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ASSIGNMENT SUBMISSION FORM

Treat this as the first page of your assignment


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
61510121
Ranjith Reddy
61510798
Samrat Seal
61510479
Sayani Mukherjee
61510064
Soumya Banerjee
61510229
(Let us not waste paper, please continue writing your assignment from below)

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 to
different 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 price business model? How should they
adapt?

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 services
like 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.

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 multiple
sourcing 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 offering not 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 Client
Base of 50000+ OEMs
- Reduced Cost of new
customer acquisition
- Cost of Servicing
Transactional Customers
Reduced

Opportunities
- Express only satisfies
demand, thus
potentially leaving
demand creation to
Arrow through
- Reduce SG&A costs

Weaknesses
- Reduction in Margin
for Arrow
- Cannibalization of
Sales
- Lack of differentiation
on the Brand/ Service

Threats
- Express would own the
portal, raising the
possibility of a conflict
of interest
- Use as a bargaining
tool by existing
customers

Supplier Reaction
The case points to a delicate balance of power between Arrow and its suppliers. By shifting to
Express, Arrow would also expose its suppliers to increased competition, essentially forcing them
to buy orders in order to stay market competitive. This will not be viewed in a good light by
suppliers, who can respond by lowering margins on design wins. In addition, this model would
essentially promote jump balls as the sale will happen without any value addition by Arrow.
Margins on jump balls were far lower than that obtained in design wins.
We do not feel that Arrow is in any danger of being de-intermediation by the suppliers as the value
of the distributor is in extending credit, servicing customers and cater to small orders by
aggregating demand. All of these are non-core activities for suppliers and it would be
counterproductive if they were to execute these activities in-house.

Customer Reaction
Arrow has four main customer bases:
1. OEMs: This segment should prove fairly immune to the benefits offered by Express. The
primary concern for this segment is reliability and speed. In addition they also expect value
added services in terms of customization of shipments. Finally, most customers view online
distributors as less than legitimate due to the prominence of independent, nonfranchised
distributors, and are unlikely to order from the Express portal.
2. Contract Manufacturers: Extremely price sensitive. Requires little Value Added
Services. Prime for shifting to the Express platform. Since this is a fast growing segment
for Arrow, presents a significant risk if Express is adopted.
3. X86 Manufacturers: Require no specialized services. Only benefit derived from Arrow is
credit facilities, which can be extended by a competing distributor as well. Purchase in a
purely commoditized fashion. High risk of existing customers shifting to the Express
platform.
4. Assembly Customers: Require highly customized solutions. No risk of shifting to the
Express solution.

Revenue Projections
From Exhibit 1, Arrow has about 867 Mn USD in BAS sales, which can potentially get affected
by the Express platform. This is a cause for worry, as BAS contributes the maximum margin for
the company. Current margins are at about 16.25%, and for the two scenarios optimistic and
pessimistic, is slated to go down to 15.49% and 14.9% respectively. If we consider some
percentage of VA sales cannibalization, these figures would further decrease below the company
target of 15%. Finally to make up the Dollar GM in sales, Arrow would need an increase of 22%,
as opposed to 10% growth achieved last year.

Recommendation
Given all the factors enumerated above, we do not see the partnership with Express as a viable
solution for Arrow. In fact, Arrow can develop its own website to have ordering capabilities and
exploit 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 and
servicing 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.

Exhibit 1: Sales Segment Analysis


Sale Segments
Total Sales Volume
Transactional Customers
Relationship Customers
Optimistic Estimate of Cannibalization (a)
Transactional BAS Volume (=a)
Transactional VA Volume
Total VA Volume
Relationship VA Volume
Relationship BAS Volume

$ Mn
2310
578
1733
293
293
285
1443
1159
574

Exhibit 2: Scenario Analysis


Customer Type
Relationship
Transactional
Total
Gross Margin
$ GM
Margin to Express

BAS
574
293
867
22.50%
195

VA
1159
285
1443
12.50%
180

Total
1733
578
2310
16.25%
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
578
Total
867
1443
2310
Gross Margin
22.50%
12.50%
14.90%
$ GM
164
180
Additional Sales to Maintain Profit
190
% Sales Increase
22%