20110019

Supply Chain Management

Case 4

A Tale of Two Electronic Components Distributors

Electronics distribution was a $23.1 billion industry in the USA and Canada. The products
included in this industry were computer products, semiconductors, connectors, electromechanical
products, wires, cables, etc. In recent years, the company was experiencing double-figure growth
annually. The growth was due to a surge in the demand of these products due to technological
advancements. Another factor was that the distributors were determined to stick to their core
competencies. The large companies such as intel were cutting down their sales force to save
costs, which in turn increased their dependency on distributors.
AESCO was founded as the Akron Electronic supply company in 1954 and distributed TV and
radio parts till 1975 when Bill Feth joined the company. The company was restructured after
1979’s devastating fire and then became an industrial distributor of electronic components to
OEMs. The company provided value in four ways, they dealt with time-place-distribution, they
provided assembly and kitting services to their customers, they gave attractive payment terms
and their employees made sales calls on behalf of their manufacturers. OEMs were now moving
towards JIT system, and they also preferred one-stop buying places for all their products.
The order processing process was like, when they got an order they checked if it was from a new
or an existing customer. If the order was from a new customer then they would send the order for
the credit approval process and then set up a new account and then check the inventory position.
However, if it was from an existing customer, then they would straight away check the inventory
position. From here onwards the process was the same for both types of customers. They would
then give them the prices quotations, confirm the order with the customer and then set up a
delivery schedule. The company had to anticipate their customers’ order in order to keep a low
inventory and also be on time with their deliveries.
The company had more than 70 employees, and all of them except Bill did not have formal
education. However, they all were given sufficient training by AESCO. Most of their employees
were on hourly wages, and payroll accounted for around 12-16% of their sales. They also gave
monetary incentives to their salesforce people for meeting their targets and also by keeping the
margins high. This was done to motivate their employees.
Due to the nature of the business, AESCO’s clientele had many repeat customers. 20% of these
recurrent customers accounted for 80% of their sales. They had software which tracked their
client’s data and anticipated their demands. To ensure long term relations, they went out of their
way to provide superior customer service, which included informal meetings, etc. AESCO was
also franchised by many manufacturers to carry their products, who in turn provided them with
products support and training. To gain the trust of their suppliers, AESCO was expected to be
neutral in case they had two similar products from two companies.
The assembly operations were done in a 3,000 square foot area attached to the warehouse. They
had 40 people for the assembly line, who were mostly uneducated with little or no prior
experience. Orders for value-added assembly were routed through the engineering department,
where the technicalities, cost and time were identified.

ES components Inc. was founded in 1981 by Aubrey. In 1995, they had sales of $4.6
million and 12 full-time employees. They provided active and passive components to defense
contracting businesses including Sipex, Raytheon. They identified and served the needs of their
customers by procuring low volume and getting them hard to get components. The market they
served was very small, and their customers also needed very specific products in small batches
with a lot of protocols, because of which there were only a few distributors doing this. ESCI
acted as OEM’s agent. The company would carry $1.2 million worth of inventory at any given
time, which allowed it to provide products in little time. The inventory was monitored very
closely.
There order processing started from the customer's order. Then they checked if the item was in
their inventory, if it was not in the inventory, they would check their vendor’s database and
contact the vendor to finalize the order and then quote the price to their customer. If the ordered
product was available in the inventory, they would straight away quote the price to their
customer. Then they would log the order information in their systems, evidence the materials,
match all the material to the order invoice, then check the technical specifications of the products
and verify them with the order places. Finally, if everything was clear, they would pack and ship
the products to their customers.
ESCI stressed on maintaining good relations with their buyers and suppliers. There were two
major reasons for this’ firstly; counterfeit goods were common, the industry players were
cautious about whom they did business with. Secondly, fair pricing was crucial in maintaining
relationships over a longer time period.
Financially ESCI was a sound business with profit margins of about 25-29%. Aubrey did not see
the internet as a threat to his company but what seemed to be the biggest threat to him was the
fact that he had most of the knowledge of suppliers and customers and was worried about the
company's fate if something happened to him.
In the distribution industry, many small companies were merging or were being acquired by
larger companies. The market was dominated by two major players, Arrow and Avnet. And these
companies were growing much faster than the industry and touching revenues of around $10
billion. Due to this consolidations, the power was shifting to the distributors from the suppliers
but also led to pressure on smaller distributors.
Internet and technology were now playing a major role in this industry as information
transmission was becoming easier and also making inventory management easier for the
distributors, which improved their efficiencies.
In order to grow, distributors had to differentiate and hence they gave value-added services. This
included assembly, kitting, customization and packaging services to the customers. They were
also becoming involved with the product development cycle.
This worried Feth, as he thought about strategic choices for AESCO in order to evade the threat
from large manufacturers. For Aubrey, he womndered if it was the right time for him to expand
or not.