The 2006 top global distributors

Electronics Supply & Manufacturing - USA
... electronic component distributors enhanced inventory management,
optimized working-capital use and introduced a raft of specialty offerings,
...

The distribution market overall fared well in 2006, despite softer demand in some end markets, continued concern about a semiconductor inventory overhang as the year drew to an end and pressure to comply with new worldwide environmental regulations.

Benefiting from hard lessons learned during the severe industry downturn at the beginning of the decade, electronic component distributors enhanced inventory management, optimized working-capital use and introduced a raft of specialty offerings, including supply chain management services. Those steps, applauded by Wall Street, paid off in improved sales, profits, earnings per share, days of inventory and other financial metrics.

Overall, the top 25 franchised distributors on the 2006 Electronics Supply & Manufacturing list posted a combined global revenue of $48.6 billion, an increase of 15 percent from $42.3 billion in 2005. The top 10 players accounted for more than 94 percent, or $45.8 billion, of global sales, with a vast majority of the traffic being routed through the two biggest companies--Arrow Electronics Inc. and Avnet Inc.

Growth was in the high-single-digit/low-double-digit range, in line with the general semiconductor market as well as with regional trends. Asia and Europe performed better than the United States, said Matthew Sheerin, an analyst at Thomas Weisel Partners LLC. While semiconductor inventories were still bloated coming out of 2006--primarily because of a slowdown in the communications market--and while many expect the higher-than-normal levels to stick around for a few more months, distributors have generally been unscathed by the swing.

"In 2006, we saw the remainder of an inventory buildup that started in the middle of the year," Sheerin said. "Inventory at the distributor level picked up during the summer, but for this cycle, the distributors have been much more rational in managing inventory and have reacted quicker than they had in the past to work through these issues."

The proactive approach has been reflected in the number of days of inventory held, he said. Ten years ago, distributors averaged 67 days of inventory. The number steadily dropped to 59 days five years ago and 54 days three years ago. During last year's second quarter, it ticked up to 53 days, but by year's end it had fallen back to 49 days, Sheerin said.

Lessons learned
Whether from the franchised or the independent side of the fence, distribution executives offered the same message: Returning to fundamentals has been a key driver of financial gains, and the back-to- basics mind-set is a direct reflection of the hit the sector took in the 2001 tailspin.

"We all had an awakening coming out of 2000 and 2001," said Chuck Kostalnick, vice president of the OEM division for Bell Microproducts Inc. (San Jose, Calif.), which booked $3.4 billion in 2006 sales, up 8 percent from 2005.

"There has been more emphasis on the return-on-working-capital metric, and we have all gotten smarter about how we manage inventory," he said. "Things really are not the way they were three to five years ago. It's not just about putting product on the shelf; we're doing a more thorough job of positioning inventory and following worldwide trends."

Kostalnick also credited the industry's renewed strength to the fiscal-accountability standards now imposed under the Sarbanes-Oxley Act. "One good thing that came from SOX is that companies are more disciplined about making sure they know what they have signed up for," he said. "After the Internet bubble burst, many distributors and contract manufacturers were on the hook for the inventory. But now the industry has matured, and companies are taking more responsibility for the products they buy."

Following the Americans' lead for reducing risks and liabilities, Taiwanese distributor WPG Holdings boasted about the steps it took last year to ensure higher returns on working capital, shorter days-of-inventory cycle times and better accounts payable and receivable processes.

Although year-over-year sales remained essentially flat, at about $3.6 billion, WPG cut two days from its days-of-inventory metric, going from 46 days in 2005 to 44 last year, said vice president Scott Lin. Accounts payable stretched favorably from 26 days in 2005 to 31 days in 2006, and the company renegotiated supplier contracts in order to extend payments out from 52 days in 2005 to 58 days in 2006, Lin said.

"Before, we didn't pay too much attention to the inventory or the costs of holding inventory. But now we are managing more carefully the quality of the inventory and moving it through the channel more effectively," he said. "These are not new financial indicators for distributors. Arrow, Avnet and other American firms have implemented these metrics for years, and they have enjoyed the benefits that come with that. WPG is the first Asian distributor to adopt these similar metrics, and we realize that they are good indicators of how a company is performing."

