H ARVA R DB U SI N E SSS C H OO L 9-601-131 REV:JANUARY 2,2002 ANDREW MCAFEE FRANCES X.FREI Delivery Problems at Arrow Electronics,Inc.(A) As she looked out over the Long Island Sound one snowy day in early 1993,Betty Jane ("B.J.") Scheihing,senior vice president of Worldwide Operations for Arrow Electronics,puzzled over her December monthly operating report for Arrow's four North American warehouses.Once again, Arrow's same-day shipping performance had fallen,reflecting an unpleasant trend that had begun about one year earlier.For some reason,Arrow's four Primary Distribution Centers(PDCs)had,over this period,been losing their ability to ship orders on the same day they were taken.In fact,Arrow's shipments had dropped from a better than 94%same-day ship rate,achieved regularly in 1991,to a 75%rate on this latest report.Given their customers'need for fast and reliable delivery,and the highly competitive nature of the electronics distribution industry,Scheihing knew that a service problem on this scale was a serious issue for Arrow. Scheihing's vice president of Logistics reported that the slip in same-day shipment was the result of a recurring"order surge"problem in the PDCs.The surge appeared as a batch of orders late in the day,flooded the distribution centers just before their freight carriers-local trucking firms,United Parcel Service(UPS),and Federal Express(FedEx)-made their final pick ups each day.The surge had first appeared shortly after Arrow's acquisition of rival electronics distributor Schweber in October of 1991.For a while,it seemed plausible to Scheihing that the general disruption caused by the Schweber acquisition could be the source of the surge,especially since Arrow also made substantial changes to the company's order transaction and management information systems(MIS) at that time.However,the surge remained long after all other acquisition-related disruptions had died down,and testing of the information systems had never revealed any flaws;they apparently operated exactly as planned. Complaints about missed shipments from the senior vice president of sales and marketing were increasing at the monthly staff meetings.Steve Kaufman,Arrow's CEO,was becoming impatient with the rising number of phone calls he was getting from unhappy customers as well as the increase in freight costs resulting from the need to use premium freight methods to make up having missed the scheduled shipping date.Scheihing knew she had to reverse the trend and return to the 94+% same day shipping performance that Arrow had built its customer service reputation around. Research Associate Kerry Herman prepared this case under the supervision of Professors Andrew McAfee and Frances X.Frei.It was derived from an earlier case,"Information Systems at Arrow Electronics,Inc.,"HBS case No.601-075.HBS cases are developed solely as the basis for class discussion.Cases are not intended to serve as endorsements,sources of primary data,or illustrations of effective or ineffective management. Copyright2001 President and Fellows of Harvard College.To order copies or request permission to reproduce materials,call 1-800-545-7685, write Harvard Business School Publishing,Boston,MA 02163,or go to http://www.hbsp.harvard.edu.No part of this publication may be reproduced,stored in a retrieval system,used in a spreadsheet,or transmitted in any form or by any means-electronic,mechanical, photocopying,recording,or otherwise-without the permission of Harvard Business School. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
9-601-131 REV: JANUARY 2, 2002 ________________________________________________________________________________________________________________ Research Associate Kerry Herman prepared this case under the supervision of Professors Andrew McAfee and Frances X. Frei. It was derived from an earlier case, “Information Systems at Arrow Electronics, Inc.,” HBS case No. 601-075. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. ANDREW MCAFEE FRANCES X. FREI Delivery Problems at Arrow Electronics, Inc. (A) As she looked out over the Long Island Sound one snowy day in early 1993, Betty Jane (“B.J.”) Scheihing, senior vice president of Worldwide Operations for Arrow Electronics, puzzled over her December monthly operating report for Arrow’s four North American warehouses. Once again, Arrow’s same-day shipping performance had fallen, reflecting an unpleasant trend that had begun about one year earlier. For some reason, Arrow’s four Primary Distribution Centers (PDCs) had, over this period, been losing their ability to ship orders on the same day they were taken. In fact, Arrow’s shipments had dropped from a better than 94% same-day ship rate, achieved regularly in 1991, to a 75% rate on this latest report. Given their customers’ need for fast and reliable delivery, and the highly competitive nature of the electronics distribution industry, Scheihing knew that a service problem on this scale was a serious issue for Arrow. Scheihing’s vice president of Logistics reported that the slip in same-day shipment was the result of a recurring “order surge” problem in the PDCs. The surge appeared as a batch of orders late in the day, flooded the distribution centers just before their freight carriers—local trucking firms, United Parcel Service (UPS), and Federal Express (FedEx)—made their final pick ups each day. The surge had first appeared shortly after Arrow’s acquisition of rival electronics distributor Schweber in