Kaufman: Distributors are at a crossroads
By James Carbone -- Purchasing, 6/18/1998
While sales growth has increased 43% for top electronics distributors over the last three years, the industry may not be as healthy as it appears, says Stephen Kaufman, president and chairman of the board at Arrow Electronics.Sales growth is up, but the three-year net income growth of Arrow, Avnet, Marshall, and Pioneer will decline 2% on average, says Kaufman. Gross profit fell to 15.5% in 1997 and has dropped every year since 1989 when it was 25%. Return on equity of the four distributors has fallen from 17% in 1994 to an estimated 12% in 1998.
"I think the distribution industry is at a crossroads," says Kaufman. "Semiconductor manufacturers and distributors need to get together and dialogue about our relationship and our role."
He says both semiconductor suppliers and customers have to ask if distribution adds value. If suppliers and customers don't believe distributors bring value, then the distribution industry will go bankrupt. If distributors do bring value, then suppliers and customers must realize that distributors have to return profits to their shareholders.
The distribution industry is a creation of component manufacturers and end customers. "We are not an independent leader in our business. We don't create anything, not products, not functions, not markets, not customers. We don't create demand, we fulfill demand."
Kaufman says distribution services both suppliers and customers. Customers need reliable delivery; short leadtimes; multiple part numbers; cheap, simple, efficient purchasing practices; and the lowest total cost of ownership. Suppliers need access to OEM customers, logistics capabilities, credit and sales support.
"Suppliers and customers are saying we want you to do these things, but we don't want to pay for them." But if distribution is to continue to exist and provide these services, then someone has to pay for them.
Kaufman says he is optimistic about distribution's future because suppliers and customers cannot perform the needed services that distribution provides. "My experience is that if there is a true need to be filled, it will be filled and people will pay for it," he says. "There will be short-term anomalies during which there will be stress and strain and people will lose money, but long term, if it is a valued service, the mechanism will spring up to compensate the providers of that service."
Kaufman adds that adoption of such practices as just-in-time, build-to-order, supply chain management, and total quality management do little to address the problems that distribution faces. "There seems to be a notion that adopting one of these things makes a fundamental change and it doesn't. JIT, kanban, BTO are just moving things around so it looks to a customer as if there is reduced inventory, but it's just moved across the street."
"We'll carry as much inventory as the world wants, but somebody has to pay the price at the end of the day. If we can find a way to live without inventory, I'm all for it. So far we haven't done that. We have just pushed it back. As long as it is pushed back, somebody is carrying cost."
Kaufman says he believes the Internet is a useful tool, but that it will not "disintermediate distribution's function no matter how many consultants say how many billions will go across the Internet in six more months." He says that the services that customers require cannot be provided by the Internet.
"I think the Internet is a marvelous communication device," says Kaufman. "It's much better than the Postal Service, it's cheaper than Federal Express, and its easier to use than faxes. I think it is terrific."
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