H ARVA R DB U SI N E SSS C H OO L 9-601-131 REV:JANUARY 2,2002 ANDREW MCAFEE FRANCES X.FREI Delivery Problems at Arrow Electronics,Inc.(A) As she looked out over the Long Island Sound one snowy day in early 1993,Betty Jane ("B.J.") Scheihing,senior vice president of Worldwide Operations for Arrow Electronics,puzzled over her December monthly operating report for Arrow's four North American warehouses.Once again, Arrow's same-day shipping performance had fallen,reflecting an unpleasant trend that had begun about one year earlier.For some reason,Arrow's four Primary Distribution Centers(PDCs)had,over this period,been losing their ability to ship orders on the same day they were taken.In fact,Arrow's shipments had dropped from a better than 94%same-day ship rate,achieved regularly in 1991,to a 75%rate on this latest report.Given their customers'need for fast and reliable delivery,and the highly competitive nature of the electronics distribution industry,Scheihing knew that a service problem on this scale was a serious issue for Arrow. Scheihing's vice president of Logistics reported that the slip in same-day shipment was the result of a recurring"order surge"problem in the PDCs.The surge appeared as a batch of orders late in the day,flooded the distribution centers just before their freight carriers-local trucking firms,United Parcel Service(UPS),and Federal Express(FedEx)-made their final pick ups each day.The surge had first appeared shortly after Arrow's acquisition of rival electronics distributor Schweber in October of 1991.For a while,it seemed plausible to Scheihing that the general disruption caused by the Schweber acquisition could be the source of the surge,especially since Arrow also made substantial changes to the company's order transaction and management information systems(MIS) at that time.However,the surge remained long after all other acquisition-related disruptions had died down,and testing of the information systems had never revealed any flaws;they apparently operated exactly as planned. Complaints about missed shipments from the senior vice president of sales and marketing were increasing at the monthly staff meetings.Steve Kaufman,Arrow's CEO,was becoming impatient with the rising number of phone calls he was getting from unhappy customers as well as the increase in freight costs resulting from the need to use premium freight methods to make up having missed the scheduled shipping date.Scheihing knew she had to reverse the trend and return to the 94+% same day shipping performance that Arrow had built its customer service reputation around. Research Associate Kerry Herman prepared this case under the supervision of Professors Andrew McAfee and Frances X.Frei.It was derived from an earlier case,"Information Systems at Arrow Electronics,Inc.,"HBS case No.601-075.HBS cases are developed solely as the basis for class discussion.Cases are not intended to serve as endorsements,sources of primary data,or illustrations of effective or ineffective management. Copyright2001 President and Fellows of Harvard College.To order copies or request permission to reproduce materials,call 1-800-545-7685, write Harvard Business School Publishing,Boston,MA 02163,or go to http://www.hbsp.harvard.edu.No part of this publication may be reproduced,stored in a retrieval system,used in a spreadsheet,or transmitted in any form or by any means-electronic,mechanical, photocopying,recording,or otherwise-without the permission of Harvard Business School. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
9-601-131 REV: JANUARY 2, 2002 ________________________________________________________________________________________________________________ Research Associate Kerry Herman prepared this case under the supervision of Professors Andrew McAfee and Frances X. Frei. It was derived from an earlier case, “Information Systems at Arrow Electronics, Inc.,” HBS case No. 601-075. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. ANDREW MCAFEE FRANCES X. FREI Delivery Problems at Arrow Electronics, Inc. (A) As she looked out over the Long Island Sound one snowy day in early 1993, Betty Jane (“B.J.”) Scheihing, senior vice president of Worldwide Operations for Arrow Electronics, puzzled over her December monthly operating report for Arrow’s four North American warehouses. Once again, Arrow’s same-day shipping performance had fallen, reflecting an unpleasant trend that had begun about one year earlier. For some reason, Arrow’s four Primary Distribution Centers (PDCs) had, over this period, been losing their ability to ship orders on the same day they were taken. In fact, Arrow’s shipments had dropped from a better than 94% same-day ship rate, achieved regularly in 1991, to a 75% rate on this latest report. Given their customers’ need for fast and reliable delivery, and the highly competitive nature of the electronics distribution industry, Scheihing knew that a service problem on this scale was a serious issue for Arrow. Scheihing’s vice president of Logistics reported that the slip in same-day shipment was the result of a recurring “order surge” problem in the