Electronics distributors are not expecting 2002 to be a banner year. Many believe sales growth percentages will run in the low single digits this year and most of the expansion will occur in the second half of the year.

But, despite last year's downturn in which sales revenues for the Top 75 distributors declined 26% on average, most distributors believe the long-term outlook for their industry is positive. They point to the fact that distributors' total available market is growing, meaning more electronic components are being sold through distribution. At the same time many of the dot.com companies that had been seen as a threat to electronics distributors have failed.

While the downturn in 2001 was difficult, distributors say they proved their value to OEMs and contract manufacturers who used their supply chain management services. These service customers, distributors say, fared better at managing their inventories than those who did not take advantage of the service options.

Once the economy turns decisively for the better and demand for electronics end equipment picks up, distributors expect to see a boom in demand for both components and services. However, few believe the boom will come in 2002.

"Things are coming back slowly," according to Robin Gray, executive vice president of the National Electronic Distributors Association ( NEDA ). "Distributors are seeing improvement from one quarter to the next. One week is a good and the next week is bad. Double-digit growth won't occur until 2003, but business will be better than it was last year," Gray adds.

Some distributors note substantial improvements in the early months of 2002.

"We saw a 20% increase in incoming order activity in the first quarter compared to fourth quarter 2001," says Mike Morton, senior vice president product marketing for passives distributor TTI. He says the downturn bottomed out in fourth quarter 2001, excessive inventories have been depleted, and growth will return to TTI and to distribution in general.

"If you look back at the compound growth rate over time, our industry grows about 13% per year," says Morton. "The 40% growth years balance out the negative years. Our job now is to manage the cycles. Looking at a 35-year timeline, we're going to see compound growth of 13-15% each year," he says.

But while most electronics distributors agree that industry growth will resume its historical rate, they don't necessarily agree as to when it will happen. Tom Pitera, president of Pioneer Standard's Industrial Electronics Division, says it won't be this year.

"Demand has not picked up," he says. "Right now we don't see any significant recovery happening in the near term. When we do see a recovery, we expect the growth to be gradual." What's more, Pitera says, "2002 will have a difficult time being equal to 2001 because the downward ramp in 2001 was steep. For 2002 to be flat you'd have to have the same type of ramp coming back up, and I don't think that is going to happen."

He says Pioneer Standard will continue to contain costs and work with customers on new designs. "We are trying to get as much of our suppliers' technologies and products as possible into new designs so when they go to production we will be in a position to capitalize," Pitera says.

Roy Vallee, CEO of Avnet, says 2002 will be a slow year for most distributors because capital spending has yet to pick up. "What is fascinating and strange is that this economic slowdown appears to be driven by a lack of corporate capital spending as opposed to the vast majority of economic slowdowns which tend to be driven by declines in consumer spending," says Vallee. He notes that growth in the gross domestic product and consumer confidence suggests an economic recovery is underway. "Things are getting a little better, but the recovery, so far, is being carried by the consumer. There is still a lack of corporate spending," Vallee says.

What's more, he says it appears that electronics buyers are purchasing components to meet demand rather than to replenish inventories. "A distributor may have a customer who had a 12-month supply of goods because business slowed last year. Now the customer may be down to 30 days of inventory," says Vallee. But the buyer won't replenish inventory beyond 30 days.

Vallee believes the recovery will accelerate in the last third of this year, noting that "Nothing meaningful happens in the July-August time frame."

Once the recovery hits, Vallee believes the distribution industry is positioned to ride a long wave of growth. For one thing dot.coms are gone. "Not too long ago, distributors were going to be 'disintermediated' by the dot.coms," says Vallee. "It's clear that the threat is gone. Distributors have done a nice job of embracing the Internet and migrating to a bricks and clicks model. I think the passing of that threat has added some credibility to the distribution model," he adds.

Also lending credibility to distributors is the fact that they did a better jo b of managing the supply chain than other electronics companies, Vallee says.

"Distributors performed better than any other member of the supply chain in terms of reacting to the slowdown and getting their houses in order from an inventory and working capital perspective along with overall balance sheets," he notes. "The result is that, going into the next cycle, distributors will be expected to play a big role in the management of inventories in the supply chain," he says.

But while buyers can expect distributors to improve and emphasize their supply chain and inventory management programs, they might find themselves paying for the benefits as some larger distributors are pushing to unbundle services, charging separate fees instead of including their costs in component-price markups.

While large distributors such as Arrow, Avnet and Pioneer are pushing the unbundling concept, other distributors are keeping close eyes on their efforts.

"Fee for services is probably the hot topic for 2002," says Gray of NEDA. "Everybody wishes Arrow, Avnet and Pioneer a lot of success. They are being watched closely and should there be any signs of success, there will be many more distributors going that route. They can't survive on the margins they're getting," he says.

With unbundling, a buyer would pay separately for each service associated with the purchase of a part whether it be IC programming, auto replenishment, in-plant stores, bonded inventory or other supply chain or design services.

In some cases, distributors are creating new services and new divisions to handle them.

Fran Scricco, CEO of Arrow Electronics, is a leading proponent of unbundling services.

