20110074 | Aqsa Saif | Section 1

A Tale of Two Electronic Components Distributors

Electronics Distribution worth $23.1 billion industry in the United States and Canada had
experienced double-digit annual growth over the last several years. Electronics distributors
were mainly intermediaries between component manufacturers and original equipment
manufacturers (OEMs) for material and information transfer. The core reasons behind
growth in the electronics distribution industry included growth in demand for electronic
products and shortages or surpluses of various electronic components. In addition to it,
large component manufacturers like Intel and Texas Instruments made efforts to counter
SG&A expenses increase from 25% to 30% of sale by reducing the size of their direct sales
force and directing their work to the distributors. The role of distributors’ salespeople
evolved over the years and demanded more technical knowledge. There was no typical
distributor concept as the distributors differed by the range of products they provided, the
kind of relationships they formed with suppliers and customers, the number of customers
they serviced, the level of value-added service they provided and the size of shipments.

AESCO emerged as an electronic component distributor primarily serving OEMs, in 1996 as

90% of its sales accounted through OEMs and the remaining through MROs. The annual
sales were close to $15 million whereas since 1979, the firm experienced strong and steady
growth averaging 14.5% per year. AESCO offered value in four possible ways, which
incorporated distributing the right components to the right person at the right time.
Secondly, on account of its value-added subassembly, it offered cheap, flexible assembly
labor in addition to supplying electronic components. Thirdly, it provided credit to small
OEMs who had low credit ratings and insufficient working capital. Lastly, sales force made
calls on behalf of the manufacturers that franchised them. AESCO facilitated OEMs by
shipping smaller order quantities whereas on the back end, it willing to “break bulk” by
buying large quantities from the manufacturers. AESCO applied the 20:80 rule whereas 20%
loyal customers would do repeat purchased accounted for 80% of the business. The firm
closely monitored customer preferences, usage history and relied on various sophisticated
models to predict demand. Employees were provided induction training and on-job training
to ensure they provided quality services to customers.

ES Components Inc (ESCI), electronics distribution business, founded by Aubrey in 1981,

specialized in procuring low volume, hard-to-get components and it identified and served
the needs of its customers specifically niche market. It confronted competition from 4 to 5
competitors but it was able to secure business as it stored broad product range of active and
passive components and its strategic location further added value. Moreover, it ensured
availability of hard-to-procure parts by sourcing it from multiple suppliers across the globe.
As the inventory was crucial to meet minimum order quantities, the inventory levels were
closely monitored to reduce surpluses. ESCI primarily acted as the OEM’s agent as it served
a small market. The firm didn’t regard large distributors as threat because he believed that
large firms might not be interested in specialized products sold by ESCI. Consolidations in
the industry were evident and the two key players including Arrow Electronics and Avnet
Inc. acquired 50% of the industry with 15,000 employees. The underlying assumption is
shifting in powers from the suppliers to distributors.

Some of the main challenges confronted by both ESCI and AESCO were evolving operations
in the changing business environment and how they would be able to grow in such a fast-
consolidating environment. Moreover, the globalization of both markets and manufacturing,
changes such as the growth of the Internet, the increased popularity of value-added services
as well as consolidation among electronics distributors were potential threats that were all
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likely to impact the future for both companies. AESCO had continued the serve the market
profitably, there were concerns as to whether partnering with a large distributor be
beneficial. Likewise, ESCI had concerns about product expansion, which posted concerns
about greater operating expenses and addition to the sales force.