PDCs. The surge appeared as a batch of orders late in the day, flooded the distribution centers just before their freight carriers—local trucking firms, United Parcel Service (UPS), and Federal Express (FedEx)—made their final pick ups each day. The surge had first appeared shortly after Arrow’s acquisition of rival electronics distributor Schweber in October of 1991. For a while, it seemed plausible to Scheihing that the general disruption caused by the Schweber acquisition could be the source of the surge, especially since Arrow also made substantial changes to the company’s order transaction and management information systems (MIS) at that time. However, the surge remained long after all other acquisition-related disruptions had died down, and testing of the information systems had never revealed any flaws; they apparently operated exactly as planned. Complaints about missed shipments from the senior vice president of sales and marketing were increasing at the monthly staff meetings. Steve Kaufman, Arrow’s CEO, was becoming impatient with the rising number of phone calls he was getting from unhappy customers as well as the increase in freight costs resulting from the need to use premium freight methods to make up having missed the scheduled shipping date. Scheihing knew she had to reverse the trend and return to the 94+% same day shipping performance that Arrow had built its customer service reputation around. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics,Inc.(A) Industry and Company Backgroundi Industry characteristics The distribution of electronic components was a $10.2 billion dollar industry in 1992 in North America.Distributors sold more than 25 major categories of goods, including semiconductors such as microprocessors;dynamic,static,and erasable memories; programmable logic;analog and digital circuits;as well as discrete circuits;and passive components such as capacitors,resistors,switches,and connectors.These parts were supplied by more than 200 different manufacturers,such as Intel,Motorola,Texas Instruments,National Semiconductor, Advanced Micro Devices,AVX,AMP,and Molex. As the marketplace's stocking intermediaries,distributors alleviated the manufacturers'need to maintain extensive inventories and enabled them to avoid a number of risk positions.Through their relationships with distributors,manufacturers also saved on the sales force expense needed to reach 10,000 customers,allowing them to divert money to research and development.In addition, distributors took care of the credit administration and risk associated with these customers. For the customer,distributors provided the convenience of one-stop shopping from over 200 possible suppliers.Customers could also get extended credit terms,make smaller orders with short lead times to avoid inventory build-up,and benefit from a number of "value-added"services provided by distributors. Industry trends Growth of the electronics industry since 1970 had been very strong,averaging 12%compounded annually,despite two significant recessions.This growth was accompanied by firms increasing their geographic scope,resulting in fewer distributors.Starting from a regional base, a few ambitious distributors had grown dramatically-organically and by acquisition-becoming national in scope.Avnet Inc.had been the first mover,growing to national scope and a dominant position in the 1970s.Geographic expansion,industry cycles,and the increasing need for capital and sophisticated management capabilities pushed many distributors beyond their capabilities,resulting in several waves of consolidation in the industry.By 1990,the top five electronics distributors accounted for over 60%of the industry's revenue;in 1970 the top five had accounted for only 25%, and it took 25 distributors to get to 60%.Some industry analysts predicted that this trend would continue,and that eventually the top five distributors would command over 75%of industry revenues. Throughout this time,gross margins2 declined throughout the industry (see Exhibit 1).This downward pressure came as the distributors moved from regional to national competition and as customers became more demanding as they grew larger and implemented more sophisticated purchasing systems.All distributors,including Arrow,were keenly aware of this trend and eager to halt,or at least,retard it.However,they all foresaw that declining margins would be a continuing characteristic of their industry,necessitating a constant need to manage and lower their cost structures. The industry was also characterized by high employee turnover-particularly among the sales force.The rapid expansion of the industry attracted high energy,ambitious people,and created above average opportunities for income growth among sales representatives,who were typically paid entirely on commission.They developed close relationships with their customers,and often believed they could take their customers with them if they moved from one distributor to another. 1 The following industry and company information draws on"Arrow Electronics:The Schweber Acquisition,"HBS case No. 798-020. 