Gallagher Gauges Avnet’s Transformation

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Phil Gallagher is optimistic about Avnet Inc. Following the announcement of the distributor's fiscal Q2 earnings, the president of Avnet’s electronic components business assessed the company’s progress after a tumultuous 18 months.

“We are making progress,” Gallagher said. “We are excited about where we are. We feel we are coming out the other side of a number of challenges.”

Beginning with the departure of Avnet CEO Rick Hamada in July 2016, Avnet has embarked on a bumpy, transformative journey. Led by Bill Amelio, who was named CEO in September of 2016, Avnet acquired catalog distributor Premier Farnell in July 2016 and sold its Technology Solutions business in September of that year. Migration to a new SAP-based ERP system effectively shut Avnet’s Americas business down for a week in 2016, and the company acknowledged early in 2017 it needs a systems overhaul.

“We never did stop using the SAP platform,” Gallagher said. “We are going to continue to invest in enhancements to SAP and make sure we are providing the best possible service to our suppliers and customers. We’ve also measured our net promoter scores and customer engagement, and we are seeing steady improvement, and the feedback from our customers is more positive as well. Our employees are making the difference as we are coming off a tough rollout.”

Phil Gallagher, president, Avnet Electronic Components

Avnet’s been operating on SAP outside the Americas for many years, Gallagher pointed out. “We’ve had a very successful adoption in Europe and that will be a foundation for what we bring to the Americas,” he said. “So, the bottom line is we are making progress. We are having great success in Europe and Asia, and we fully expect the Americas region will be back up and we’ll see incremental improvement quarter to quarter.” Avnet’s Americas sales dipped in the December quarter; EMEA and Asia sales were up.

Supplier transition

Activity in the supplier market has also had an impact on Avnet. Analog Devices, after its acquisition of Linear Technology, named Arrow Electronics Inc. as its sole global volume distributor. Texas Instruments has discontinued a distributor incentive program. And, according to several analysts, M&A in the semiconductor sector is causing supply disruption.

Gallagher, who briefly retired from Avnet, has spent a lot of time with suppliers. “M&A is not new for our industry, but it has certainly accelerated, for example look at NXP and Freescale; Qualcomm and NXP -- there’s a lot of cash out there and companies are looking for ways to grow. But we can’t control what our suppliers do. What we can control is executing and maintaining our value proposition to help them maximize their success.”

One side effect of supplier M&A is a condensed product portfolio, which can leave gaps in a distributor’s technology offering. Avnet has moved quickly to fill those holes. “One of the first things we do is go to our existing suppliers and see if they have a technology roadmap that will cover those gaps,” said Gallagher. “If not, we will then look for a new supplier that can. We’ve added 14 suppliers in the past few months; some are niche and some are Premier Farnell suppliers that are now expanding with Avnet, and others are Avnet suppliers that are expanding with Premier Farnell.”

Avnet told analysts in its Q2 conference call that it has regained design-wins lost due to supplier transition. Design registrations were up sequentially and year over year. Additionally, 2017 marked the end of TI’s design-related impact on Avnet’s sales: TI distributors still fulfill orders but they no longer participate in demand creation.

Reaching engineers

Premier Farnell is playing a leading role in Avnet’s transformation. Small-volume (or catalog) orders, such as those handled by Premier Farnell, carry higher profit margins than volume sales. Premier Farnell boosted Avnet's operating income margin in Q2. Catalog distributors cater to engineers, which are the first step in the design chain. By reaching designers, distributors hope to secure volume sales when a product reaches production. This effort is also important to suppliers: if their device is designed into an end product, it could mean years of secure business.

Premier Farnell’s design community, element14, brought about 400,000 engineer members to Avnet. The company further boosted it engineer outreach though investments in Hackster.io and Dragon Innovation. “Engineers are actively going in to these communities and doing design work,” Gallagher said. Premier Farnell has been able to leverage Avnet’s inventory as customer designs move to production, and Avnet has expanded its line card and design services through Premier Farnell.

The maker movement in particular is capturing distributors’ imagination. Consumer electronics, which are low-margin high volume products, are typically not a great fit for distribution. But mobile communication and the IoT are changing that. Avnet was among the distributors that set up booths at CES this year.

“We thought CES was extremely exciting  – it’s the first time we really had a presence there — and IoT is exploding. We made a lot of connections and good new customer opportunities," Gallagher said. "It’s still an emerging market, and many of those customers have great ideas, but don’t know about hardware and software. We are in a great position to help them understand a BOM [bill of materials], as well tie it all together with the software and hardware. We are helping new customers navigate through the supply chain.”

The IoT is a particularly good fit for distributors as it utilizes an array of common components. “We see IoT customers using sensors — they aren’t brand new — but we are building end to end solutions for a lot of startups,” Gallagher said. Avnet recently helped a healthcare company build a device that tracks users’ vital signs. Data is collected and stored in the Avnet cloud; then it’s shared with doctors who can monitor the patient remotely. These solutions are designed to be repeatable and scalable, Gallagher said.

That kind of capability helps secure supplier relationships. “We have suppliers coming to us — they want to sell chips and software — and we can be ‘their guy’ for that," Gallagher said. "IoT applications are pervasive and we’re selling traditional components into existing customers and opening up new vertical end-to-end solutions for new customers and new applications.”

Avnet reports it’s about halfway through its transformation. It’s digital business now exceeds an $800 million annual run rate. “Avnet is always evolving and our foundation is still our people, and relationships matter," Gallagher said. "Our employees get the job done. We provide service and listen to the supplier and customer, and we enable our teams to get the job done."

"At the same time we must continue to adapt, it is never ending," he added. "The acquisitions we’ve made are all about building an ecosystem. We are helping customers design full-fledged products and we are figuring out how to drive that value and provide that to other sources. This is the journey of transformation that we have been on for two years…adapting, and evolving, to meet the changing needs of the market, while driving a fair ROI for all constituents.”