October of 1991. For a while, it seemed plausible to Scheihing that the general disruption caused by the Schweber acquisition could be the source of the surge, especially since Arrow also made substantial changes to the company’s order transaction and management information systems (MIS) at that time. However, the surge remained long after all other acquisition-related disruptions had died down, and testing of the information systems had never revealed any flaws; they apparently operated exactly as planned. Complaints about missed shipments from the senior vice president of sales and marketing were increasing at the monthly staff meetings. Steve Kaufman, Arrow’s CEO, was becoming impatient with the rising number of phone calls he was getting from unhappy customers as well as the increase in freight costs resulting from the need to use premium freight methods to make up having missed the scheduled shipping date. Scheihing knew she had to reverse the trend and return to the 94+% same day shipping performance that Arrow had built its customer service reputation around. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics,Inc.(A) Industry and Company Backgroundi Industry characteristics The distribution of electronic components was a $10.2 billion dollar industry in 1992 in North America.Distributors sold more than 25 major categories of goods, including semiconductors such as microprocessors;dynamic,static,and erasable memories; programmable logic;analog and digital circuits;as well as discrete circuits;and passive components such as capacitors,resistors,switches,and connectors.These parts were supplied by more than 200 different manufacturers,such as Intel,Motorola,Texas Instruments,National Semiconductor, Advanced Micro Devices,AVX,AMP,and Molex. As the marketplace's stocking intermediaries,distributors alleviated the manufacturers'need to maintain extensive inventories and enabled them to avoid a number of risk positions.Through their relationships with distributors,manufacturers also saved on the sales force expense needed to reach 10,000 customers,allowing them to divert money to research and development.In addition, distributors took care of the credit administration and risk associated with these customers. For the customer,distributors provided the convenience of one-stop shopping from over 200 possible suppliers.Customers could also get extended credit terms,make smaller orders with short lead times to avoid inventory build-up,and benefit from a number of "value-added"services provided by distributors. Industry trends Growth of the electronics industry since 1970 had been very strong,averaging 12%compounded annually,despite two significant recessions.This growth was accompanied by firms increasing their geographic scope,resulting in fewer distributors.Starting from a regional base, a few ambitious distributors had grown dramatically-organically and by acquisition-becoming national in scope.Avnet Inc.had been the first mover,growing to national scope and a dominant position in the 1970s.Geographic expansion,industry cycles,and the increasing need for capital and sophisticated management capabilities pushed many distributors beyond their capabilities,resulting in several waves of consolidation in the industry.By 1990,the top five electronics distributors accounted for over 60%of the industry's revenue;in 1970 the top five had accounted for only 25%, and it took 25 distributors to get to 60%.Some industry analysts predicted that this trend would continue,and that eventually the top five distributors would command over 75%of industry revenues. Throughout this time,gross margins2 declined throughout the industry (see Exhibit 1).This downward pressure came as the distributors moved from regional to national competition and as customers became more demanding as they grew larger and implemented more sophisticated purchasing systems.All distributors,including Arrow,were keenly aware of this trend and eager to halt,or at least,retard it.However,they all foresaw that declining margins would be a continuing characteristic of their industry,necessitating a constant need to manage and lower their cost structures. The industry was also characterized by high employee turnover-particularly among the sales force.The rapid expansion of the industry attracted high energy,ambitious people,and created above average opportunities for income growth among sales representatives,who were typically paid entirely on commission.They developed close relationships with their customers,and often believed they could take their customers with them if they moved from one distributor to another. 1 The following industry and company information draws on"Arrow Electronics:The Schweber Acquisition,"HBS case No. 798-020. 2 Defined as the difference between purchase and sale prices of components. 