2 Defined as the difference between purchase and sale prices of components. 2 This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics, Inc. (A) 2 Industry and Company Background1 Industry characteristics The distribution of electronic components was a $10.2 billion dollar industry in 1992 in North America. Distributors sold more than 25 major categories of goods, including semiconductors such as microprocessors; dynamic, static, and erasable memories; programmable logic; analog and digital circuits; as well as discrete circuits; and passive components such as capacitors, resistors, switches, and connectors. These parts were supplied by more than 200 different manufacturers, such as Intel, Motorola, Texas Instruments, National Semiconductor, Advanced Micro Devices, AVX, AMP, and Molex. As the marketplace’s stocking intermediaries, distributors alleviated the manufacturers’ need to maintain extensive inventories and enabled them to avoid a number of risk positions. Through their relationships with distributors, manufacturers also saved on the sales force expense needed to reach 10,000 customers, allowing them to divert money to research and development. In addition, distributors took care of the credit administration and risk associated with these customers. For the customer, distributors provided the convenience of one-stop shopping from over 200 possible suppliers. Customers could also get extended credit terms, make smaller orders with short lead times to avoid inventory build-up, and benefit from a number of “value-added” services provided by distributors. Industry trends Growth of the electronics industry since 1970 had been very strong, averaging 12% compounded annually, despite two significant recessions. This growth was accompanied by firms increasing their geographic scope, resulting in fewer distributors. Starting from a regional base, a few ambitious distributors had grown dramatically—organically and by acquisition—becoming national in scope. Avnet Inc. had been the first mover, growing to national scope and a dominant position in the 1970s. Geographic expansion, industry cycles, and the increasing need for capital and sophisticated management capabilities pushed many distributors beyond their capabilities, resulting in several waves of consolidation in the industry. By 1990, the top five electronics distributors accounted for over 60% of the industry’s revenue; in 1970 the top five had accounted for only 25%, and it took 25 distributors to get to 60%. Some industry analysts predicted that this trend would continue, and that eventually the top five distributors would command over 75% of industry revenues. Throughout this time, gross margins2 declined throughout the industry (see Exhibit 1). This downward pressure came as the distributors moved from regional to national competition and as customers became more demanding as they grew larger and implemented more sophisticated purchasing systems. All distributors, including Arrow, were keenly aware of this trend and eager to halt, or at least, retard it. However, they all foresaw that declining margins would be a continuing characteristic of their industry, necessitating a constant need to manage and lower their cost structures. The industry was also characterized by high employee turnover—particularly among the sales force. The rapid expansion of the industry attracted high energy, ambitious people, and created above average opportunities for income growth among sales representatives, who were typically paid entirely on commission. They developed close relationships with their customers, and often believed they could take their customers with them if they moved from one distributor to another. 1 The following industry and company information draws on “Arrow Electronics: The Schweber Acquisition,” HBS case No. 798-020. 2 Defined as the difference between purchase and sale prices of components. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics,Inc.(A) 601-131 Arrow's history Arrow was founded as a local distributor in New York City in the 1930s,and was taken public in the early 1960s.Three young HBS graduates acquired a controlling interest in the company in 1968.At that time,Arrow was the eleventh largest electronics distributor,as measured by revenue and was active only in the New York and New England areas;by 1980,it was the second largest and had a nationwide presence.This growth was achieved by opening sales branches and acquiring local and regional competitors in the major industrial cities of North America.By 1993, Arrow outpaced Avnet with sales of $2.5 billion in North America.