Avnet EM's Harley Feldberg: Looking to small to stay big

By Suzanne Deffree, Managing Editor, News -- Electronic Business, 10/28/2008

Electronic Business recently spoke with Harley Feldberg, president of Avnet Electronics Marketing (Avnet EM), about the distributor's plans to expand its accounts base, work with the new inventory situation, gain from market consolidation, and grow its small customer strategy while navigating the rocky economic environment. What follows are excerpts of that conversation.

EDN: Avnet CEO Roy Vallee stated on your September quarter call that the inventory situation is not what it was around 2001. How does the inventory situation look as compared to other downturns?

Feldberg: A number of [the financial analysts on our call] have published inventory views of the supply chain. If you look at them, generally the trend is the same and that is that days of inventory in the channel has come down over the last couple of years. Where inventory has come up is primarily at our suppliers. … There's been some suspicion that's what's happening is distributors are just not buying inventory. Indeed, what's happened is the supply chain has gotten more efficient in its entirety. Therefore more of the inventory as a percentage is backed up further in the supply chain either in die or in semi finished goods. Because the channel in general has been working with our suppliers to get more efficient, it's had the result -- maybe an unintended consequence -- of moving more of the inventory backward to the most efficient provider, which ultimately is in die form.

There's a lot of doomsday thinking out there right now on the macro economy. What Roy was trying to say is we can't control end demand. Ultimately how many iPods, cars, and airplanes are purchased we don't have any impact on. But the analysts shouldn't think about us in an inventory crisis situation because the overall supply chain is much more efficient.

We have never seen inventory as evil. We don't promote a culture inside of Avnet EM that this is a race to zero inventory. We think inventory is one of the fundamental value propositions of a distributor. If you think about our role, it's to provide multiple services on behalf of our suppliers in the mass market. Whether its demand creation, or credit, or inventory, that's our role. So we don't take a philosophy that says, let's keep driving it down, down, down, down. Rather, what we try and do is work with our suppliers on the overall working capital velocity performance metrics, which can be inventory, but it can be terms, payable, it can be a lot of different things. Don't assume that the distributor that gets to zero inventory first wins. Would you shop at a Wal-Mart that had nothing in it?

EDN: What opportunities does this challenging economic situation provide you with as a distributor?

Feldberg: Our history tells us that these kinds of prolonged challenging periods usually create further consolidation. Without sounding like Daddy Warbucks, the reality is that usually plays to the larger, better capitalized, global distributors, or for that matter any company. We believe, again without wanting to sound arrogant, that there will be an accelerated round of consolidations coming in the parts of the world that are not currently consolidated, which would obviously be Asia and Japan.

EDN: Has the credit crunch impacted your M&A (merger and acquisition) strategy at all?

Feldberg: Only from the perspective that, like everyone else, managing cash and liquidity got more important recently. So we are scrutinous, more than ever, that our investments, whether they be organic or M&A, are the right ones. With that said, we still view ourselves as a consolidator.

EDN: What was behind Avnet's recent Abacus buy and how does it fit into the overall IP&E (interconnect, passive, and electromechanical) strategy?

Feldberg: It's not just IP&E. … There's more things about Abacus that excite me. Their strength in the market is, yes, IP&E, but they also have an embedded system business, which is an area of interest for us. You've seen a lot from us for the last year or so around the general topic of design chain. In essence, what design chain takes us to is from selling a single discrete component to various iterations of solutions. Some of those solutions could be full embedded boards. We think the embedded board business as a natural extension of our design-chain strategy. Abacus has an embedded board business, so that's attractive to us, as well.

The other thing that for me today is even maybe more important is their strength tends to lie in medium to small customers. Avnet's strength, generally speaking, tends to lie in medium to large customers. Whether it be Avnet Express in America, whether it be a really exciting thing we did in Asia this past week, we continue to find strategies to expand and broaden our account base because our suppliers need us to do that, especially as things further consolidate, but also because that portion of the business tends to offer higher gross margin.

EDN: What are you noting in Asia, Harley?

Feldberg: In Shenzhen, there's a warehouse-kind-of set up, where a lot of the local distributors have retail shops. In an environment like China, a lot of the R&D, new product, small customer start-ups, get their materials from those kinds of retail applications. By working with the Chinese government, we were able to get a prime spot in that store.

We think the timing is really good. If you think about Abacus with small customer penetration in Europe, if you think about the Avnet Express rollout in America, and if you think about this application in China giving us access to new start-ups and small companies, what we are really building here, somewhat clandestinely, is a small customer strategy. That's what you are seeing the roots of. For me that's a critical strategy.

EDN: What are you watching as market indicators as we move through the December quarter and into 2009?

Feldberg: What all the analysts are trying to figure out is the answer to your question. And the answer is nobody knows. Now maybe it's Avnet's personality, maybe it's our view on the business, but we just don't think we are in a global meltdown. If we were a prime supplier to the financial institutions, we'd give you a different answer. With our very broad customer base and our very broad supplier offerings, we think we are in for a period of stagnancy or maybe even some reduction, but we are not approaching it as a meltdown. One of the things that's most rewarding and is really helping us is that our gross margin and our operating margin are really holding up quite well. The reason for that is we really turned the culture of Avnet EM to one much more focused on profitable growth than on growth. For example, we have been very consistent and aggressive in investing in our demand-creation capabilities. We continue to drive the percentage of our sales that come from design products up. That affords us a higher margin and greater penetration into customers.

So, I'm not answering your question because I don't know. What I'm telling you is what we are going to do. We're going to manage our business prudently; we're not a lavish company anyway. We'll make adjustments where we need to make adjustments, but there is no panic at EM. We’re staying focused on our principle strategies: design chain and supply chain. My opinion is that the market is going to go through an adjustment period and will come out strong at some point in time and we hope to be positioned both because we've been consistent with out strategies and because we've made smart acquisitions.