Supply Chain Forecast for 2018: Digital Transformation

All annual business forecasts have a theme, and 2018 will mark the year of the supply chain’s digital transformation. By the end of 2018, half of manufacturers will be using analytics, IoT, and social collaboration tools to extend the integrated planning process throughout the enterprise in real time, according to IDC. Digital transformation is opening new opportunities -- and presenting new challenges.

Electronics companies tend to be early adopters of transformative technologies, albeit at different rates. The industry's two largest distributors, Arrow Electronics Inc. and Avnet Inc., have made digital a cornerstone of their evolution. Distributors uniquely serve two masters in the supply chain: their suppliers and their customers. Transformation has to benefit both constituencies.

Arrow SVP & Chief Digital Officer Matt Anderson

Arrow hired Senior Vice President and Chief Digital Officer Matt Anderson in 2014 to execute its vision of an integrated hardware, software, content and commerce platform accessible through a single site. “When I first got here the company had made a number of acquisitions including SiliconExpert, Verical and Transim,” said Anderson. “So the early part of our transformation was uniting Arrow’s capabilities and developing a critical mass. When I look at where we are today, I would say we are well down that path.”

By 2020, 60 percent of the world’s largest manufacturers will rely on digital platforms to support as much as 30 percent of overall revenue, predicts IDC. Distribution's role in electronics manufacturing has evolved from inventory management to design, supply chain, logistics and end-of-life support. At the same time, distributors have been under pressure to provide these options at the lowest possible cost. Self-help and online offerings such as chats, video, BOM management and design tools have helped defray expenses, and Anderson says many customers actually prefer digital interaction.

Enabling collaboration

“We see that the market and our customers like the value proposition that we can do online consultations — and it’s not just chatting with agents and certified specialists,” Anderson said. “We can see that procurement likes to collaborate with their engineering teams from the early phase of design to making millions of [their products]. We have millions of people coming to our sites for research and getting help, and what I am most excited about is what is still ahead.”

The Internet of Things (IoT) is a classic case for digital collaboration. Many IoT developers enter the market with a great idea but no implementation strategy. Component makers offer a vast array of IoT products ready for integration. Arrow’s digital platform unites suppliers, products, reference designs, spec sheets, tools and technical assistance in a single place.

“We see entrepreneurs that have a great idea but no technical expertise,” said Anderson. “Then what happens? They need a supply chain. We bring a new way to work with entrepreneurs: they can get consultation they didn’t have access to before; we have hardware assets online; and we’ve plugged in people that can work in a virtual market with thousands of other companies. Then we can set [developers] up with service and maintenance. That’s what I think ‘digital’ means: you aren’t just a hardware supplier.”

Showcasing suppliers

Suppliers rely on their channel to showcase their products. In the components realm, distributors are incentivized by suppliers to get their brand designed in to an OEM device. This not only requires distributors to have deep product expertise; it requires tracking components from the point of design to the point of production. Distributors’ compensation for design work depends on component traceability. By 2020, predicts IDC, one-third of manufacturers and retailers will be tracking goods using blockchain, improving delivered product quality by up to 20 percent.

“Digital is a vital part of demand creation with our suppliers,” Anderson said. “When I first came here suppliers were intrigued and wanted to see if we were serious [about our digital vision] and if we could compete with companies such as Digi-Key and Avnet. We are not trying to replace [traditional demand creation] strategies – but our solution is a whole ecosystem. What we have seen from our suppliers regarding hardware is margins are falling and companies are buying one another. Suppliers are looking for growth, not just new product introductions (NPI).”

Customers connect with suppliers in a variety of ways. “We have SiliconExpert that provides data sheets and reference designs, and we have relationships with ORCAD and Cadence design tools. You can develop your design using the cloud and ORCAD and then go straight on to Arrow.com for sampling and then on to production. Or, you can use datasheets provided by SiliconExpert, download your BOM on our BOM tool, and Arrow can manage fulfillment. To support our suppliers, we have FAEs, reference designs, architecture models and tools that can save designers days of work. This also translates into sales for our suppliers.”

Increasingly, sales aren’t just coming from OEMs – the maker movement is driving a lot of new product development. In 2016 Arrow formed an alliance with crowdfunding site Indiegogo. “Suppliers were very excited to bring working technology to where it hasn’t been before,” Anderson said. “We believe 50 of the biggest companies to come don’t exist yet.”

By 2019, 80 percent of supply chain interactions will happen across cloud-based commerce networks, according to IDC. “If you have the cloud, you can bring together two or more suppliers and deliver a full customer experience both online and offline,” said Anderson. "We are working with both cloud providers and cloud suppliers, and through these we can provide a ton of information including lead generation. Our model transcends traditional co-opetition [between suppliers]."

The big picture

Sales related to design assistance provide a higher profit margin for distributors. In November, Arrow CEO Michael Long told analysts its digital transformation “is designed to get more people to the site, because we know once they're there and they do go on the platform, they like what's there, they come back, they tend to grow. The other thing that I would tell you is that there is almost a 10 to 1 benefit after somebody buys on the web from us. When they go into the normal channel, they typically buy 10 times the amount from us as we're seeing today.”

Arrow's digital business is approaching a $1 billion annual run rate. “Arrow is becoming more than a distributor -- we are becoming an ecosystem," Anderson said. "We believe that design and production are really important whether [suppliers] are doing hardware or software.”

Digital platforms are helping distributors transcend traditional boundaries. By 2021, said IDC, 60 percent of manufacturers will be using data and analytics to improve the speed and accuracy of the fulfillment process.

“More of our customers are operating with a truly global model,” Anderson said. “Their supply chains span every continent. So how do you enable an engineer in Poland that works with procurement in China with their IT in France? All of those are at different levels of maturity but all are one brand.”

Arrow transacts in multiple languages and currencies and allows companies to collaborate across geographies. “Customers are looking for partners to handle everything from design to supply chain to manufacturing,” Anderson said. “It doesn’t take a physical presence in every market to manage those demands. Digital allows a pretty good touch model both online and offline.”

Distributors acknowledge their future relies on a mix of hardware and services. “I wouldn’t say we are getting far away from our core capabilities,” said Anderson. “We have already scaled those capabilities. But we also haven’t taken advantage of all the opportunities enabled by digital. You are not just hardware or software and services, and Arrow has spanned those various elements for a long time. Adding adjacent capabilities such as design and solutions creates an extraordinary ecosystem.”