return on the capital we have toemploy (spend or invest) to function and grow.

The ROCE calculation can be a bit, say, painful.Complex, for those whose glass is half full. But don'tpanic! Read on. It's not nearly as heinous when we take itone step at a time.

Sales - Cost of Sales = Gross Profit$100.00 - $86.90 = $13.10

First step: sales. Well, that's pretty obvious. How muchrevenue did we take in? For example's sake, let's say wesold $100 worth of cupcakes (really, who doesn't prefer tothink about rich, creamy, yummy cupcakes instead oftech distribution?) Now, subtract how much we paid ourvendors for the cupcakes we sold, taking into accounteverything from the cost of the wrapper to those littlesugar dots on top – that's the cost of sales. What we're leftwith is our gross profit, a very important number reflect-ing the amount of money we had to spend to generate thesale in the first place.

Using Avnet's actual gross profit margin from last quarter,

which was 13.1 percent, that means that for every$100 we sold we got to keep a whopping $13.10.Enjoy it while you can.

Gross Profit - Operating Expenses =Operating Income

$13.10 - $9.08 = $4.02

What about your salary? What about buildingrent? Benefits? Travel expenses? Training? ForAvnet, such operating expenses last quarteramounted to 9.08 percent of our sales. That's$9.08 using our $100 example. So, $13.10 (ourgross profit) minus $9.08 leaves us an operatingincome of $4.02.

Operating Income - Taxes = NOPAT $4.02 - $1.36 = $2.66

Knock knock. The taxman cometh. Avnet's tax rate on itsoperating income is just shy of 34 percent, which is about$1.36 of our $4.02 in operating income. So, $4.02 less$1.36 takes us down to $2.66. That's our net operatingprofit after taxes, the NOPAT in the equation above.

NOPAT ÷ Sales = Earns $2.66 ÷ $100.00 = 2.66%

The end is in sight! All we have to do now is divide that number by our $100 in sales, and we have calculated ourearns (earns is also the nickname for return on sales).Okay, are you ready? Drumroll... 2.66 percent!

Everything’s Coming Up ROCE

Part 2 TURNS

elcome back! In the May/June issue of AvnetGlobal Perspective, we took on the first halfof the ROCE equation, “earns,” comprisingour profit, expenses, taxes and a handful ofother items. In this issue, we’ll delve into“turns,” the second part of the calculation.

Why should you care about ROCE, or return on capitalemployed? As we pointed out last time, ROCE (pro-nounced ro-see) is an indicator of financial performance.From an employee’s point of view, a financially healthycompany is one that provides the best career, training andadvancement opportunities, as well as fatter paychecks(always a crowd pleaser). With all the metrics that go intoROCE, you - yes, you - directly influence atleast one of them. That’s right! Thepower to improve Avnet, atleast a little bit, is yours.Here’s the basic equation onceagain:

Earns x Turns = ROCE

The earns side of the equation wasall about the profit and loss, orP&L, statement. We began that exer-cise with $100 in sales and by thetime we had worked our way throughthe earns calculations - taking out costof sales, taxes, etc. - we arrived at a fig-ure of 2.66 percent. (To refresh yourmemory, see the series of earns calcula-tions from the last issue in the sidebar.)

NOPAT ÷ Sales = Earns$2.66 ÷ $100.00 = 2.66%

What might that 2.66 percent signify? Well... nothing,actually. We need the other side of the equation, turns, tobe able to come up with a figure we can use to measureour progress and compare ourselves to others.

So what is the “turns” side of the equation?

Sales ÷Total Capital Employed = CapitalTurns

What is the goal of the turns calculation, you ask? It’s toimprove our capital turns number by increasing our salesnumber or lowering our total capital employed. In lastissue’s article we talked about how to increase our sales byselling more products to our existing customers, findingnew customers or adding new products or services to ourline card. What about lowering our total capitalemployed? To accomplish this, let’s first learn what itmeans.

Debt + Equity - Cash = Total CapitalEmployed

12.00 + $20.00 - $6.00 = $26.00

Realistically, very few of us - the CEO’s team and the

Umm, so what, you say? Well, precisely. It doesn't tell usmuch, does it? That's why Avnet focuses on both sides ofthe earns/turns equation, a much better gauge of howwell we're performing. 2.66 percent is just half of ourROCE calculation. We'll tackle the other half, turns, nexttime. The clouds will part. The birds will sing. All will bewell with the world.

Naah, but at least we'll be one step closer to cracking thisROCE nut.

Everything’s Coming Up ROCEPart 3

This is it, the third and final installment in our series of articles on return on capital employed, or ROCE. AlthoughROCE is one of the more involved financial computationsused to determine how well Avnet is doing, it also providesus with a great deal of insight. Furthermore, everyone atAvnet has the power to impact one or more numbers inthe ROCE calculation, giving each of us the opportunityto improve the company’s performance. We’ve pointed outbefore, a financially healthy company is one that providesthe best career, training and advancement opportunities –and of course, fatter paychecks.

