Avnet Inc. had grand plans for this week but instead of hosting its scheduled annual Investors’ Day conference the top-tier distributor has returned instead to its restructuring drawing board. It must plug a projected $1 billion sales shortfall in fiscal 2018 and implement a new, global ERP project, sparking afresh concerns that the leadership may be underestimating the severity of the challenges facing the company.
If Avnet had proceeded with the investors conference as planned today CEO William Amelio would have faced some tough questions. Why, for example, did Avnet lose so many suppliers that its sales for fiscal 2018 are now projected to decrease this sharply; and why has it taken the company this long to realize a jumble of IT systems would not serve its goal of becoming a prime, digital-enabled partner to its customers and suppliers?
Amelio valiantly tried to provide answers to these questions during the company’s conference call with analysts in April. However, his efforts and contributions from other senior Avnet executives, including CFO Kevin Moriarty, only deepened the mystery of what’s going on at the company and whether the management has a firm understanding of its problems and how to resolve these.
“We're disappointed that our financial performance will be negatively impacted in near term,” Amelio told analysts. “Despite the new challenges, we are more convinced than ever that we have the right strategy, a unique value proposition that spans the entire product life cycle, and the best team in the industry to drive future success.”
The concept sounds believable but the challenges have toughened and the timeline for resolving them have stretched well beyond initial projections. This isn’t hyperbole: Without a major push by the management, brilliant execution of all the varied programs (the ERP system rollout being the thorniest) and the total commitment of all Avnet stakeholders – including employees, customers and suppliers – it will be several years before the numerous business pieces get properly reassembled, optimized and energized to become the exceptional enterprise envisioned by its executives.
Amelio’s optimism may be justifiable but this doesn’t mean the challenges facing Avnet are less onerous. Only one month before the conference call with analysts, Amelio had expressed the same confidence in an interview with EPSNews at the company’s headquarters. He didn’t talk about the IT problem that’s now going to consume management’s attention for the next 24 months. The revenue shortfall, too, wasn’t discussed.
Did the company only recently become of aware of these issues? Are there other difficulties lurking in legacy assets that Avnet has yet to unearth and, if yes, when will these crop up and would the company have the resources to tackle them? Furthermore, competitors are moving ahead while Avnet is battling the twin demons of IT system harmonization and the impact of lost suppliers. Can Avnet change the wheels on this motorcar while racing at full speed? In other words, can Avnet protect current revenue streams while reorganizing operations to prepare them for a rapidly evolving economy?
These aren’t idle questions. Turning a company of Avnet’s size around is like shifting an armada; it can be done but it won’t happen speedily. And even if Avnet has enough time to carry out these tasks the company must also flawlessly execute each project. The recent announcement of further reorganization actions showed its challenges have tripled at around the same time it must integrate its biggest acquisition while countering speculations about departing suppliers.
Avnet’s sales will be flat to slightly higher over the next couple of years. It expects revenue for fiscal 2017 ending this June to be in the range of $17.3 billion to $17.5 billion. Despite a surge in digital sales and strong contribution from newly acquired U.K. distributor Premier Farnell, revenues are expected to be unchanged in fiscal 2018 at a range of $17.3 billion to $17.7 billion, according to Moriarty. Avnet will likely take steps to further reduce selling, general and administrative expenses over the next year. Details may be provided when it finally hosts the cancelled Investors’ Day conference.
“While we are confident our transformation plan will continue to deliver profitable growth in the future, the addition of recent supplier program changes has escalated the need to reduce and redeploy resources to where they can have the most impact,” Moriarty said. “While these near-term headwinds will have more pronounced impact of the first half of fiscal 2018, we are committed to offsetting the gross profit margin – profit dollar loss through the remainder of this fiscal year.”
What Moriarty dubbed “supplier program changes” is better described simply as cancellation or severe alteration of vendor relationship. Consolidation in the ranks of component suppliers, a reduction in the number of distributors by some suppliers and the outright cancellation of “demand creation and fulfillment program” by chipmakers like Texas Instruments have negatively impacted distributors like Avnet.
The $1 billion revenue decline Avnet has forecast for fiscal 2018 is directly related to supplier losses, Moriarty said. Until now, however, Amelio and his team have downplayed the potential impact of the cancelled supplier engagements. He switched tack during the April conference call, defended his company’s position and noted the situation remains fluid.
