Obsolescence Insurance, a New High-Margin Business for EMS Companies
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Avnet Inc.’s ongoing restructuring actions have ruffled feathers internally and sparked controversy in the industry about the kind of future CEO William Amelio has envisaged for the top-tier components distributor. Perhaps the entire electronics supply chain should contemplate the same question because the structural issues Avnet is trying to resolve are similar to those facing other enterprises struggling with the digitalization of the global economy and the advent of new and unbridled players.
The resignation last week of Avnet veteran Gerald (Gerry) Fay and the announcement of further management changes deepened the mystery about Amelio’s plans for the company. It added to the furor over the sale of the company’s technology solutions (TS) division and the purchase of European distributor Premier Farnell last year. Industry sources say Avnet is likely to overhaul its executive management team in continuation of Amelio’s goal of refocusing on the design engineering community and making it more competitive.
William Amelio, Interim-CEO, Avnet Inc.
“Avnet has a long history of adapting to change while staying focused on helping our customers bring new products to market,” said Amelio in a statement announcing the new management decision. “Our business strategy is undergoing a transformation, and we have strong leaders in place to deliver on this strategy. I’m confident that the team will maintain a laser focus on providing world-class distribution and design and supply chain services to our customers and suppliers.”
Amelio wasn’t appointed to patch holes and keep the old structure in place. His task was to initiate deep changes at the company but he’s proven to be a disruptor at Avnet and in the rest of the market. Avnet urgently needed to change direction and reassess its position in the industry, having been stuck in a holding pattern for some years now. Even if some of Amelio’s initial actions have confounded observers, the company is already radically different and is bound to change even more by the time he’s finished.
Recent appointments confirm Amelio knows Avnet needs to become a different company. He named a chief transformation officer (Pete Bartolotta) and appointed Therese M. Bassett chief innovation officer. Last week’s press statement says the company will be making additional management changes. I would like to suggest one. Avnet needs a chief operating officer, someone whose mandate would be to keep the company on an even keel while Amelio leads its transformation. At this critical time, Amelio should not concentrate on operational management while engineering the much-needed structural reorganization of the company.
A huge organization with more than 800 suppliers, over 100,000 customers, 17,700 employees, a field presence in all geographic regions and serving customers in 125 countries, Avnet is a complex organization to manage at the best of times. That task is more difficult now because of the fundamental changes occurring in the global economy and in the technology market.
Change Avnet, Change an Entire Market
If only Avnet was an anomaly. It is not. The entire electronics components distribution market is in a rut despite current growth trends which may delay but won't eradicate the need for reforms. The market must transform urgently and keep evolving over the next 10 to 15 years before things might settle down for a while. As Amelio restructures Avnet he must also champion drastic changes in the larger distribution market. He needs a trusted lieutenant to keep current business running smoothly while dedicating his time to figuring out how to transform Avnet and make it a leading innovator.
Amelio will have only a few years to do this and must be uniquely focused on keeping innovations coming at a fast clip. Once he’s positioned Avnet as a leader in this new and fast-evolving market, Amelio himself must be ready to hand over the baton to a new CEO, a nuts and bolts specialist in the mold of Timothy Cook of Apple who can take a disruptor and cement its position in the industry. That’s not Amelio’s job. His main task is to recreate and refashion Avnet.
That job started with the decision to sell TS. The purchase of Premier Farnell may yield immediate gains through process and cost consolidation and the opportunity to forge a bigger position in the design engineering community but it is merely supportive of the old Avnet and not the new one that must be forged to serve a rapidly evolving economy.
In a previous article, I had queried the decision to purchase Premier Farnell and I am still not sold on the overwhelming embrace of the design engineering community and indirect snubbing of procurement by top distributors. What’s unarguably clear is that Avnet is not standing still. Competitors who think the direction Amelio is taking the company is wrong should nevertheless hold their doubts; if you are reading this Mr. Amelio, there are quite a few folks who think the sale of TS was a major slip-up. Avnet may emerge a stronger competitor just because it is daring to question all conventions.
Being static in this industry is a kiss of death. That’s why the affable Gerry Fay had to go. Fay’s days were numbered once Amelio became CEO and especially after the decision to sell Avnet TS. With the company focused on components distribution mainly, there was no need for a separate divisional head. Avnet regional presidents need to have a clear line to the CEO. They now do.
This isn’t the only change that should happen at Avnet, however. So far, all the changes the company has announced – apart from the sale of TS – have been superficial, in my opinion. Avnet needs a deeper and more structural reorganization. The company had become comfortable and too reliant on the status quo. It is undoubtedly a leader but the industry Avnet once dominated with North American rival Arrow Electronics Inc. is morphing into something else.
Distribution is in peril of losing its prime position in an industry filled with too many disintermediate players trying to snatch or whittle down its already paltry margins. Suppliers are restless and no longer quite as reliable a group of partners as they once were. Worse, OEMs have become extremely self-centered; the supply chain, or supply network as some prefer to call it, is tenuous. We have entered a world of everyman for himself.
Distribution is taken for granted by its so-called “partners” in the electronics manufacturing chain, especially OEMs/EMS providers and some component suppliers. OEMs and suppliers enjoy much fatter gross profit margins (GPM) – in the low- to mid-60 percent range for some suppliers – while distributors who finance the market with lengthy and favorable payment terms and do the grunt work of selling parts and keeping production humming can barely boast margins in the upper single-digit or low teens (Arrow's gross profit margin is approximately 13 percent and Avnet about 11.5 percent). Suppliers rely on distributors for demand creation while OEMs expect them to keep inventories lean and still assure adequacy of supplies.
In recent years, though, the old order has been falling apart. Distributors are still investing in demand-creation by building up databases of engineers, creating design communities and providing extensive technical product information to designers. In the meantime, some suppliers have announced direct, go-to-market sales strategies, cutting or threatening to cut distribution out of the demand-creation business.
Distribution must fight smartly back. They should demonstrate their value and critical role in the supply chain. Amelio can show this to the entire industry by making Avnet a nimble and valuable partner to customers and suppliers. These goals cannot be achieved with incremental changes; Avnet must be turned upside down.
Just like the rest of the electronics industry.
Bolaji Ojo is editor-at-large and publisher of EPSNews. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at bolaji.ojo@epsnewsonline.com.
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