Arrow Electronic Inc - BBMK_A

8/9/2019 Arrow Electronic Inc - BBMK_A

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INTRODUCTION

Arrow/Scweber (A/S), a franchised distributor and subsidiary of Arrow Electronics, is one of three

groups (the other two being Anthem Electronics and Zeus Electronics) sold semiconductors todifferent customer bases. While Zeus sold to military and aerospace customers, A/S and Anthem

sold to industrial customers. Currently, A/S is evaluating the Express Parts Internet Distribution

Proposal. It is an internet based trading system that would enable distributors to post inventories

and prices, allowing for price shopping. The two sides of the coin were:

Advantages:

A/S could expand its customer base by attracting new companies who could view the

traded items on Express and prices and reach out to the company

Disadvantages:

Could affect relationship with suppliers

Could affect relationship with customers How many customers might switch over to

Express? Could A/S could even be dis-intermediated from distribution channels?

Would open market trading destroy A/Ss low pricebusiness model? How should they

adapt?

ASSIGNMENT SUBMISSION FORM

Treat this as the fi rst page of yo ur assignm ent

Course Name: BBMK

Assignment Title: Arrow Electronic Inc.

Submitted by:

(Student name or group name)

Group Member Name PG ID

Ankit Ahuja 61510049

Ramashis Biswas 61510121Ranjith Reddy 61510798

Samrat Seal 61510479Sayani Mukherjee 61510064

Soumya Banerjee 61510229

(Let us not waste paper, please continue writing your assignment from below)


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DISTRIBUTOR POWER

A franchised distributor like A/S offers a wide range of services to both its suppliers and customers,

giving them considerable power:

1. One of A/Ss largest suppliers Altera sold only 20% of its proprietary programmable logic

devices (PLDs) to customers directly. This is because the PLDs required extensive serviceslike value added programming after the sale, which was provided by its two distributors.

2. Distributors also helped suppliers gain new business by marketing their new technologies

to customers. Design win distributors like A/S worked with customers to engineer their

end products, making the supplier chips integral to the product, thus generating demand

for suppliers and gaining larger margins from them.

3. Distributors provide considerable value add through order cycle management and an

increasing g proportion of sales required this, removing this additional pressure from

the suppliers.

4. Some OEM customers ordered small lot sizes and required short lead time, which would

be an operational challenge for a supplier. This is where the distributor came in.5. Some suppliers did not offer credit management services to its customers, giving the

distributors another opportunity to service the customer needs, thereby facilitating supplier

sales and customer satisfaction.

6. OEM customers ordered based on forecasted demand and not historic sales records,

resulting in fluctuating inventories for suppliers who preferred to let the distributors take

care of materials management.

7. Distributors can play favorites only in the standardized product category by pushing

preferred suppliers products.

SUPPLIER POWER

Of course, the market power is well balanced between the suppliers and the distributors, as it

needs to be in any sustainable business ecosystem. Suppliers offered the following incentives

and also put certain checks in place to strike a balance:

1. Suppliers offer financial incentives such as price protection and limited return

privileges only to franchised distributors, even refusing to honor product warranties

bought via other channels.

2. They also offer large discounts to preferred design win distributors, who then can beat

out their competition by securing more sales and pocketing a bigger margin.

3. Suppliers control the order of names on their distributor list, regulating distributors

chances of closing a sale by letting preferred ones know about potential sales earlier.

4. Suppliers channelize distributor requests to sales reps who could be readily available

to work for a preferred distributor or push it to overloaded sales reps who could take

up to 24 hours to process the request.


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The Express Proposal

Express Parts is a new, independent distributor which has developed an Internet based trading

system. The Express model is essentially a marketplace model, where there is little differentiation

amongst offerings. From Exhibit 6, it is clear that the site listings on Express will necessarily drive

down prices in the absence of collusion amongst distributors/ suppliers by providing multiplesourcing channels for each product. Essentially acting as a price aggregator, Express will allow

bargain hunting customers to quickly compare offerings across distributors and close in on the best

priced offeringnot necessarily the best value offering.

On the positive side, Express would allow Arrow to quickly reach out to a far wider customer base

than what its sales force was doing till date. Additionally, since the order taking would be handled

by Express, Arrow could cut down on manpower needed to service transactional customers.

SWOT Analysis of Express

Strengths

- Access to a large ClientBase of 50000+ OEMs

- Reduced Cost of newcustomer acquisition

- Cost of ServicingTransactional CustomersReduced

Weaknesses

- Reduction in Marginfor Arrow

- Cannibalization ofSales

- Lack of differentiationon the Brand/ Service

Opportunities

- Express only satisfiesdemand, thuspotentially leavingdemand creation to

Arrow through- Reduce SG&A costs

Threats

- Express would own theportal, raising thepossibility of a conflictof interest

- Use as a bargainingtool by existingcustomers


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Recommendation

Given all the factors enumerated above, we do not see the partnershi p with Express as a viable

solutionfor Arrow. In fact, Arrow can develop i ts own website to have ordering capabil i ties and

exploi t the internet as a direct channel for acquiring and servicing price-sensitive customers.

Internet presence will also enable Arrow to streamline inventory management for OEMs andservicing the fast growing CMs more effectively. Finally, the VA customers currently contribute

60% to Arrows business their largest customer base is immune to the Express solution

justifying the non-acceptance of Express.


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Exhibit 1: Sales Segment Analysis

Sale Segments $ Mn

Total Sales Volume 2310

Transactional Customers 578

Relationship Customers 1733Optimistic Estimate of Cannibalization (a) 293

Transactional BAS Volume (=a) 293

Transactional VA Volume 285

Total VA Volume 1443

Relationship VA Volume 1159

Relationship BAS Volume 574

Exhibit 2: Scenario Analysis

Customer Type BAS VA TotalRelationship 574 1159 1733

Transactional 293 285 578

Total 867 1443 2310

Gross Margin 22.50% 12.50% 16.25%

$ GM 195 180

Margin to Express 6%

Optimistic Scenario: Transactional Sales Lost

Customer Type BAS VA Total

Relationship 574 1159 1733

Transactional 293 285 578

Total 867 1443 2310

Gross Margin 22.50% 12.50% 15.49%

$ GM 177 180

Additional Sales to Maintain Profit 107

% Sales Increase 12%

Pessimistic Scenario: Transactional Sales + 40% Relationship Sales Lost

Customer Type BAS VA Total

Relationship 574 1159 1733

Transactional 293 285 578Total 867 1443 2310

Gross Margin 22.50% 12.50% 14.90%

$ GM 164 180

Additional Sales to Maintain Profit 190

% Sales Increase 22%

Arrow Electronic Inc - BBMK_A

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