Jeff Shafer is senior vice president in charge of product management, product data and pricing at Newark InOne, the U.S. operation of U.K.-based Premier Farnell plc, one of the top electronic catalog distributors in the world. Bruce Rayner, ESM's editorial director, met with Shafer recently for a discussion about challenges in component distribution, RoHS and the prospects for further industry consolidation.
ESM: What are the biggest challenges facing Newark InOne
Shafer: The main challenges have been trying to meet the customers' commitments and requirements as they relate to [the European Union's] directive on the Restriction of Hazardous Substances [RoHS], which takes effect July 1. Part of that challenge is: What are we going to do with the noncompliant inventory at some point in time? There are questions also with respect to pricing. What we've seen is that pricing is now beginning to go up for noncompliant products.
Also, there's the challenge of [a lack of] U.S. legislation. The [federal] government really is not involved; [environmental compliance is] legislated state by state. You have states like California, which have put in pretty stringent legislation. So what's the environmental standard if I'm in Chicago and I ship product to a customer in Milwaukee, and they build something that gets shipped to California?
Then there's China. In the last three or four months, China has come along with its own directive. How different is that going to be from what's going on in Europe?
ESM: What's the company's strategy with respect to inventory? Will Newark InOne hold both RoHS-compliant and noncompliant inventory?
Shafer: We've made a commitment to support customers who want noncompliant components. Even though we are less than six months away from RoHS implementation on July 1, there are going to be a number of customers that have really not positioned themselves, or even thought about positioning themselves, with any kind of RoHS initiative at all.
ESM: What percentage of your customers have RoHS initiatives at this time?
Shafer: I'd say it might be 25 to 30 percent, and most of that is only at the large OEMs. We really haven't seen the midtier or small customers making any kind of transition. I think that they are saying, "Well, I probably won't be involved," and in some cases they won't, and they have requested us to ship them noncompliant product.
We also have MRO [maintenance, repair and overhaul] customers, and they are pretty much grandfathered for as long as they can receive noncompliant product. So that might go on for 12 to 18 months beyond the July 1, 2006, date.
ESM: What percentage of your business is MRO vs. OEM?
Shafer: Currently about 75 percent of our overall business is MRO and about 25 percent [is] from the design side. But in the past 12 months, we've put in a very heavy initiative to grow the electronic-design-engineering side of our business.
We've made changes to our Web site, and we are bringing on new franchises, new resources and individuals that have relationships with semiconductor suppliers. It all begins with semiconductors; all other products support semiconductors.
ESM: So do you see the MRO percentage declining?
Shafer: I don't see the MRO portion going away, but I see the design business growing two to three times faster than the MRO business. A lot of that growth is the result of the position the customers find themselves in today. They need to support engineering here in the U.S., while [production] has transitioned offshore, over to China.
ESM: Many OEMs are setting up design centers in India, China and Eastern Europe. Is the total available market in the design space in North America growing, staying stable or declining as a result of this globalization of design, and how is Newark dealing with globalization?
Shafer: I think it's still slightly growing [in North America]. There are many accounts out there that I think have received minimal attention over a period of time because everyone has gone after the large-volume business. That's been our [challenge] for some time: working with the small accounts. We are working now with what we consider our "C" and "D' accounts to give them a lot more attention and service than they have ever received in the past. A lot of that is what we've been talking about: a better product offering, better information on the Web, better data sheet access, tech- nical support and online or live chat on any sub- ject they are looking for.
In general, though, I think the [North American] market is growing, but not as fast as in the past. It is interesting that the large distributors are trying to play more to the middle market and small-production-volume business. It's something they have never done before. But they have to grow their account base because they are losing some of their [large-production] accounts offshore. They can try to follow the business as best as they can, and sure, they position themselves overseas very well. But what are you going to do here in the U.S. to try to make up that difference? There's only so much of the pie, and it's shrinking.
ESM: The distribution industry has been consolidating now for about 20 years. Do you think we are at the end of that period? Do you see structural changes pending in the industry?
Shafer: I think the large distributors would really like to have a catalog distribution capability. I've seen the large distributors pursuing this for the last 24 months. They would like to purchase a catalog house to broaden their customer base. They could take the catalog customers to a certain level of small production and then hand it over to the other divisions that service the large contract buyers. So design registrations can occur through the catalog house, and then they can take that business from there to make their additional profits in volume production.
ESM: So when you say the big guys are looking at buying a catalog house, do you think that will happen this year?
Shafer: I don't know about this year. When you look at it, you've got two private catalog companies [Digi-Key and Mouser, owned by TTI Inc.] and two public companies [Premier Farnell, parent of Newark InOne, and Electrocomponents plc, parent of Allied Electronics in the United States].