(See Exhibit 2 for a list of the top 20 distributors,and Exhibit 3 for Arrow financials.) During the 1980s,reacting to the industry's highly competitive market and decreasing margins and the development of reliable freight carriers like Federal Express and UPS,Arrow differentiated itself from its competitors by centralizing its purchasing and its distribution centers,and by growing the company through acquisition.With centralization,Arrow had better inventory utilization and lower warehousing costs to compete in the tightening market.Between 1980 and 1990,Arrow went from 37 local warehouses to four PDCs(New York,Memphis,Denver,and Reno,Nevada).During this period,Arrow also focused on automating the PDCs and adding technology and training that allowed the company to expand its special handling capabilities.Arrow linked its information systems with a growing number of its customers',relying on EDI(electronic data interchange)to enable the automation of various steps of the order-delivery-payment cycle,and to better ensure quality "just-in-time"delivery to its customers.Arrow also significantly increased its "value-added" services,including in-plant terminals;in-plant stores;PAL/EPROM programming,3 kitting;turnkey or contract manufacturing;computer products integration;connector assembly;marking;testing; specialized packaging;and automated replenishment.Value-added services became an essential competitive weapon in electronics distribution;for Arrow,orders that included value-added services went from 7%of total sales in 1985,to 51%in 1993. Acquisitions of its competitors had also been central to Arrow's strategy during the late 1980s and early 1990s.4 In January of 1988 Arrow acquired a major competitor,fourth-ranked Kierulff Electronics,for $130 million.The $150M acquisition of Schweber Electronics (then the number three distributor)in late 1991 gave Arrow a stronger presence on the West Coast,brought eight new suppliers-including Motorola Semiconductor--into Arrow's stable,and gave Arrow the potential to vault into the position of industry leader.These acquisitions were not without their disruptive aspects,and Scheihing,as head of operations was responsible for managing the integration process of each acquisition,knew that it usually took Arrow about six months to fully integrate new companies, eliminate duplicate functions,and learn or adjust to new technologies brought in with the purchased company Arrow's structure In 1992,the company maintained 37 branch sales offices called divisions (see Exhibit 4 for Arrow's organizational structure).Corporate headquarters housed the MIS group; credit and accounts receivable;finance and accounting;operations departments;and product marketing.The product marketing department,with 110 people,was responsible for relations with Arrow's 25 major and 175 minor electronic component suppliers.This group also developed nationwide marketing programs,purchased all products,and managed the $298 million of inventory held in Arrow's four PDCs. 3 PAL/EPROM programming involved implanting a customer-specified program onto semiconductor chips before shipping them 4 The following information on Arrow's corporate strategy and structure draws significantly on"Arrow Electronics:The Schweber Acquisition,"HBS case No.798-020. 3 This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics, Inc. (A) 601-131 3 Arrow’s history Arrow was founded as a local distributor in New York City in the 1930s, and was taken public in the early 1960s. Three young HBS graduates acquired a controlling interest in the company in 1968. At that time, Arrow was the eleventh largest electronics distributor, as measured by revenue and was active only in the New York and New England areas; by 1980, it was the second largest and had a nationwide presence. This growth was achieved by opening sales branches and acquiring local and regional competitors in the major industrial cities of North America. By 1993, Arrow outpaced Avnet with sales of $2.5 billion in North America. (See Exhibit 2 for a list of the top 20 distributors, and Exhibit 3 for Arrow financials.) During the 1980s, reacting to the industry’s highly competitive market and decreasing margins and the development of reliable freight carriers like Federal Express and UPS, Arrow differentiated itself from its competitors by centralizing its purchasing and its distribution centers, and by growing the company through acquisition. With centralization, Arrow had better inventory utilization and lower warehousing costs to compete in the tightening market. Between 1980 and 1990, Arrow went from 37 local warehouses to four PDCs (New York, Memphis, Denver, and Reno, Nevada). During this period, Arrow also focused on automating the PDCs and adding technology and training that allowed the company to expand its special handling capabilities. Arrow linked its information systems with a growing number of its customers’, relying on EDI (electronic data interchange) to enable the automation of various steps of the order-delivery-payment cycle, and to better ensure quality “just-in-time” delivery to its customers. Arrow also significantly increased its “value-added” services, including in-plant terminals; in-plant stores; PAL/EPROM programming;3 kitting; turnkey or contract manufacturing; computer products integration; connector assembly; marking; testing; specialized packaging; and automated replenishment. Value-added services became an essential competitive weapon in electronics distribution; for Arrow, orders that included value-added services went from 7% of total sales in 1985, to 51% in 1993. Acquisitions of its competitors