“We spend a lot of time with all our top suppliers and got validation that we've got solid relationships with them,” Amelio said. “We don't see any more on the horizon, but in any business, there's always some level of risk, and I can't predict with 100 percent certainty that there is never an issue out there.”
New CEO, Old Headache
Amelio was named CEO last September to restore Avnet to a better fiscal health. His first reorganization moves, including the sale of the technology solution business and the acquisition of Premier Farnell, were controversial but after nearly one year in office it initially seemed the long-term PC industry executive had finally placed Avnet back on the right track. He has identified hundreds of projects aimed at optimizing operations and, in a highly-praised tactical move, lured back Phil Gallagher, a well-regarded former Avnet executive, to head the electronic components business.
Avnet has also initiated a raft of cost-cutting measures, the details of which it had planned to announce at the postponed Investors’ Day event. In addition to Gallagher’s welcomed hire, Amelio has also shored up the executive team in other ways, including the appointment of Kevin Summers as chief information officer. Summers reportedly is experienced at the rollout of complicated IT systems, skills that will come in handy when Avnet begins its own global ERP project.
Nevertheless, the $1 billion revenue shortfall remains problematic. Amelio assured shareholders that the company has been successful in plugging the hole and has also strengthened relationship with existing suppliers. The revenue shortfall wasn’t the worst news, however. The announcement of the need for a new ERP system was more troubling. It shouldn’t have been news to anyone that Avnet needed to overhaul its global IT system. In fact, the company had been working on this for a while and ran into ongoing problems with the rollout in North America.
The acquisition of Premier Farnell last year only worsened the IT scenario. The U.K. distributor may be boosting Avnet’s sales now but integrating it into Avnet to squeeze out the optimal benefits was bound to be problematic. Avnet rejected this notion when it was raised at the biennial industry show Electronica last year in Germany. What changed?
This new decision followed the appointment of Summers last year. After a review of the company’s existing IT structure, Summers recommended a migration “to a global system.” The timeline of this decision is troubling a bit. Avnet has now decided to bring not just Premier Farnell but also all its business units under one single ERP system, a successful implementation of which would result in a more seamless enterprise operation.
“Given that we’re solely focused on a component distribution business with recently added digital capability, [Summers’] team was tasked with evaluating our current systems in each region then proposing a global IT strategy for a go-forward strategy,” Amelio said. “Based on his assessment and with the input of industry experts, our systems, he concluded were not optimized to support our future business requirements.”
Amelio also added that the company also concluded that “Premier Farnell’s systems will require investments to fully connect to our full Avnet ecosystems.” This should have been obvious from the beginning. Avnet outbid Premier Farnell suitor Dätwyler Group AG in July 2016. Datwyler executives, during a June 2016 conference call with analysts, discussed the need to upgrade Premier Farnell’s IT system to be on par with Datwyler’s. The Swiss conglomerate had just finished enhancing its own IT infrastructure.
Amelio’s decision to implement a global ERP system is the right move but it is also problematic because of the financial and operational toll. The rollout of the new ERP system will take up to 24 months and cost as much as $125 million, the company said. It will also require the scrapping of a problematic ERP system that has so far cost the company about $150 million in North America. The company expects to take a non-cash charge of $18 million per quarter over the next 8 quarters, Moriarty said.
Avnet’s implementation goals are likely over-ambitious. Other enterprises that have implemented such massive projects have seen delays and cost overruns. Furthermore, the ERP program will be massively disruptive no matter the skills and expertise of the implementation team because they will have to do the installation while the company continued regular operation.
The loss of suppliers and a new ERP project aren’t Avnet’s toughest challenges. It is simply juggling too many fire sticks: it must put its house in order; strengthen operations; safeguard current revenue streams; refocus on a single market (component distribution); rebuild the executive team under a new CEO and; position itself to serve the digital economy. That’s a lot.
In the meantime, the competition is not standing still and neither is the market. This is the conundrum Amelio faces: restructure this industry leader and keep up with the competition. It is “doable” as the Avnet CEO said in an interview with EPSNews but it’s a challenge of Herculean proportions.
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 email@example.com.