The two private companies are doing very well, even though one is owned by a large distributor [TTI]. And the other is the largest catalog house in the world [Electrocomponents] and does very well. They don't need anyone to come in and buy them; they don't need any additional dollars. So I think there is a price to pay to hook a catalog house and reel it in.
Still, I think that is somewhat of a gap that the large distributors are in, and they would like to have a catalog company.
ESM: Premier Farnell? Any interest in selling to Arrow or Avnet?
Shafer: We are a profitable pub- lic company. We are doing very well, and I don't see that happening. But then again, I'm not on the board, and I don't make thosedecisions.
ESM: How does Newark InOne work with Premier Farnell in Europe and Asia? How has the relationship changed with the industry's globalization?
Shafer: It's a very tight relationship. We share a lot of information on what's selling in Asia and Europe, and what's selling in the U.S. We are trying to make sure that our franchises are aligned and to make sure we are pursuing the same franchises. We try to align our systems, and we try to align our value-added services. We have a lot of communications among individuals who have global responsibilities.
ESM: You mentioned you are seeing prices rise for non-RoHS-compliant parts. You also said you will provide both compliant and noncompliant parts. Does mean you are committing to supporting inventory for both? Are you going to have increased warehouse space dedicated to parallel inventory?
Shafer: We have had to utilize space in our warehouse right now to accommodate the additional products that we are bringing on board for RoHS. We have put additional [capital] aside to support the RoHS initiative by increasing our inventory levels. That is something we have to do as we go through this transition. We have to support ourselves here as we bleed off our noncompliant inventory.
But we have to look at our noncompliant inventory in two different ways. First, we have some suppliers that are supporting both for a period of time. And some of them are doing that because they feel they can gain some market share and some new customers along the way.
There are other suppliers that are saying that when they make this new part they will obsolete this particular product, and Newark InOne will pretty much go along that line. If they are going to obsolete it, we have an obsolescence program. We go against our database with that part--we grab the past history, past purchase order, quantity, pricing, and we offer them options. One is a last-time buy, but we also offer them substitutes. One substitute, of course, would be the new, compliant product from the same manufacturer. But we also offer them other manufacturers that might be making that same part.
ESM: Is Newark passing the cost of RoHS compliance through to the customer?
Shafer: No, we are not passing anything through to the customer. For the past year, we have tried to be the distributor that's at the forefront of [RoHS]. We feel if we can offer the most information and the [broadest range] of product for the customer as they are making this transition, then there is a chance we will see a market share gain.
ESM: How do you see the next four to five months shaping up in terms of the RoHS transition and its impact on inventory management? Will there be shortages and price spikes as July 1 approaches?
Shafer: Now we go into a Jeff Shafer editorial. My thought on that is that we will start to see things heating up. By the end of the first quarter and going into the second quarter, there are going to be a lot of customers that you could say procrastinated, or they decided to wait until everything became compliant. Then there are others that are just plain late.
So I see things heating up. Beginning in the second quarter, there will be a lot of transitioning occurring.
ESM: Will there be a panic?
Shafer: I think there will be somewhat of a panic. We've already seen lead times go out slightly, maybe one or two weeks for some commodities and three to four weeks for others as a result of the RoHS transition.
There will be some companies, especially large OEMs, which will be looking to flip the switch at a certain point because they already have their product in the pipeline with their distributors, and as that pipeline gets filled, they will be transitioning to RoHS compliance. As a result, there will be large volumes of components they need that will shift immediately.
That's why we are trying to be prepared right now, and putting in a lot of investment in inventory. So, come the end of the first quarter, beginning of the second quarter, we will be in a position to support the customers' needs as we see this very steep ramp-up.
We were talking about the number of SKUs in our warehouse space: We see that going up in a crescendo and things peaking as far as the number of SKUs in the August-September time frame, and then we see a lot of things starting to drop off as the demand for noncompliant products starts to go away.
ESM: Do you think the RoHS issue will negatively impact the distribution business?
Shafer: I think the regional and smaller distributors are going to have a very tough time. It's about how deep their pockets are. Do they have the dollars to invest in their inventory?
ESM: Can you give an annual figure for what RoHS is costing Newark InOne?
Shafer: We look at inventories and people that we try to bring on, even part-time, to help get over the hump. It's millions and millions of dollars. It's tough to try to pinpoint a specific amount, though.
It affects every single department in your company, through IT, sales, product, marketing people, everyone.
RoHS has helped us to reinvent ourselves. It's helped us to clean out our inventory. We have to do more for the customer, provide more opportunities via the Internet. It's brought change to the industry--more sophistication and more technology to the forefront. It was out there, but we didn't use it to the degree we are using it today.