"I think distribution provides lots of value," says Scricco. "If we create value for you, we would like to share in the value we create. I think one inhibitor to extracting value is that our pricing mechanisms have been overly simplistic. We try to cram everything into the price of the part and I think that's just silly."

Scricco says Arrow is working with its customers and showing them the value that Arrow provides through various supply chain and inventory management services including auto replenishment, cable assembly, in-plant stores as well as design services. In some cases Arrow provides field application engineers who work at a customer's site to help with component selection on new designs.

"We are saying 'Let's acknowledge where we are providing value and let the customer pay for it.' If the customer is unwilling to pay for it then we ought to stop doing it because they obviously don't value it," says Scricco. "We want to get pricing models for the industry that reflect reality. We have had rational conversations with customers. In some cases they have been willing to pay and in some cases they have refused and we have removed the service," he says.

Scricco compares the unbundling of services to restaurants. "The restaurant isn't going to tell you what you have to have. If you don't want wine or an appetizer that's okay, but if you do want those things, you need to pay for them," he says. "The same is true with services. If you want the services you need to pay for them."

Pioneer Standard is also moving to fee for services, but is doing so with new services that involve intellectual property. Pitera says that charging separately for services may not help distributors realize more profits.

"If a customer pays a buck for a programmed part, he may be paying 75¢ for the component and 25¢ for programming. To turn around and say we are going to sell the component for 75¢ and ask 25¢ for the programming or more than a buck for the part is not realistic," says Pitera. "We can unbundle it, but we aren't going to get any more."

Pioneer's fee for services involve two companies it purchased: SupplyStream and Aprisa. SupplyStream offers software tools for quoting, inventory management and determining total cost of acquisition. Aprisa provides its CircuitNet design tool. An engineer can go online, find reference designs, modify them, do product searches and use the tools and information to design products.

"They have a high degree of intellectual property behind them," says Pitera.

At the Electronics Distribution Show in May, Pioneer Standard is announcing service offerings that will be sold through a subscription-licensing format.

Avnet's fee-for-services programs involve its Avnet Global Services division which offers a variety of supply chain, inventory and logistics services.

"The service offering that is jumping off the page is supply network services," says Vallee. "This includes assisting in the design, construction and, in some cases, the operation of a supply network. We can do one or any combination of these things."

Avnet's Promière services group offers design, supply chain, and exchange services. "Through Promière we are doing things like bill of materials scrubbing and grading, which helps customers make sure they are designing in the right kinds of materials and that they have the right part numbers and can find cross references or upgrades," says Vallee.

He believes that, as distributors offer more services, they will expand their roles in the electronics supply chain.

"The word distributor can be construed as one who buys in large volumes, warehouses, and sells in smaller volumes to a small customer base," he says. "That is classic distribution. We are looking to expand the role that we play in the technology supply chain by increasing the value that we deliver to our trading partners both upstream in engineering and design services and downstream in terms of supply chain services," Vallee says.

While buyers need to keep an eye on this fee for services trend in 2002, it isn't the most important thing to which they need to be paying attention. Gray, for one, says there may be more consolidation, involving, most likely, the smaller distributors.

"There is going to be consolidation among some of the smaller guys to form regional distributors again," says Gray. The time is ripe for a reemergence of regional distributors because customers and suppliers want distributors that give them a little more attention than they feel they are getting from the larger distributors. "They want the attention they get from smaller distributors, but they want someone big enough to carry the lines and offer some of the services that the bigger guys offer," says Gray.

Purchasers can also expect distributors to enhance their Web capabilities. While the number of purchase orders sent over the Internet is still relatively small, the Internet remains an important tool for most distributors to reach new customers.

The Internet played a role in minimizing Digi-Key's sales decline last year. The catalog distributor's sales were down about 4.5%, but it could have been worse, says Mark Larson, president.

"We had a fairly significant increase in our customer base last year and we are finding a high percentage of our new customers are making initial contact with Digi-Key on the Internet," he says. "We are also seeing more international business. It is a rapidly growing area."

Larson says his number of customers increased 14.5% over 2000. "Last year we processed 300,000 Internet orders, which is about 27% of our total and we expect that to increase this year," he notes.

Digi-Key is also expanding its role beyond catalog distributor to supplying parts for production runs.

"We have been gradually moving into medium volume orders," says Larson. "That is proving to be effective. We intend to develop our volume business and broaden our product lines," he adds.

A separate business group in the company handles Digi-Key's production business. "It has its own infrastructure, customer service support, quoting, and sourcing. It is a focused business unit."

Newark Electronics, another catalog distributor, is also expanding its role in distribution, according to Mike Ruprich, CEO. "We do kitting and we have dedicated inventory for customers. We will build and manage the customer's stock. It's not fee for services, but we will have people on site that manage the inventory."

The trend among distributors to offer more services and perhaps to charge separately for them will undoubtedly continue as distributors expand their roles in the supply chain.

In fact, Scricco says the role has already expanded to the extent that "distribution" doesn't fit anymore. " 'Distribution' is a misnomer. When you say distribution to people they think of dark warehouses and forklift trucks," says Scricco. "We haven't been doing that for 15 years. We are a supply chain services company. Our business is to assist our customers and help our customers in the design, manufacture and use of electronics products from concept through production, and to do it globally and profitably," says Scricco.