Arrow Electronics grew its revenue 31.6% to $8 billion in 2000 and expects to continue to have strong long-term growth, not just because of the product lines it sells, but because of supply chain services.

"Distribution increasingly is an inadequate term to describe what we do," says Fran Scricco, CEO of Arrow. "We are a service provider. We are rapidly becoming a supplier of both goods and services to the electronic industry."

Scricco says Arrow and other distributors will play a greater role in the entire supply chain from concept through production. That role will increasingly center on value-added and supply chain management services.

"We started in the purchasing department with the purchasing agent. It was about parts for dollars," he says. "Now we also deal with engineers and the manufacturing departments at companies." He notes that Arrow has about 600 field application engineers who work with OEMs and contract manufacturers.

He adds that Arrow obviously still deals with purchasers, "but we are doing increasingly complex materials management. That involves negotiating how we are going to set up our supply chain interaction with the customer," says Scricco. Many of the material management programs such as auto replenishment, in-plant stores and bonded inventory involve electronic data interchange (EDI). Arrow does EDI with about 1,000 customers.

"We are also increasingly involved in design activity and we are physically altering product whether it is device programming or computer integration or cable connector assembly," he says. For example, Arrow programs about 400,000 chips per day for customers. It's more cost-effective for OEMs and contract manufacturers to use Arrow or other distributors to program semiconductors rather than doing it themselves, because the programming equipment is expensive. Most OEMs don't have the necessary volume of chips to make purchase of the programming equipment worthwhile.

A contract manufacturer might have the volumes to get a cost-effective return on its investment in the equipment, but "the CM has an inventory turn model that requires the CM to turn its inventory faster than us," says Scricco. "They don't want those parts in their inventory. Let a third party do it? Then you have a cycle-time disadvantage because they don't have the parts in stock," he says. "We already have the parts in our warehouse. We just slide them across the warehouse floor and program them. We have cycle-time advantage versus a third party."

Whether the service is IC programming, auto replenishment or consigned inventory, the challenge for Arrow and other distributors will be getting paid for such services. "There is an increasing emphasis on services," says Scricco. "We are willing to do more, but we need to get paid more. If we are going to get less, then we will have to do less. If you want an in-plant store, you'll have to pay for it," he says.

Many of the services are in demand on a global basis. In fact, supply chain services will help Arrow global expansion efforts, but providing the services and components is not easy because many customers and suppliers are not ready to do business on a global basis.

"Customers may say 'we want you to handle this part of the bill of material anywhere in the world. We want you to be able to supply parts if we have a facilities in North America, Ireland and Asia, and we want to be able to move material back and forth,'" says Scricco. "We say 'fine,' but we ask, 'do you use the same part-numbering system at all facilities? Are you willing to buy in one currency? Are you willing to pay under the same terms and conditions around the world?'" asks Scricco. The answer to all these questions is usually no, but the customer needs to do those things if he truly wants to be global, according to Scricco.

"Global means seamless around the world, but we're not there yet," he says. "Customers are not there yet. Suppliers are not there yet. Is the supplier willing to charge the same price everywhere in the world? No, because in some cases you have a North American supplier who is trying to penetrate Asia and the prices in Asia are lower," says Scricco.

As Arrow services more customers globally, the Internet is becoming a useful tool because it improves communication with customers. But how useful the Web becomes remains to be seen.

"It seems like everyone focuses on simple transactions when they talk about using the Internet," says Scricco. "But the bulk of our business is not simple transactions. It needs to be done human to human. If everything is negotiated in our business, how do you do that automatically? Volume needs are complex. You want two parts on Tuesday in a kit with 55 other parts. How do you do that on the Internet? How do you price that?"

Some distributors are using the Internet to sell parts and handle the buying transactions. Catalog distributors sell a fair amount of parts online and the spot market is moving online. "The catalog business is a multimillion-dollar business. The spot market is a $14- or $15-billion business," says Scricco. "But the entire electronics component industry is a $300-billion business. Everybody gets all worked up and says engineers are going to buy stuff over the Internet. That's great, but whether we are successful or not doesn't destroy our core business," he says. That's because more of a distributor's business involves services as well as parts.

"The online exchanges are transaction-based," says Scricco. "But distributors increasingly are doing complex supply chain management. You can't do that computer to computer without human intervention."