2 This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics, Inc. (A) 2 Industry and Company Background1 Industry characteristics The distribution of electronic components was a $10.2 billion dollar industry in 1992 in North America. Distributors sold more than 25 major categories of goods, including semiconductors such as microprocessors; dynamic, static, and erasable memories; programmable logic; analog and digital circuits; as well as discrete circuits; and passive components such as capacitors, resistors, switches, and connectors. These parts were supplied by more than 200 different manufacturers, such as Intel, Motorola, Texas Instruments, National Semiconductor, Advanced Micro Devices, AVX, AMP, and Molex. As the marketplace’s stocking intermediaries, distributors alleviated the manufacturers’ need to maintain extensive inventories and enabled them to avoid a number of risk positions. Through their relationships with distributors, manufacturers also saved on the sales force expense needed to reach 10,000 customers, allowing them to divert money to research and development. In addition, distributors took care of the credit administration and risk associated with these customers. For the customer, distributors provided the convenience of one-stop shopping from over 200 possible suppliers. Customers could also get extended credit terms, make smaller orders with short lead times to avoid inventory build-up, and benefit from a number of “value-added” services provided by distributors. Industry trends Growth of the electronics industry since 1970 had been very strong, averaging 12% compounded annually, despite two significant recessions. This growth was accompanied by firms increasing their geographic scope, resulting in fewer distributors. Starting from a regional base, a few ambitious distributors had grown dramatically—organically and by acquisition—becoming national in scope. Avnet Inc. had been the first mover, growing to national scope and a dominant position in the 1970s. Geographic expansion, industry cycles, and the increasing need for capital and sophisticated management capabilities pushed many distributors beyond their capabilities, resulting in several waves of consolidation in the industry. By 1990, the top five electronics distributors accounted for over 60% of the industry’s revenue; in 1970 the top five had accounted for only 25%, and it took 25 distributors to get to 60%. Some industry analysts predicted that this trend would continue, and that eventually the top five distributors would command over 75% of industry revenues. Throughout this time, gross margins2 declined throughout the industry (see Exhibit 1). This downward pressure came as the distributors moved from regional to national competition and as customers became more demanding as they grew larger and implemented more sophisticated purchasing systems. All distributors, including Arrow, were keenly aware of this trend and eager to halt, or at least, retard it. However, they all foresaw that declining margins would be a continuing characteristic of their industry, necessitating a constant need to manage and lower their cost structures. The industry was also characterized by high employee turnover—particularly among the sales force. The rapid expansion of the industry attracted high energy, ambitious people, and created above average opportunities for income growth among sales representatives, who were typically paid entirely on commission. They developed close relationships with their customers, and often believed they could take their customers with them if they moved from one distributor to another. 1 The following industry and company information draws on “Arrow Electronics: The Schweber Acquisition,” HBS case No. 798-020. 2 Defined as the difference between purchase and sale prices of components. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics,Inc.(A) 601-131 Arrow's history Arrow was founded as a local distributor in New York City in the 1930s,and was taken public in the early 1960s.Three young HBS graduates acquired a controlling interest in the company in 1968.At that time,Arrow was the eleventh largest electronics distributor,as measured by revenue and was active only in the New York and New England areas;by 1980,it was the second largest and had a nationwide presence.This growth was achieved by opening sales branches and acquiring local and regional competitors in the major industrial cities of North America.By 1993, Arrow outpaced Avnet with sales of $2.5 billion in North America.(See Exhibit 2 for a list of the top 20 distributors,and Exhibit 3 for Arrow financials.) During the 1980s,reacting to the industry's highly competitive market and decreasing margins and the development of reliable freight carriers like Federal Express and UPS,Arrow differentiated itself from its competitors by centralizing its purchasing and its distribution centers,and by growing the company through acquisition.With centralization,Arrow had better inventory utilization and lower warehousing costs to compete in the tightening market.Between 1980 and 1990,Arrow went from 37 local warehouses to four PDCs(New York,Memphis,Denver,and Reno,Nevada).During this period,Arrow also focused on automating the PDCs and adding technology and training that allowed the company to expand its special handling capabilities.Arrow linked its information systems with a growing number of its customers',relying on EDI(electronic data interchange)to enable the automation of various steps of the order-delivery-payment cycle,and to better ensure quality "just-in-time"delivery to its customers.Arrow also significantly increased its "value-added" services,including in-plant terminals;in-plant stores;PAL/EPROM programming,3 kitting;turnkey or contract manufacturing;computer products integration;connector assembly;marking;testing; specialized packaging;and automated replenishment.Value-added services became an essential competitive weapon in electronics distribution;for Arrow,orders that included value-added services went from 7%of total sales in 1985,to 51%in 1993. Acquisitions