had also been central to Arrow’s strategy during the late 1980s and early 1990s.4 In January of 1988 Arrow acquired a major competitor, fourth-ranked Kierulff Electronics, for $130 million. The $150M acquisition of Schweber Electronics (then the number three distributor) in late 1991 gave Arrow a stronger presence on the West Coast, brought eight new suppliers—including Motorola Semiconductor--into Arrow’s stable, and gave Arrow the potential to vault into the position of industry leader. These acquisitions were not without their disruptive aspects, and Scheihing, as head of operations was responsible for managing the integration process of each acquisition, knew that it usually took Arrow about six months to fully integrate new companies, eliminate duplicate functions, and learn or adjust to new technologies brought in with the purchased company. Arrow’s structure In 1992, the company maintained 37 branch sales offices called divisions (see Exhibit 4 for Arrow’s organizational structure). Corporate headquarters housed the MIS group; credit and accounts receivable; finance and accounting; operations departments; and product marketing. The product marketing department, with 110 people, was responsible for relations with Arrow’s 25 major and 175 minor electronic component suppliers. This group also developed nationwide marketing programs, purchased all products, and managed the $298 million of inventory held in Arrow’s four PDCs. 3 PAL/EPROM programming involved implanting a customer-specified program onto semiconductor chips before shipping them. 4 The following information on Arrow’s corporate strategy and structure draws significantly on “Arrow Electronics: The Schweber Acquisition,” HBS case No. 798-020. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics,Inc.(A) Each of the 37 divisions in the field had a parallel structure,with six types of personnel: 1.Field Sales Representatives (FSRs)were traditional sales personnel who traveled to their customers(usually 10 to 20 customers per FSR).They spent time with design engineers in order to understand and promote new and emerging products developed by Arrow's suppliers.They also invested time in developing relationships with the purchasing personnel of their customers,in order to build ongoing relations,negotiate major contracts,and resolve any problems in the flow of orders and deliveries.FSRs bore the brunt of shipping or inventory problems originating at Arrow.They were paid on commission,typically 8%of the gross margin dollars generated.Experienced FSRs earned $65,000 to $85,000 per year,with the top performers earning over $150,000. 2. Sales and Marketing Representatives(SMRs)were branch-based personnel who handled the thousands of daily phone calls from customers checking on delivery availability,quoting daily prices,taking orders,and tracking shipments.Each SMR used a computer terminal linked to a comprehensive real-time,on-line computer system that Arrow had developed that tracked the costs,prices,and movement of the 150,000 different part numbers that Arrow kept in inventory,as well as the detailed ordering patterns and sales history for each of the company's customers.SMRs were paid completely on commission,with a typical commission rate of 4%-5%of the gross margin dollars generated.The average order size was about $900,and most orders involved several phone calls with the customer,who generally checked the current price and availability at several distributors before placing an order.In addition,the SMR was responsible for making changes to orders already entered if the customer called and wanted to modify the quantity or scheduled arrival date of a previously placed order.The SMR job was an intense and high-pressure position;typical SMRs earned $40,000 to $55,000 annually,with the top performers earning $100,000. 3.Product Managers(PMs)in the field acted as the advocate for the suppliers,ensuring that the FSRs and SMRs were up to date on the suppliers'latest products and marketing programs and that the sales force was meeting its supplier-by-supplier sales budgets.The PMs worked closely with the suppliers'local personnel to follow-up on leads and referrals that came to Arrow from the suppliers.The PM job generally paid $35,000 to $75,000 annually,depending on experience and which suppliers a PM was responsible for (e.g.,handling large,technically complex lines like Intel or Motorola lines generally paid more than handling smaller,less sophisticated lines).Approximately 25%of a PMs pay was dependent on the sales and gross margin generated by their lines. 