Flexing muscles
Distribution heavy hitters Avnet and Arrow marked their own successes in 2006.

Phoenix-based Avnet finished integrating its big 2005 acquisition of Memec; recently completed the acquisition of Access Distribution, a General Electric company and value-added distributor of complex computing solutions, and saw growth in all major markets last year, said Harley Feldberg, global president of Avnet Electronics Marketing.

The inventory glitch is still on Avnet's watch list--particularly in terms of how it will affect the Asian market, which is more susceptible to demand and supply fluctuations in the consumer electronics and communications areas. Still, the strength of the European and American markets, a diversified line card and an expanding global reach are expected to make 2007 another good year for Avnet, according to Feldberg.

"One of the main plans for us in 2006 was to get more efficient at managing worldwide customer engagements," Feldberg said. "There are an increasing number of American or Western-based companies that do design work in one place and manufacturing somewhere else. Customers want a solution that crosses multiple geographies, and they want to work with someone who can efficiently link multiple sites. The greatest value we provide is making the materials management and planning process more efficient."

Arrow (Melville, N.Y.), which recently completed the acquisitions of Alternative Technology, Agilysys KeyLink Systems Group and the storage and security distribution business of InTechnology plc, has received similar requests, said Mike Long, president of Arrow Global Components.

"We are still seeing an increased interest in how supply chain services can be adapted on a global basis," Long said. "Ten or 15 years ago, product quality was the big concern, and now ensuring delivery of a high-quality product has become an industry standard. That's exactly what is happening on the supply chain side. Our role now is to help customers efficiently manage their supply chains."

This trend is likely to continue as more electronic components are funneled into what used to be fringe industries, such as medical, automotive and transportation, and companies within those segments catch up on worldwide distribution, supply chain and logistics practices.

Besides seeing strong growth in those emerging segments, as well as in the traditional passive, electromechanical, PC and telecommunications areas, Arrow expects to make strides in the lighting industry, Long said. In 2006, Arrow's North American Components business formed a group dedicated to supporting manufacturers of products containing high-brightness LEDs.

In another noteworthy, muscle-flexing move that could ripple through the 2007 franchised-distributor rankings, Berkshire Hathaway Inc. recently sealed its acquisition deal with TTI Inc., a passives and connector specialist. TTI and its affiliate Mouser Electronics will become part of the Berkshire Hathaway Group, whose chair- man and chief executive is billionaire investor and philanthropist Warren Buffett.

Paul Andrews, TTI's chairman and CEO, said in a statement that the move will position TTI and Mouser for the longer term and that the company anticipates "a smooth and seamless transition internally as well as for our customers and suppliers."

Adding more value
As the top-tier distributors jockey for global market share, secure footholds in emerging regions (such as Russia, Brazil, Vietnam and Eastern Europe) and update their line cards, others are emphasizing services that bring more supply chain value.

Independent distributor Commodity Components International Inc. (Peabody, Mass.), for example, took a hard look at recently launched and soon-to-be-launched global environmental regulations and stepped up its "green" initiatives to help customers comply, said chief executive officer Eric "Rick" Gervais.

"The outstanding event for us in 2006 was the RoHS regulations coming out of Europe," Gervais said. "We started working on compliance initiatives in October 2005, in conjunction with our ISO recertification. We developed in-house capabilities to help our customers meet the requirements. We adopted a set of policies and trained our personnel to handle the regulations."

With RoHS-like rules going into effect in China, California and elsewhere, Gervais expects compliance to be a priority for high-tech companies for the next several quarters.

Other companies, like Bell, are beefing up design and integration services, and are looking to get involved earlier in the design, component selection and reuse phases, said Kostalnick. Such services will increase in importance as more companies shift from proprietary designs to off-the-shelf components and as they look to speed time-to-market.

Bell opened an integration and configuration facility in San Jose last June in a bid to serve such requirements.

"We're trying to drive the costs of the process. We're creating a virtual supply chain and a virtual factory," Kostalnick said. "Being able to provide customers with design, preproduction, postproduction and end-product delivery is a compelling busi- ness strategy."