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Reject the proposal of Express. Prepare for the competition of Express by launching aggressive marketing campaign to match the price of Express in short run. Maintain and improve gross margin on BAS sales by leverage the strong relationship with supplier to get the lowest price. Continue improving the value added content, short delivery lead time and inventory management as main values of the company. Aggressively invest R&D to provide an on-line booking and ordering system to further improve customer’s time-to-market, facilitate the BAS sale order; provide the customer “efficient, low price, one-stop-shop” experience that will differentiate A/S from competitors. Focus on VA sales and improve the service, consistently grow sale volume of VA content.
Values of Arrow/Schweber (A/S): Being as the subsidiary of the No.1 distributor of electronic parts company Arrow Electronic, A/S is able to provide customers low price electronic parts and add-value system design solution. A/S also creates demand and provides the inventory buffer for suppliers. The Customer benefits from A/S of low cost parts, technical support and short delivery lead time. And suppliers benefit from A/S of hassle-free sales. Internet trading service Express creates one more level to the existing value chain (Exhibit 1). Express allows A/S to have opportunity to sell product to potential customers. And customers can place order on different distributors. But whether this business model is valuable to the customer especially to small OEM and CM is questionable. Although transactional customers are price sensitive, time to market is also critical to them. They prefer to place entire order within one company to make sure the short delivery lead time. Under this circumstance, jumping into the Express boat is not a wise decision for A/S.
VA Business--Key Business for A/S: Among the overall business of A/S, the VA sales increases from 2% in 1977 to 62% in 1996, and it targets to grow to 80% in 2000. Although the VA gross margin is only 10-15%, it is the key business for A/S to create the demand. For example, one of suppliers, Altera, sells 80% of PLD to its two distributors because value-added programming required by individual customers. Suppliers rely on distributor to generate demand. In return, they offer A/S: Price protection & limited return privileges, warranties not available to others, and control prices by providing discounts. Because of the importance of VA business, it evolved from simple inventory buffer to alter components to meet customer needs by programming or kitting parts, to virtual organization, and to order cycle management.
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Long-term Relationship is Extremely Important to A/S: There are two types of customers for A/S, transactional vs. relationship customers. Transactional customer, place request-for-quotes with a number of distributors simultaneously, negotiate for the price and get the lowest price. Relationship customer: use value-added products to build the relationship. Valued-added business helps to build the relationship but it is not a division having high profit premium. It helps A/S maintain profit by cross-selling BAS products. Helping customers in their times of need, getting customers to invest in the supply chain which provides value-added service are the strategies of A/S to build the long-term relationship. After that, the customer will tend to buy standardized products. Joining Express won’t help building A/S current customer channel and it is not aligned with A/S business model.
Gross Profit Margin: In 1996, about 35% of sales of Arrow Electronic come from A/S group. With the profit margin of 10-15% of VA and 20-25% of BAS, the total gross margin of A/S is around 16%. Considering 11% of expense, the A/S division can’t afford the gross margin dropping below 15%. After we understand the business model of A/S, we know even if A/S uses the Express as sales portal, they can’t reduce the sales cost by taking risk to cut the BAS sales team. Under this assumption, we conclude that if using Express with 6% of expense, under both scenarios, the gross profit margin will below 14%. But without Express, given the possibility of losing market share on BAS, A/S is still able to maintain the gross margin very close to 15% on both scenarios. (Exhibit 2)
Why should A/S build its own web-based system: Threaten by potential competitor, A/S need rethink its strategy on web-based booking and ordering system. Building its own on-line price checking and ordering system is aligned with A/S business model. First, it will facilitate the booking and ordering system and further reduce customer’s lead time. Second, it will reduce sales expense especially BAS sales expense. Third, it can help A/S differentiate itself from competitors by providing low price efficient “one-stop-shop”. Last, A/S already had completed inventory control system, on the top of the system, building an on-line ordering system should be cost efficient. Comparing to existing on-line based enfranchised distributor, A/S should be able to lead the trend.
Price Matching Strategy: It is not easy for A/S to lose relationship customers because of values provided by A/S. Most likely they will use Express as the negotiation tool. And for transactional customer, again because of the nature of this type of customer ---“small project and lead time sensitive”, A/S still has chance to win them back. So “Matching Price of Express” will be the best strategy to compete with Express. And combining with the strength of A/S, it is possible for A/S to have minimum impact from Express while it is building its own web-based booking and ordering system.
Conclusion: We think rejecting the proposal of Express is the wise decision for A/S based on the marketing analysis on A/S business. Although A/S will lose the sales in short run, it is able to maintain the gross margin. And A/S is able to create more demands on BAS and grow its sales on VA and BAS by focusing on VA sales. Later by providing similar web-based booking and ordering system, A/S can reduce its sales expenditure on BAS and be in better poison handing the transaction customer at electronic distributor markets.