of its competitors had also been central to Arrow's strategy during the late 1980s and early 1990s.4 In January of 1988 Arrow acquired a major competitor,fourth-ranked Kierulff Electronics,for $130 million.The $150M acquisition of Schweber Electronics (then the number three distributor)in late 1991 gave Arrow a stronger presence on the West Coast,brought eight new suppliers-including Motorola Semiconductor--into Arrow's stable,and gave Arrow the potential to vault into the position of industry leader.These acquisitions were not without their disruptive aspects,and Scheihing,as head of operations was responsible for managing the integration process of each acquisition,knew that it usually took Arrow about six months to fully integrate new companies, eliminate duplicate functions,and learn or adjust to new technologies brought in with the purchased company Arrow's structure In 1992,the company maintained 37 branch sales offices called divisions (see Exhibit 4 for Arrow's organizational structure).Corporate headquarters housed the MIS group; credit and accounts receivable;finance and accounting;operations departments;and product marketing.The product marketing department,with 110 people,was responsible for relations with Arrow's 25 major and 175 minor electronic component suppliers.This group also developed nationwide marketing programs,purchased all products,and managed the $298 million of inventory held in Arrow's four PDCs. 3 PAL/EPROM programming involved implanting a customer-specified program onto semiconductor chips before shipping them 4 The following information on Arrow's corporate strategy and structure draws significantly on"Arrow Electronics:The Schweber Acquisition,"HBS case No.798-020. 3 This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics, Inc. (A) 601-131 3 Arrow’s history Arrow was founded as a local distributor in New York City in the 1930s, and was taken public in the early 1960s. Three young HBS graduates acquired a controlling interest in the company in 1968. At that time, Arrow was the eleventh largest electronics distributor, as measured by revenue and was active only in the New York and New England areas; by 1980, it was the second largest and had a nationwide presence. This growth was achieved by opening sales branches and acquiring local and regional competitors in the major industrial cities of North America. By 1993, Arrow outpaced Avnet with sales of $2.5 billion in North America. (See Exhibit 2 for a list of the top 20 distributors, and Exhibit 3 for Arrow financials.) During the 1980s, reacting to the industry’s highly competitive market and decreasing margins and the development of reliable freight carriers like Federal Express and UPS, Arrow differentiated itself from its competitors by centralizing its purchasing and its distribution centers, and by growing the company through acquisition. With centralization, Arrow had better inventory utilization and lower warehousing costs to compete in the tightening market. Between 1980 and 1990, Arrow went from 37 local warehouses to four PDCs (New York, Memphis, Denver, and Reno, Nevada). During this period, Arrow also focused on automating the PDCs and adding technology and training that allowed the company to expand its special handling capabilities. Arrow linked its information systems with a growing number of its customers’, relying on EDI (electronic data interchange) to enable the automation of various steps of the order-delivery-payment cycle, and to better ensure quality “just-in-time” delivery to its customers. Arrow also significantly increased its “value-added” services, including in-plant terminals; in-plant stores; PAL/EPROM programming;3 kitting; turnkey or contract manufacturing; computer products integration; connector assembly; marking; testing; specialized packaging; and automated replenishment. Value-added services became an essential competitive weapon in electronics distribution; for Arrow, orders that included value-added services went from 7% of total sales in 1985, to 51% in 1993. Acquisitions of its competitors had also been central to Arrow’s strategy during the late 1980s and early 1990s.4 In January of 1988 Arrow acquired a major competitor, fourth-ranked Kierulff Electronics, for $130 million. The $150M acquisition of Schweber Electronics (then the number three distributor) in late 1991 gave Arrow a stronger presence on the West Coast, brought eight new suppliers—including Motorola Semiconductor--into Arrow’s stable, and gave Arrow the potential to vault into the position of industry leader. These acquisitions were not without their disruptive aspects, and Scheihing, as head of operations was responsible for managing the integration process of each acquisition, knew that it usually took Arrow about six months to fully integrate new companies, eliminate duplicate functions, and learn or adjust to new technologies brought in with the purchased company. Arrow’s structure In 1992, the company maintained 37 branch sales offices called divisions (see Exhibit 4 for Arrow’s organizational structure). Corporate headquarters housed the MIS group; credit and accounts receivable; finance and accounting; operations departments; and product marketing. The product marketing department, with 110 people, was responsible for relations with Arrow’s 25 major and 175 minor electronic component suppliers. This group also developed nationwide marketing programs, purchased all products, and managed the $298 million of inventory held in Arrow’s four PDCs. 3 PAL/EPROM programming involved implanting a customer-specified program onto semiconductor chips before shipping them. 4 The following information on Arrow’s corporate strategy and structure draws significantly on “Arrow Electronics: The Schweber Acquisition,” HBS case No. 798-020. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics,Inc.(A) Each of the 37 divisions in the field had a parallel structure,with six types of personnel: 1.Field Sales Representatives (FSRs)were traditional sales personnel who traveled to their customers(usually 10 to 20 customers per FSR).They spent time with design engineers in order to understand and promote new and emerging products developed by Arrow's suppliers.They also invested time in developing relationships with the purchasing personnel of their customers,in order to build ongoing relations,negotiate major contracts,and resolve any problems in the flow of orders and deliveries.FSRs bore the brunt of shipping or inventory problems originating at Arrow.They were paid on commission,typically 8%of the gross margin dollars generated.Experienced FSRs earned $65,000 to $85,000 per year,with the top performers earning over $150,000. 2. Sales and Marketing Representatives(SMRs)were branch-based personnel who handled the thousands of daily phone calls from customers checking on delivery availability,quoting daily prices,taking orders,and tracking shipments.Each SMR used a computer terminal linked to a comprehensive real-time,on-line computer system that Arrow had developed that tracked the costs,prices,and movement of the 150,000 different part numbers that Arrow kept in inventory,as well as the detailed ordering patterns and sales history for each of the company's customers.SMRs were paid completely on commission,with a typical commission rate of 4%-5%of the gross margin dollars generated.The average order size was about $900,and most orders involved several phone calls with the customer,who generally checked the current price and availability at several distributors before placing an order.In addition,the SMR was responsible for making changes to orders already entered if the customer called and wanted to modify the quantity or scheduled arrival date of a previously placed order.The SMR job was an intense and high-pressure position;typical SMRs earned $40,000 to $55,000 annually,with the top performers earning $100,000. 3.Product Managers(PMs)in the field acted as the advocate for the suppliers,ensuring that the FSRs and SMRs were up to date on the suppliers'latest products and marketing programs and that the sales force was meeting its supplier-by-supplier sales budgets.The PMs worked closely with the suppliers'local personnel to follow-up on leads and referrals that came to Arrow from the suppliers.The PM job generally paid $35,000 to $75,000 annually,depending on experience and which suppliers a PM was responsible for (e.g.,handling large,technically complex lines like Intel or Motorola lines generally paid more than handling smaller,less sophisticated lines).Approximately 25%of a PMs pay was dependent on the sales and gross margin generated by their lines. 4. Field Application Engineers(FAEs)were assigned to each branch to act as technical support for the sales force when their customers wanted detailed design assistance or problem solving on specific product design issues.FAEs were all qualified electrical engineers and earned between $45,000 and $70,000 depending on experience and location.FAEs occasionally received a bonus for helping Arrow win a major contract,but in general were paid a salary only. 5.Clerks and Administrative Assistants entered data into the computer system and managed the flow of paperwork within the office.These positions typically paid $18,000 to $25,000 per year. 6.A General Manager(GM)and one to three Sales Managers comprised the administration for each office.In addition to normal management tasks (supervision,hiring,and budgets) Arrow viewed it as critically important that they spend a significant part of their time visiting current and prospective customers and meeting with the local managers and representatives This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics, Inc. (A) 4 Each of the 37 divisions in the field had a parallel structure, with six types of personnel: 1. Field Sales Representatives (FSRs) were traditional sales personnel who traveled to their customers (usually 10 to 20 customers per FSR). They spent time with design engineers in order to understand and promote new and emerging products developed by Arrow’s suppliers. They also invested time in developing relationships with the purchasing personnel of their customers, in order to build ongoing relations, negotiate major contracts, and resolve any problems in the flow of orders and deliveries. FSRs bore the brunt of shipping or inventory problems originating at Arrow. They were paid on commission, typically 8% of the gross margin dollars generated. Experienced FSRs earned $65,000 to $85,000 per year, with the top performers earning over $150,000. 