4. Field Application Engineers(FAEs)were assigned to each branch to act as technical support for the sales force when their customers wanted detailed design assistance or problem solving on specific product design issues.FAEs were all qualified electrical engineers and earned between $45,000 and $70,000 depending on experience and location.FAEs occasionally received a bonus for helping Arrow win a major contract,but in general were paid a salary only. 5.Clerks and Administrative Assistants entered data into the computer system and managed the flow of paperwork within the office.These positions typically paid $18,000 to $25,000 per year. 6.A General Manager(GM)and one to three Sales Managers comprised the administration for each office.In addition to normal management tasks (supervision,hiring,and budgets) Arrow viewed it as critically important that they spend a significant part of their time visiting current and prospective customers and meeting with the local managers and representatives This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics, Inc. (A) 4 Each of the 37 divisions in the field had a parallel structure, with six types of personnel: 1. Field Sales Representatives (FSRs) were traditional sales personnel who traveled to their customers (usually 10 to 20 customers per FSR). They spent time with design engineers in order to understand and promote new and emerging products developed by Arrow’s suppliers. They also invested time in developing relationships with the purchasing personnel of their customers, in order to build ongoing relations, negotiate major contracts, and resolve any problems in the flow of orders and deliveries. FSRs bore the brunt of shipping or inventory problems originating at Arrow. They were paid on commission, typically 8% of the gross margin dollars generated. Experienced FSRs earned $65,000 to $85,000 per year, with the top performers earning over $150,000. 2. Sales and Marketing Representatives (SMRs) were branch-based personnel who handled the thousands of daily phone calls from customers checking on delivery availability, quoting daily prices, taking orders, and tracking shipments. Each SMR used a computer terminal linked to a comprehensive real-time, on-line computer system that Arrow had developed that tracked the costs, prices, and movement of the 150,000 different part numbers that Arrow kept in inventory, as well as the detailed ordering patterns and sales history for each of the company’s customers. SMRs were paid completely on commission, with a typical commission rate of 4%-5% of the gross margin dollars generated. The average order size was about $900, and most orders involved several phone calls with the customer, who generally checked the current price and availability at several distributors before placing an order. In addition, the SMR was responsible for making changes to orders already entered if the customer called and wanted to modify the quantity or scheduled arrival date of a previously placed order. The SMR job was an intense and high-pressure position; typical SMRs earned $40,000 to $55,000 annually, with the top performers earning $100,000. 3. Product Managers (PMs) in the field acted as the advocate for the suppliers, ensuring that the FSRs and SMRs were up to date on the suppliers’ latest products and marketing programs and that the sales force was meeting its supplier-by-supplier sales budgets. The PMs worked closely with the suppliers’ local personnel to follow-up on leads and referrals that came to Arrow from the suppliers. The PM job generally paid $35,000 to $75,000 annually, depending on experience and which suppliers a PM was responsible for (e.g., handling large, technically complex lines like Intel or Motorola lines generally paid more than handling smaller, less sophisticated lines). Approximately 25% of a PMs pay was dependent on the sales and gross margin generated by their lines. 4. Field Application Engineers (FAEs) were assigned to each branch to act as technical support for the sales force when their customers wanted detailed design assistance or problem solving on specific product design issues. FAEs were all qualified electrical engineers and earned between $45,000 and $70,000 depending on experience and location. FAEs occasionally received a bonus for helping Arrow win a major contract, but in general were paid a salary only. 5. Clerks and Administrative Assistants entered data into the computer system and managed the flow of paperwork within the office. These positions typically paid $18,000 to $25,000 per year. 6. A General Manager (GM) and one to three Sales Managers comprised the administration for each office. In addition to normal management tasks (supervision, hiring, and budgets) Arrow viewed it as critically important that they spend a significant part of their time visiting current and prospective customers and meeting with the local managers and representatives This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics,Inc.