Suppliers depended on distributors like Arrow to generate demand. A/S helps the suppliers in standardized products category to grow and gain profit and market share. Lastly, it enables the suppliers to represent new technologies and proprietors products to their customers.
Arrow provided its customers an opportunity to order in small quantities with short lead times and credit facilities, provided value added services such as programming and supply chain management well as highly customized solutions.
Most customers want the convenience of submitting an entire bill of items for a quote, finding it more valuable to have a steady partner than rock bottom prices in the long run. At the same time they wished to get the best available prices. Arrow provides this convenience and affordable prices. Customers with JIT procurement systems required receiving their products on time based on forecast rather than purchase orders and Arrow enabled them to do this by carrying huge inventories.
3) How does Express affect Arrow’s business model and its selling effort? Will Arrow be able to keep its margins above 15% - the objective set by Steve Kaufman?
For customer looking for standard products, the Express initiative facilitates the interaction for the customer.
The Express initiative supplements their basic business model. It provides them an opportunity to offer standardized pricing over the Internet which can minimize the efforts and make it worthwhile to serve the transactional customers.
BAS has gross margin of 20 to 25 %, VA has gross Margin of 10% to 15 %
Present Gross margin = (1443*.125 + 867 * .225) /( 1443 + 867 ) = 16.25%
If the future projections are optimistic
Gross margins =( 1443 * .125 + (867 – 293) *.225) + .165 * 293 / (1443 + 867 ) = 15.49 %
If pessimistic,
Gross margins = (1443 *.125 + (867 – 601)*.225 + (.165 * 601))/ (1443 + 867) = 14.69 %
Thus the gross margins can be expected to be in the range of 14.69% to 15.49 %.
Assuming a uniform probability distribution pattern, the gross margin can be assumed to be (14.69 + 15.49)/ 2 = 15.09 %
Thus the gross margin figures are still over the desired 15% figure by the top management.
4) What is your action plan? How should Arrow respond to the Express proposal? Should they accept or reject it? What other measures should they take?
Traditionally the company's basic approach has been to provide value added services to gain more and more relationship customers. Presently these customers account for 75% of total sales. It's not possible to win such customers just by quoting price and delivery data through Express. The company will lose the most favored distributor status (and the rewards associated with it) by the suppliers since the company will merely get jump ball customers. The company can think of using Express' help in targeting only transactional customers but this option will not give enough margins later. In the present scenario for the commoditised products the company always has an option to search for highest margin supplier after getting the order. This flexibility will be lost when using express. Overall analysis of the case shows that there is not much to gain from using Express. In the long-term interest of the company it will be better if the company rejects Express proposal.
As for the measures the company should take to counter the challenge posed by Express they should focus more on turning present transactional customers into relationship customers. By the year 2000 almost 80% of the business will result from value added services. The company should focus on providing these high value services, creating demand, gaining suppliers support and thus expanding the business. The price and order related information should be provided on the website along with all the services provided by the company.
5) Explore the relationship between Arrow and its suppliers. How do the suppliers reward-franchised distributors? What are design wins? Jump balls?
Most electronic component manufacturers (suppliers) relied on distributors to generate demand of the 2 chip categories: proprietary and standardized. Standardized chips were interchangeable and produced by multiple suppliers whereas proprietary chips were manufactured by a single supplier.
Many suppliers ship their proprietary and standardized products to arrow at list price or slightly below it. When Arrow gets a request for a price quote from the customer, they give the supplier the details of the customer and the opportunity. Then the Supplier decides how much of an additional discount they would provide to the distributors on this request. Hence, the suppliers know exactly what the distributors are doing and are also able to control prices. The level of discount provided varies depending on whether it is a design win or a jump ball.
Moreover suppliers control distributors in the following ways:
- Honoring warranties of products purchased only through channels that they have designated.
- Informing the customers about the various distributors they can buy from.
- Deciding the order in which they inform the distributors about an opportunity.
- Managing the flow of orders by managing the time they take in responding to a distributor’s request for prices.
Suppliers reward franchised distributors in the following ways:
- Suppliers franchise certain distributors to sell their products and they provide financial incentives such as price protection and limited return privileges to only these franchised distributors.
- Only franchised distributors could sell suppliers’ standardized or proprietary products.
Jump balls on the other hand were those customers that purchased on the basis of manufacture reputation or price and did not involve a distributor in design work.
Design wins were those accounts where demand was generated by helping customers engineer end products to which its suppliers chips were integral.
Thus if suppliers use jump balls to keep distributors in check, distributors are able to use design wins and competitive standardized products to counter balance their power.
6) How does the Arrow salesperson build a relationship with customers that buy B&S and VA products from Arrow? What is the impact of the internet on the Arrow salesperson?
Customers that buy B&S are those that request a quote directly, a SMR then tries to secure the business and arranges to ship the product. SMRs exercise pricing authority, obtaining discount levels from suppliers and quoting prices to their assigned customers on the basis of their knowledge of customers’ buying patterns, local market trends, current cost levels and inventory on hand.
Customers that buy VA products are generally design wins. Here the order is originated by the field engineering and facilitated by the field sales representative. In this case the SMR would merely finalize the details of the organization. FSRs establish relations with customers’ purchasing personnel, negotiate major contracts and resolve problems with the flow of orders and deliveries.
In terms of the impact of the internet, the company’s and operating groups homepages were established, but did not incorporate purchasing capability. They functioned only as information centers, sources of material about suppliers, Searchable list of parts, and news. It also directed the potential customers.
This approach helped the salesman as now he had to spend less time in explaining to the customer about the product (the details of the products were already available on the website), the salesman had to just go there and make a sales call rather than informing the customer about what the product is all about. Customer directed to the 1-800 number ensured that the customers always get the right information, directly from the company. The salesman could now cater to more number of customers’ in lesser time.
7) Do you think the internet is a friend or a foe to Arrow? In what ways can Arrow leverage the internet to facilitate its sales effort?
Arrow is aware of the potential business opportunities that internet offers, evident by the fact that homepages have already been established for the company although websites does not incorporate purchasing capability. Moreover Internet is not a proprietary technology and easily available and so is not a much of a differentiating factor for the competing firms. The internet is not a foe as it is not giving any special advantage to the competitors and is offering all the competitors the same features. Also the Express portal will be of use to sell the standardized chips on which all the distributors have the same price. This cant be used for the specific value add services which Arrow offers like turnkey consulting, design and development help and total product management help. Also the % of Arrow sales with value add content has increased from 1% in 1975 to 60% in 1990. This is a growth segment which Arrow should focus on and it can use the Internet to its advantage here and outbid its competitor But Internet can definitely be converted to a friend, if used in a manner which is different for the competitors. The different ways it can be done is by:
Incorporating the purchasing capability on the already available web pages of Arrow which at present give the product information and establishing an online store which the customers can directly access and book their orders. This way Arrow will offer something which its competitors not doing at present and get the first mover advantage in the market.
By putting up online shop on its own Website, Arrow will be able to retain its contact with relationship customer and covert some of the transactional customers to relationship ones.
It can also register at Express portal. This might lead to a loss of sales initially but that can be made up by focusing on Value-add business services which Arrow offers. Also by keeping competitive prizes on the Express portal, the danger of the cannibalization can be made up for.
Arrow can use the Website to provide online consultancy and thus provide value-add to its customers and this will help it in focusing on the Value add part of the business which will be the growth area of the future.