2. Sales and Marketing Representatives (SMRs) were branch-based personnel who handled the thousands of daily phone calls from customers checking on delivery availability, quoting daily prices, taking orders, and tracking shipments. Each SMR used a computer terminal linked to a comprehensive real-time, on-line computer system that Arrow had developed that tracked the costs, prices, and movement of the 150,000 different part numbers that Arrow kept in inventory, as well as the detailed ordering patterns and sales history for each of the company’s customers. SMRs were paid completely on commission, with a typical commission rate of 4%-5% of the gross margin dollars generated. The average order size was about $900, and most orders involved several phone calls with the customer, who generally checked the current price and availability at several distributors before placing an order. In addition, the SMR was responsible for making changes to orders already entered if the customer called and wanted to modify the quantity or scheduled arrival date of a previously placed order. The SMR job was an intense and high-pressure position; typical SMRs earned $40,000 to $55,000 annually, with the top performers earning $100,000. 3. Product Managers (PMs) in the field acted as the advocate for the suppliers, ensuring that the FSRs and SMRs were up to date on the suppliers’ latest products and marketing programs and that the sales force was meeting its supplier-by-supplier sales budgets. The PMs worked closely with the suppliers’ local personnel to follow-up on leads and referrals that came to Arrow from the suppliers. The PM job generally paid $35,000 to $75,000 annually, depending on experience and which suppliers a PM was responsible for (e.g., handling large, technically complex lines like Intel or Motorola lines generally paid more than handling smaller, less sophisticated lines). Approximately 25% of a PMs pay was dependent on the sales and gross margin generated by their lines. 4. Field Application Engineers (FAEs) were assigned to each branch to act as technical support for the sales force when their customers wanted detailed design assistance or problem solving on specific product design issues. FAEs were all qualified electrical engineers and earned between $45,000 and $70,000 depending on experience and location. FAEs occasionally received a bonus for helping Arrow win a major contract, but in general were paid a salary only. 5. Clerks and Administrative Assistants entered data into the computer system and managed the flow of paperwork within the office. These positions typically paid $18,000 to $25,000 per year. 6. A General Manager (GM) and one to three Sales Managers comprised the administration for each office. In addition to normal management tasks (supervision, hiring, and budgets) Arrow viewed it as critically important that they spend a significant part of their time visiting current and prospective customers and meeting with the local managers and representatives This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics,Inc.(A) 601-131 of the suppliers.A GM's total cash compensation ranged from $90,000 to $150,000 annually depending on their experience and the size of their market,with about 35%of this total being an incentive based on the financial performance of the division.The major profit variable that GM could influence was the price and gross margin of each order since costs were primarily related to the number of people in each division and the headcount budgets for each location were generally set by the regional vice president and the senior vice president of sales. Throughout the electronics distribution industry,including Arrow,products were not sold at a fixed cost.SMRs had pricing authority for all orders and would negotiate prices with their assigned customers based on their knowledge of the customer's size and buying patterns,trends in that local market,and the current cost levels and availability of inventory on hand.Availability of product from the supplier,and the prices Arrow paid for each part type could vary widely(and wildly)week to week,day to day,and even hour by hour. For example,retail prices of the most popular Intel PentiumTM microprocessors which typically sold for $150-$250 could change by as much as $5 to $10 within a single day based on market conditions,and Intel would periodically lower the cost to Arrow by $50 to $75 with almost no notice as they introduced new,higher speed versions.This product line was very competitive and provided little opportunity for Arrow to add value,so Arrow's gross margin for Pentiums was in the 5%range. On the other hand,other products-such as discrete devices like diodes or LEDs-had very stable prices and afforded Arrow value-added opportunities.On these devices Arrow's gross margin could be as high as 25%-35%. In addition,customer-buying patterns varied widely.Some customers placed orders one part number at a time,with only two to three days'notice,which would mean the product had to ship from the PDC the same day.Other customers placed orders for many part numbers only once a month,and might ask that the products be delivered weekly over a two to three month period.Still others might order several times a week,but give Arrow a two-to three-week leadtime before delivery was required.In these latter two cases,the customer might later call and change either the quantity and/or the required arrival date.On average,these types of orders were modified twice between placement and shipment,with some long-scheduled orders changing as many as five or six times before shipment.While most orders were for a single part number,some orders had as many as 50 "line-items"(i.e.part numbers);on average,there were 1.4 line items per order.Finally,while some customers stuck with a "favored"distributor and rarely got multiple quotes,others would effectively conduct a multi-distributor auction for every order. Thus,FSRs and SMRs played a critical role,since with every price quoted and every order taken, they could directly affect Arrow's gross margin and ultimate profitability. Order Fulfillment Processes The basic order fulfillment process had remained largely unchanged since the early 1970s,flowing from phone call to order to shipping and ending with billing.This process had been increasingly automated over time,through increased use of information technology.In the early 1970s, computerization of order-placement,inventory management,and shipping had begun to affect the entire electronics distribution industry.As early as 1972,Arrow began to automate this fulfillment process,and by the early 1980s-under Scheihing's guidance-a fairly automated and comprehensive MIS system was fully implemented.This system captured sales inquiries in order to build customer orders,managed purchasing,inventory,and shipping,tracked the entire process,and managed the billing and collection,all in an on-line,real-time environment.Each merger or consolidation required that the Arrow MIS infrastructure,and the processes that made use of it,be expanded to 5 This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics, Inc. (A) 601-131 5 of the suppliers. A GM’s total cash compensation ranged from $90,000 to $150,000 annually depending on their experience and the size of their market, with about 35% of this total being an incentive based on the financial performance of the division. The major profit variable that GM could influence was the price and gross margin of each order since costs were primarily related to the number of people in each division and the headcount budgets for each location were generally set by the regional vice president and the senior vice president of sales. Throughout the electronics distribution industry, including Arrow, products were not sold at a fixed cost. SMRs had pricing authority for all orders and would negotiate prices with their assigned customers based on their knowledge of the customer’s size and buying patterns, trends in that local market, and the current cost levels and availability of inventory on hand. Availability of product from the supplier, and the prices Arrow paid for each part type could vary widely (and wildly) week to week, day to day, and even hour by hour. For example, retail prices of the most popular Intel Pentium™ microprocessors which typically sold for $150-$250 could change by as much as $5 to $10 within a single day based on market conditions, and Intel would periodically lower the cost to Arrow by $50 to $75 with almost no notice as they introduced new, higher speed versions. This product line was very competitive and provided little opportunity for Arrow to add value, so Arrow’s gross margin for Pentiums was in the 5% range. On the other hand, other products—such as discrete devices like diodes or LEDs—had very stable prices and afforded Arrow value-added opportunities. On these devices Arrow’s gross margin could be as high as 25%-35%. In addition, customer-buying patterns varied widely. Some customers placed orders one part number at a time, with only two to three days’ notice, which would mean the product had to ship from the PDC the same day. Other customers placed orders for many part numbers only once a month, and might ask that the products be delivered weekly over a two to three month period. Still others might order several times a week, but give Arrow a two- to three-week leadtime before delivery was required. In these latter two cases, the customer might later call and change either the quantity and/or the required arrival date. On average, these types of orders were modified twice between placement and shipment, with some long-scheduled orders changing as many as five or six times before shipment. While most orders were for a single part number, some orders had as many as 50 “line-items” (i.e. part numbers); on average, there were 1.4 line items per order. Finally, while some customers stuck with a “favored” distributor and rarely got multiple quotes, others would effectively conduct a multi-distributor auction for every order. Thus, FSRs and SMRs played a critical role, since with every price quoted and every order taken, they could directly affect Arrow’s gross margin and ultimate profitability. Order Fulfillment Processes The basic order fulfillment process had remained largely unchanged since the early 1970s, flowing from phone call to order to shipping and ending with billing. This process had been increasingly automated over time, through increased use of information technology. In the early 1970s, computerization of order-placement, inventory management, and shipping had begun to affect the entire electronics distribution industry. As early as 1972, Arrow began to automate this fulfillment process, and by the early 1980s—under Scheihing’s guidance—a fairly automated and comprehensive MIS system was fully implemented. This system captured sales inquiries in order to build customer orders, managed purchasing, inventory, and shipping, tracked the entire process, and managed the billing and collection, all in an on-line, real-time environment. Each merger or consolidation required that the Arrow MIS infrastructure, and the processes that made use of it, be expanded to This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012