In a move to unify its worldwide sales and support network, Hewlett-Packard Co.'s Components Group has expanded its franchises with the industry's three leading distribution players-Arrow Electronics Inc., Avnet Inc., and VEBA Electronics Inc. As part of the effort, the $975 million group expects to nearly double the amount of business conducted through the channel and to transition many of its direct accounts to distribution.
"As we move forward with our new distribution program, it is our expectation that our total distribution business will quickly grow from 25% of our overall business to in excess of 40%," said Colin Chin, vice president of worldwide sales and marketing for HP's Components Group, Palo Alto, Calif.
The franchise expansions give Arrow and Avnet worldwide rights to the HP Components line. HP extended VEBA's European franchise to the Americas, through Wyle Electronics Inc., which will sell HP's product throughout North America and Latin America.
The companies will sell the Components Group's full line, including LED products, fiber-optic components, RF and microwave components, infrared transceivers, high-speed I/O products, and CMOS image sensors.
HP joins a growing number of component suppliers responding to customer pressure for worldwide sourcing ability. Traditionally, suppliers have granted franchises on a country-by-country basis, but as North American distributors have grown into global entities, these spotty agreements have made it difficult for customers to purchase the same line through the same distributor in multiple areas. Distributors' efforts to unify their own global logistics programs have increasingly prompted suppliers such as HP to grant franchise rights on a worldwide basis.
"We've had a lot of HP salespeople working deals alongside our distributors, and it's our belief that distribution has grown up a lot over the past 10 years and doesn't need that much handholding," said Frank Robertazzi, distribution manager for the Components Group. "Our distribution partners have invested in a lot of technical resources to provide global technical and logistics support, and we want to leverage that."
With the franchise expansions come higher expectations for HP's channel partners. Under the new model, distributors will have increased responsibility for strategic management of the components business and expansion of their logistical roles. While HP management will maintain primary responsibility for driving marketing efforts at the corporate level, responsibility for implementing demand-creation programs rests with the distributors.
In the Asia-Pacific region, the focus of distribution will be on what HP calls its "transfer" business: supplying components to Asian manufacturers of products that are developed, marketed, distributed, and sold throughout the world. Worldwide distributors will be expected to find opportunities in new markets; existing global and regional partners will continue to play a strategic role in support of HP Components.
Those regional partners include Pointe-Claire, Quebec-based Future Electronics Inc., which carries HP in North America; and the Netherlands' SEI Group, which was granted a pan-European franchise by the supplier. In specific cases, said Robertazzi, HP customers have preferred to work globally with Future or with SEI, which partners with Marshall Industries in North America. These customers have the ability to deal worldwide with those distributors. And HP has not ruled out further global franchise agreements.
HP expects its distributors (and contract manufacturers) to provide consistent services, terms, and conditions across the supply chain. Most HP-supported contract manufacturers already operate on a global basis.
Over the next year or so, HP will work with its channel partners on customer transition, Robertazzi said. "We plan to do a multiyear program with two types of transitions," he said. "One is the transfer of purchasing activity from direct to the distributor. The second is giving the distributor more account ownership in cases where the customer is already engaged with distribution."
The process is also expected to provide increased efficiencies for HP. "With the regional franchises, we've found that we have inventory in Europe that we're scrapping that we could use in the Pacific Rim," Robertazzi said. "We're losing orders because our distributor couldn't move that inventory from one place to another."
HP is looking at different ways of conducting business with its distributors to streamline the process and make it more cost-effective for the supply chain. At present, HP-like other suppliers-has different ASPs in different regions. "We're looking at different models to strip out the non-value-added costs-such as ship-to-stock-and-debit-toward consignment or other models," Robertazzi said.
The oft-used "ship-to-stock" practice credits a distributor if a supplier's price fluctuates downward, but often creates "phantom" inventory and adds transaction steps to the sales process.
HP's efforts will allow the distributors to put more resources into technical demand creation, Robertazzi said.
HP is currently working with both Arrow and Avnet, based in Melville, N.Y., and Phoenix, respectively, in developing global sales practices as well as logistics support. "Customers are demanding this, and we had to make decisions: Do we invest in our own global sales and support systems, or outsource that? We we want to be one of the first to get there," Robertazzi said.
Virtually every North American distributor with revenue of $1 billion or more has implemented a global strategy. Arrow's and Avnet's acquisitions have been largely overseas; VEBA, which acquired Irvine, Calif.-based Wyle a year ago, has opened 17 new offices worldwide since January. Marshall Industries, El Monte, Calif., has formed an alliance with SEI in Europe and Singapore-based Serial Systems Ltd. in the Asia-Pacific region. Within the past 18 months, Pioneer-Standard Electronics Inc. has teamed with Eurodis Electron plc in Europe and World Peace International in the Asia-Pacific region. Future, which traditionally has expanded by opening offices in new locations, recently acquired companies in China and, more recently, Advent Electronics Inc., Des Plaines, Ill.