Using our example of $100 in sales, we followed thefinancial trail (see sidebar, pg. 28) through the profitand loss statement and balance sheet (accounting foreverything from salaries to debt obligations) to arrive atAvnet’s Q3 FY06 ROCE number, 10.2 percent. But what tomake of that? Is it good? Awful? Are we getting raises ornot?

In Avnet terms, 10.2 percent is just north of acceptable. It’sabout a C on an A-F grading scale. When we reach 10 per-cent ROCE, we are generating returns just slightly greaterthan our investors would expect for a company of our sizein this industry. Our goal is to reach 12.5 percent, provid-ing higher returns for our shareholders and making us amore attractive investment choice. As they see higherreturns on capital, they will be willing to pay a higherprice for shares of the company, and the stock priceshould go up.

Also, when we are below the 10 percent ROCE threshold,we are not generating enough profit to reinvest in ourbusiness and fund new growth initiatives, which could putus at a competitive disadvantage in the marketplace.When we reach our 12.5 percent ROCE goal, we open thedoor to a whole new set of options, from acquisitions to adcampaigns. We can be more aggressive, and we can takeadvantage of a broader range of opportunities.

The bottom line: We need to generate higher returns forour shareholders, and we are well on our way to accom-plishing that goal. We climbed from Q3’s 10.2 percent to11.1 percent in Q4* (a grade of B-). Despite a dip to 9.5percent in the first quarter of FY07, we should resume ourupward trend and reach our 12.5 percent target (grade A!)by June, the end of the current fiscal year. The Seeds of

board of directors - have anything to do with Avnet’s debtor equity (issuing shares of stock, initiating a buyback ofoutstanding shares, floating debt on the market, etc.)However, almost all of us impact the cash flow. An admin-istrative assistant does it every time she orders office sup-plies or books travel. A product manager impacts it whennegotiating payment terms with a supplier. A credit man-ager does so when ensuring proper payment for our servic-es. An inventory manager does her part by making sure wehave the right mix of product on our shelves to sell to ourcustomers.

Comparing the $100 in sales we’re using in our examplewith Avnet’s actual sales gives us a rough estimate of theappropriate dollar amounts for debt, equity and cash weneed to use in the total capital employed equation above.Now, divide our $100 in sales by our $26 in total capitalemployed. Voila! Our turns number: $3.85.

Sales ÷ Total Capital Employed = Turns$100.00 ÷ $26.00 = $3.85

And now, the big finish!

Earns x Turns = ROCE2.66% x $3.85 = 10.2%

You’ve done it! You’ve calculated ROCE. Do you feelsmarter? You should. Not many people know how to do so.But what, you might ask, does it all mean? Is 10.2 percentgood? Is it awful? Are we getting raises or not? Find out inthe next issue of Avnet Global Perspective.

Refresher Course: How We Calculate Earns

Sales - Cost of Sales = Gross Profit$100.00 - $86.90 = $13.10

Gross Profit - Operating Expenses = OperatingIncome

$13.10 - $9.08 = $4.02

Operating Income - Taxes = NOPAT$4.02 - $1.36 = $2.66

NOPAT ÷ Sales = Earns

Change seed packets list a host of things each of us can do to help Avnet reach that goal, and youcan probably think of a few others. The more we improve ROCE, the more stable Avnet becomesand the more attractive we are to investors.

Hopefully, this series has taught you something aboutthe calculations that go into the ROCE equationand how you influence them. If you’d like themetric sleuths to investigate another financialenigma, let us know and we’ll takeon the challenge.

Many happyreturns!

Earns x Turns = ROCEUsing $100 in sales as an example

Sales - Cost of Sales = Gross Profit$100.00 - $86.90 = $13.10(Cost of sales refers to how much we pay our vendorsfor all that goes into the goods and services we sell)

Gross Profit - Operating Expenses = Operating Income$13.10 - $9.08 = $4.02(Operating expenses include salaries, rent, benefits,travel, training, etc.)

Operating Income - Taxes = NOPAT $4.02 - $1.36 = $2.66(NOPAT means net operating profit after taxes)

NOPAT ÷ Sales = Earns$2.66 ÷ $100.00 = 2.66%

Debt + Equity - Cash = Total Capital Employed$12.00 + $20.00 - $6.00 = $26.00

Sales ÷ Total Capital Employed = Turns$100.00 ÷ $26.00 = 3.85

Earns x Turns = ROCE2.66% x 3.85 = 10.2%

* Due to a change in accounting rules in the first quarterof FY07, the ROCE numbers for Q3 FY06 and Q4 FY06were recalculated to 9.8 percent and 10.6 percent, respec-tively.