Venture Outsource talked with Roy Vallee, Chief Executive Officer with Avnet. Transcripts from that discussion follow.
VO: What trends do you see taking hold in electronics procurement and distribution over the next few years and, can you please comment on ‘price masking’ and vendor managed inventory?
Vallee: Certainly, the now infamous technology downturn of 2001-03 taught the electronics industry some hard lessons about inventory management. For example, carrying excess parts inventory on the balance sheet ties up a company’s capital. So today you will find companies more disciplined in supply-chain practices. Implementing systems like vendor managed inventory (VMI) through a broad line distributor serves to keep the right level of inventory on demand, while reducing the effect of carrying too much inventory on the balance sheet.
VMI programs naturally lead to just-in-time, or lean manufacturing, and greater flexibility in reacting to market changes. Another advantage is the cost savings associated with buying components in volume from a distributor. Instead of the manufacturer issuing multiple purchase orders to multiple suppliers, an authorized, broad line distributor can provide a one-stop-shop.
A second trend, globalization, has changed the way we do business. OEMs are designing products in Europe while sending manufacturing to Asia, or designing in the United States and manufacturing in Eastern Europe. To get the right devices designed in and then delivered on time, in the needed quantities, to any manufacturing location, is challenging up and down the supply chain. The job of developing forecasts and procuring raw materials, to streamlining logistics, requires communications between vendors and buyers, sophisticated information technology, automation, central logistics and overall operational excellence to perform optimally under demanding market requirements.
In citing a recent industry-produced report, the definition of price masking is when the OEM hides component pricing from the EMS providers through a variety of means, including buy/sell agreements and rebates. For the OEM, price masking allows the negotiations between it and the supplier to occur in private and can actually improve supply assurance during times of allocation. However, price masking can be difficult and expensive to implement.
VMI is a means of optimizing supply-chain performance whereby the vendor (the manufacturer) manages the inventory of the distributor. The manufacturer receives electronic messages from the distributor, noting what the distributor has sold and what it currently has in inventory. The manufacturer reviews this information and decides when it is appropriate to generate a purchase order. Vendor managed inventory promotes a strong partnership between the manufacturer and the distributor.
VO: India has a challenging electronics distribution infrastructure. What primary event must occur in India, before you feel the country can begin building confident distribution capabilities?
Vallee: India is accelerating its focus and investments in further improving its infrastructure, which it considers a vital component of its overall economic growth. We do not see any major problems or bottlenecks in the way this impacts our business. However, an improved infrastructure will create more efficiency in the overall business cycle.
Distribution capabilities already exist in a lot of areas and are being created, even in our industry. As the size of distribution grows overall — which will depend upon more local manufacturing — the distribution industry will respond by creating local warehousing capabilities as well as an ability to trade in local currency. Incidentally, Avnet India is already on the way to creating such a capability within the next few months.
VO: Avnet has high exposure to Europe’s electronics channel, which has not faired too well as a geography lately, and low exposure to the PC; handset, and consumer end-markets which typically do well in calendar Q4. What are some of the changes taking shape with Avnet’s core business to address near-term challenges and support long-term growth?
Vallee: First, the seasonality of the PC, handset and consumer end-markets may suggest that they show stronger results in Q4; however, the volatility of the consumer channel is far greater than
that of the electronics market. The electronics channel is more predictable, but also typically grows at lower rates (and declines at lower rates). Nevertheless, the electronics channel in Europe faces a different problem: globalization and the inevitable production transfer to lower cost regions such as China.
Europe is coping with the situation by concentrating on high-mix/high-quality products with medium and low volumes, which will remain in Europe. Avnet is suited to deal with these changes, thanks to our flexible structure of decentralized business units and skilled work force, including more than 500 engineers who help customers early in the value chain. Thus, Avnet in Europe has constantly gained market share and will continue to do so.
VO: What are some of the value-add services Avnet offers EMS/ODM providers and how do such services translate to value for OEM customers partnering with these providers?
Vallee: The EMS industry is a service industry. We measure customer satisfaction relative to our execution in a number of areas including quality, cost, delivery, technology, supply chain management. Avnet VMI for OEM and EMS/ODM customers offers the following services; vendor consolidation into one VMI program, component supplier management, VMI management and logistics support, VMI information technology networks, forecast management, supplier aggregation, and outsource warehousing and logistics.
VO: Name one person you admire, living or dead, and why you admire this person?
Vallee: Ronald Reagan, for his ability to take incredibly important and complex issues and make them seem simple and clear to all.
VO: Thank you, Roy.
Vallee: You’re welcome. Thank you.
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