Sell services to your suppliers: a new twist in fee-for-services - Supply Chain - Avnet IP and E - Company Business and Marketing

Electronic News, Nov 11, 2002 by Rob Spiegel

Distributors are mostly hush-hush on a new development that could put a backbone on the fee-based services movement.

Since distributors are already performing services on components for their customers, it wouldn't take much more effort to sell those same services back to the supplier for the supplier's direct customers, so a number of distributors are working to see if providing third-party services to manufacturers is a viable business model.

Avnet IP&E, formerly known as Avnet Kent, the interconnect, passives and electromechanical components division of Phoenix-based Avnet Inc., is planning to offer assembly services to suppliers. "There are significant opportunities in product value-add that play into the hands of IP&E product modification and assembly," said Tom McCartney division president.

Growth for the unit's business involves assembly and modification. "Twenty percent of our business is value-add and it's a growing percentage," McCartney said. If a manufacturer wanted to offer the service to its direct customers, it would make economic sense to outsource it to the fully equipped distributor. "The next step is that an OEM would go to our supplier and say, 'We'll take the assembly for a fee because of the value-add.'"

Arrow Electronics Inc. of Melville, N.Y., is also exploring the prospect of selling fee-based valueadded services outside of the context of a component sale. The company is working to make sure that the model is sound before making announcements. But there are indications those announcements could come soon. Arrow didn't specify what services were involved, but company representatives did suggest potential third-party service offerings could involve more than one area of services.

"It's an intriguing idea," said Clarke Walser, principal of Walser and Associates of Arlington Heights, Ill. "It makes a lot of sense because of IP&E guys have developed considerable expertise in putting the stuff together and they're good at it."

Walser noted that Kent Electronics toyed with the concept before it was a acquired by Avnet last year. He said the concept was an attempt to get out from under the expense of providing assembly services as part of the component price. "Kent established K*TEC [its assembly subsidiary] as a separate organization so they wouldn't have to provide assembly services as a value-add. Early on they found a way to answer the fee-for-services question."

Many distribution executives insist they are satisfied with the compensation they receive for value-added assembly services. "For us, the fee has always been in the form of gross margin," said Craig Conrad, senior VP of global sales and marketing at "TTI Inc. Conrad believes much of the fee-for-services discussion is just talk. It's a new buzz for old news. We've always provided the services and charged appropriately."

McCartney said he feels well compensated for the company's assembly services. "Physical valueadd always enhances margins. That is effectively selling a service since you're selling customer parts rather than commodity parts." For McCartney, though, the opportunity lies in the possibility of selling those same assembly services to non-customers, thus creating a new market.

Walser suggested that third-party assembly services would likely be attractive to manufacturers for their direct business. "The service is peripheral from a management standpoint, so it makes perfect sense to outsource it." Of course, if the manufacturer could obtain the service without buying the components through a distributor, the OEM may have less incentive to use distribution.

RELATED ARTICLE: Setting Sell

Advantages and disadvantages of providing service to non-customers

Advantages

* Diminishes overcapacity

* Creates new revenue source

* Services produce high margin revenue

Disadvantages

* Service may not be a core competency

* May diminish the need for distribution

* Encourages direct business at the expense of distribution