Obsolescence Insurance, a New High-Margin Business for EMS Companies
by 
William Amelio has been anything but quiet at Avnet Inc. but anyone who has a different thought will find out sometime in a few weeks when the new CEO unveils details of his transformational plans for the top-tier distributor. The company is already a radically different organization – having sold its technology solutions (TS) business – but any changes implemented so far will pale beyond what’s coming next.
Internally, Avnet is conducting a massive reorganization that involves more than 450 projects that sources say will touch every part of the company’s operations. By the time these are completed, Avnet will not only look radically different but be better positioned to ignite change within and well beyond its market, according to Amelio, in an interview with EPSNews.
William Amelio, CEO, Avnet Inc.
“We are well on our way in a major transformation of the company,” he said. “Over the last 8 to 9 months we’ve been doing some things that are radically different than we had done in the past. We’ve shed 30 percent-plus of our company, we’ve embarked upon the costliest acquisition in our history and we’ve changed the course of the company.”
The reorganization of Avnet is not only in response to the company’s peculiar challenges but it is also being carried out because of major structural realignments in its business. Still, last year’s sale of Avnet TS, one of the company’s two principal business divisions, was considered radical by many.
The jury is out on whether Amelio’s gamble with the sale of TS will yield the expected results. He is convinced it will. However, the company is counting on more than this to re-energize operations. In addition to the sale of TS to Tech Data, Avnet has made acquisitions over the last year to embed itself deeper into the design chain. The purchase of Premier Farnell, the largest M&A transaction in Avnet’s history, and the acquisition also last year of Hackster.io, were all pieces in the same puzzle. The goal is to make Avnet the industry’s “innovation facilitator,” Amelio said.
Amelio said he will lay out details of the company’s reorganization with facts and figures combined with further explanations in a couple of months. He should expect skeptics to wade in with a raft of questions they’ve been mulling since Amelio’s formal appointment as CEO last September. Many have privately questioned the direction he is taking the company while some have even raised doubts about his ability to pull off the transformation. Even Amelio’s impressive executive background in the OEM market did not douse concerns about his lack of hands-on distribution executive experience.
None of this appeared to be a major concern to Amelio when he spoke last month with EPSNews at Avnet’s head office. The reorganization will make sense to some people and not to others but this is something the company must do to spark growth and prepare for an evolving market, he insists. Amelio is miffed, though, at rivals that are peddling their own versions of the Avnet story. So, he has been narrating parts of the company’s story to analysts, investors and journalists. It’s time to set the record straight, he says.
“I’ve spent 3 or 4 days in the past month talking to analysts back-to-back about our strategy,” Amelio said. “Some of them are getting it. Some haven’t. They also hear from our competitors but I can tell you we are happy with the Premier Farnell acquisition because it is performing better than we expected and we are excited with the opportunity for us to get moving quickly and leapfrog everybody in the digital space.”
Avnet executives have fanned out to tell parts of the company’s transformation story and are getting some positive response from many parts of the industry, according to the company. As part of the information and education push, Avnet announced the launch of a new branding campaign on April 3, complete with the rollout of a refreshed logo, tagline and a marketing blitz. (See: Avnet Rebrands, Unveils the New Avnet.com).
“We are only 3 months into our transformation and in a couple of months I’d be able to say more about this,” Amelio said. “We’ve had some headwind, which you are aware of, and some of the things that have happened have scratched some margins off the table. The transformation that we are going through is going to fill some of those holes so we’d have smooth earnings. It’s good we were prepared with our transformation because it’s going to help us move from the current model to the new model seamlessly.”
More than Divestment, Acquisitions and Chatter
Avnet isn’t just scratching the surface during this reorganization. The company has in the last 8 months conducted a microscopic review of every operational function. It has conducted a stress test of administrative functions, sales and marketing, warehousing and inventory management strategies and even assessed every single employee to determine their readiness for the new Avnet and the ecosystem being created by Amelio and the executive team.
In fact, so many new reform projects are going on today at the distributor that executives believe the changes in Avnet’s corporate DNA and public profile will also lead to changes in the entire distribution market.
Amelio said Avnet has initiated more than 450 critical projects in only the last 3 months, all of them aimed at upturning its staid culture, make it more responsive to customers, serve customers via multiple digital tools and deepen its relationship with a wider range of customers.
Avnet is targeting a set of new, diverse, digitally-savvy and fast-growing customer groups with services and offerings aimed at easing the acquisition of design information and technical specs, reduce or eliminate procurement, supply chain and other manufacturing transaction frictions, help mold and guide designers in the various product conception stages and rapidly move designs from prototype to market at the most cost-efficient way.
Beyond general comments Avnet did not provide complete details of these transformation projects perhaps because they involve mission-critical operations. However, the panoramic view offered by Amelio hints at how deeply these changes go and what they might mean for the company and the industry. The changes will touch financial operations as well as back-end product fulfillment strategies. It will also impact how the different groups within Avnet relate with each other.
For instance, while the different operating business units will continue to have control over their activities, Avnet is moving to a more integrated profit and loss system to cut down on service duplication. Under the old system, each unit had its own HR, finance and inventory control units, which meant higher costs for the entire company. By collapsing and integrating many of these services Avnet expects to shave costs and improve efficiencies, Amelio said.
“50 percent of our EBITDA savings will come from revenue-generating activities and 50 percent from cost-reduction activities such as streamlining the organization,” Amelio said. “If you have 27 P&Ls across the organization then everybody has their own HR person and their own finance person. That’s one example. The other example is for how efficiently we hold inventory. If everybody can hold inventory it is, obviously, not in one location or in a few locations. It’s in lots of locations so you have more than you need. Consolidating inventory locations can yield substantial savings.”
Avnet can use the extra savings. The company has in recent months lost a few supplier agreements, including the one it had with Analog Devices. The franchise losses reverberated through the industry and further gave the impression of a company in a downward spiral. Nothing could be further from the truth, according to Amelio, who noted that Avnet continues to gain other franchises and added that the loss of the lines has compelled it to take steps to broaden services, creating new revenue streams.
The loss of the supplier distribution agreements, while painful, has also forced Avnet to accelerate and deepen ongoing adjustments being taken in response to structural changes occurring in the larger electronics industry. The pace of supplier and customer consolidation in the electronics market has increased in the five years with more deals being done in the last two than in prior years.
In addition to the consolidation of the market other disruptions have emerged, including the irreverent Maker movement, which threatens to upturn the old electronics design chain models. Unlike in the past, more product designs are emerging from this community nowadays and the supply chain must be prepared to identify early and smoothen the path for the next generation of OEMs, Amelio noted.
“Consolidation was bumping along steadily over the prior 5 years but it went up almost 3 times in the last two years. The big companies were gobbling each other up,” Amelio said. “There was also a lot of pressure on distributors as suppliers began taking accounts direct and deciding they were only going to use distributors for fulfillment as opposed to demand-creation, which was a big part of our value proposition. With all these pressures, it was clear to us that there was a chance for us to transform the company both from a strategy point of view and from a culture point of view.”
Related posts