(A) 601-131 of the suppliers.A GM's total cash compensation ranged from $90,000 to $150,000 annually depending on their experience and the size of their market,with about 35%of this total being an incentive based on the financial performance of the division.The major profit variable that GM could influence was the price and gross margin of each order since costs were primarily related to the number of people in each division and the headcount budgets for each location were generally set by the regional vice president and the senior vice president of sales. Throughout the electronics distribution industry,including Arrow,products were not sold at a fixed cost.SMRs had pricing authority for all orders and would negotiate prices with their assigned customers based on their knowledge of the customer's size and buying patterns,trends in that local market,and the current cost levels and availability of inventory on hand.Availability of product from the supplier,and the prices Arrow paid for each part type could vary widely(and wildly)week to week,day to day,and even hour by hour. For example,retail prices of the most popular Intel PentiumTM microprocessors which typically sold for $150-$250 could change by as much as $5 to $10 within a single day based on market conditions,and Intel would periodically lower the cost to Arrow by $50 to $75 with almost no notice as they introduced new,higher speed versions.This product line was very competitive and provided little opportunity for Arrow to add value,so Arrow's gross margin for Pentiums was in the 5%range. On the other hand,other products-such as discrete devices like diodes or LEDs-had very stable prices and afforded Arrow value-added opportunities.On these devices Arrow's gross margin could be as high as 25%-35%. In addition,customer-buying patterns varied widely.Some customers placed orders one part number at a time,with only two to three days'notice,which would mean the product had to ship from the PDC the same day.Other customers placed orders for many part numbers only once a month,and might ask that the products be delivered weekly over a two to three month period.Still others might order several times a week,but give Arrow a two-to three-week leadtime before delivery was required.In these latter two cases,the customer might later call and change either the quantity and/or the required arrival date.On average,these types of orders were modified twice between placement and shipment,with some long-scheduled orders changing as many as five or six times before shipment.While most orders were for a single part number,some orders had as many as 50 "line-items"(i.e.part numbers);on average,there were 1.4 line items per order.Finally,while some customers stuck with a "favored"distributor and rarely got multiple quotes,others would effectively conduct a multi-distributor auction for every order. Thus,FSRs and SMRs played a critical role,since with every price quoted and every order taken, they could directly affect Arrow's gross margin and ultimate profitability. Order Fulfillment Processes The basic order fulfillment process had remained largely unchanged since the early 1970s,flowing from phone call to order to shipping and ending with billing.This process had been increasingly automated over time,through increased use of information technology.In the early 1970s, computerization of order-placement,inventory management,and shipping had begun to affect the entire electronics distribution industry.As early as 1972,Arrow began to automate this fulfillment process,and by the early 1980s-under Scheihing's guidance-a fairly automated and comprehensive MIS system was fully implemented.This system captured sales inquiries in order to build customer orders,managed purchasing,inventory,and shipping,tracked the entire process,and managed the billing and collection,all in an on-line,real-time environment.Each merger or consolidation required that the Arrow MIS infrastructure,and the processes that made use of it,be expanded to 5 This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics, Inc. (A) 601-131 5 of the suppliers. A GM’s total cash compensation ranged from $90,000 to $150,000 annually depending on their experience and the size of their market, with about 35% of this total being an incentive based on the financial performance of the division. The major profit variable that GM could influence was the price and gross margin of each order since costs were primarily related to the number of people in each division and the headcount budgets for each location were generally set by the regional vice president and the senior vice president of sales. Throughout the electronics distribution industry, including Arrow, products were not sold at a fixed cost. SMRs had pricing authority for all orders and would negotiate prices with their assigned customers based on their knowledge of the customer’s size and buying patterns, trends in that local market, and the current cost levels and availability of inventory on hand. Availability of product from the supplier, and the prices Arrow paid for each part type could vary widely (and wildly) week to week, day to day, and even hour by hour. For example, retail prices of the most popular Intel Pentium™ microprocessors which typically sold for $150-$250 could change by as much as $5 to $10 within a single day based on market conditions, and Intel would periodically lower the cost to Arrow by $50 to $75 with almost no notice as they introduced new, higher speed versions. This product line was very competitive and provided little opportunity for Arrow to add value, so Arrow’s gross margin for Pentiums was in the 5% range. On the other hand, other products—such as discrete devices like diodes or LEDs—had very stable prices and afforded Arrow