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Arrow Electronics 
 
Category: Case Study Analysis | Word(s): 502 | Page(s): 3 | View(s): 547 | Rank: 0
 
Arrow Electronics as a leading distributor of electronic parts faces new challenges and competitors with the advent of the information age. Profit margins had been steadily increasing through the 80fs and early 90fs with Arrowfs closest competitor trailing in sales by 20% as recently as 1996. However even at this point there was indication of stagnation as competitor Avnetfs sales had grown by 14% compared to Arrowfs 10% in that same year. At the same time Arrowfs largest group, Arrow/Schweber (A/S) had taken on new leadership under Jan Salsgiver who viewed technological innovation in product and inventory management as a way of improving the companyfs competitive advantage.
Express Parts, Inc. entered this increasingly competitive industry as an independent distributor offering an on-line service which would allow customers to compare prices among leading electronic manufacturers allowing customers to bargain hunt for the best price among rival companies. For a fee of 6% per each payment, Express would handle what had been a previously time and cost consuming process of receiving
and ordering transactional orders from customers. This process had proven problematic in the past for Arrowfs sales and marketing representatives as these orders tended to be of the Book and Ship variety and comprised 25% of the companyfs sales. Relationship customers usually dealing in Value Added requests have been more important to the company as this population represented more long-term and consistent orders as opposed to the more fickle transactional customers. Furthermore much of the companyfs focus on developing its core competency has been on improving its Value Added(VA) services as they comprised $1.443 billion of the Arrowfs $2.31 billion total services. With these considerations in mind Arrow has to decide whether to view Express as a potential competitor who could eventually cannibalize not only its transactional but also relationship customer base or as a business partner who could relieve Arrow of its transactional customers developing a collaborative network allowing the company to focus more on its core competencies of VA services.
Collaborating with Express would essentially require Arrow to generate 36% of new customer revenue due to the fee of using Express services decreasing the companyfs contribution margin by 6%. This led Salsgiver to request the development of two possible scenarios, one optimistic and the other pessimistic. The optimistic scenario envisioned all transactional customers switching to Express and thus yielding a gross margin of 15.5 as opposed to the current gross margin which was at 16.23%. The pessimistic scenario saw all transactional customers as well as up to 40% of all relationship customers moving over to express yielding a gross margin of 14.3%. With expenses currently at 11% and an already recent downward trend in margins it would initially appear that a partnership with Express would not be wise for the future or Arrowfs business. However, if one considers that this negative impact on margins would be felt similarly among Arrowfs rivals and would lead to a market correction the benefits of a partnership appear more attractive.
 
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