value-added opportunities. On these devices Arrow’s gross margin could be as high as 25%-35%. In addition, customer-buying patterns varied widely. Some customers placed orders one part number at a time, with only two to three days’ notice, which would mean the product had to ship from the PDC the same day. Other customers placed orders for many part numbers only once a month, and might ask that the products be delivered weekly over a two to three month period. Still others might order several times a week, but give Arrow a two- to three-week leadtime before delivery was required. In these latter two cases, the customer might later call and change either the quantity and/or the required arrival date. On average, these types of orders were modified twice between placement and shipment, with some long-scheduled orders changing as many as five or six times before shipment. While most orders were for a single part number, some orders had as many as 50 “line-items” (i.e. part numbers); on average, there were 1.4 line items per order. Finally, while some customers stuck with a “favored” distributor and rarely got multiple quotes, others would effectively conduct a multi-distributor auction for every order. Thus, FSRs and SMRs played a critical role, since with every price quoted and every order taken, they could directly affect Arrow’s gross margin and ultimate profitability. Order Fulfillment Processes The basic order fulfillment process had remained largely unchanged since the early 1970s, flowing from phone call to order to shipping and ending with billing. This process had been increasingly automated over time, through increased use of information technology. In the early 1970s, computerization of order-placement, inventory management, and shipping had begun to affect the entire electronics distribution industry. As early as 1972, Arrow began to automate this fulfillment process, and by the early 1980s—under Scheihing’s guidance—a fairly automated and comprehensive MIS system was fully implemented. This system captured sales inquiries in order to build customer orders, managed purchasing, inventory, and shipping, tracked the entire process, and managed the billing and collection, all in an on-line, real-time environment. Each merger or consolidation required that the Arrow MIS infrastructure, and the processes that made use of it, be expanded to This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics,Inc.(A) accommodate the newly acquired companies.Scheihing had learned that acquired companies often had developed interesting and more effective approaches to various aspects of managing the business,which she would try to incorporate into Arrow's processes and MIS system soon after the system integration was complete. Up until the mid-1980s,SMRs would take a call from their customers,quote the price and availability on the product ordered over the phone,and would then write the order on a paper form. The order form went to the General Manager's desk where it sat in a wire basket,awaiting approval. Once approved,the order entry clerk entered the order into the on-line system,which then processed the order and immediately directed it to the appropriate warehouse.Orders for same-day shipment had to be printed in the warehouse by 4:00 p.m.in order to be picked,packed and given to the transportation carriers,who generally made their last pick-up at Arrow's PDCs between 5:00 p.m. and 6:00 p.m.This process is charted in Exhibit 5. For the most part,GMs reviewed orders to make sure they met minimum gross margins,and to check for accuracy of price quoted.Only very rarely was an order rejected once taken from the customer,and prices were virtually never changed even if the SMR had used bad judgment in determining the pricing.In such circumstances,the GM usually decided that there would be more harm to customer relations in calling and trying to raise the price of an order the customer assumed had been accepted,than benefit from the potential price increase.However,discussing it with the SMR(or FSR)provided an opportunity to coach and train them in what constituted a "bad"and "good"order for Arrow.In general,a good order was one that contained only accurate information and had a gross margin as high as possible,given its contents,the state of the market,and the customer's profile. In the late 1980s,Arrow enhanced the order entry system to allow SMRs to enter orders themselves,while on the phone with their customers (called Direct Order Entry,or "DOE"), eliminating the need for a paper form.With this system,a customer order could be "built"on-line as the phone conversation between customer and SMR proceeded.This required training Arrow's sales force to use a new and unfamiliar on-line transaction-and to adjust their views of the division of labor involved in the order process.At the same time,under pressure from local competitors,Arrow had extended the "same-day shipment"window and began advertising that orders received by 5:00 p.m.would be shipped the same day (as opposed to the previous 4:00 p.m.cut-off time). Initially,most SMRs did not use the DOE,perceiving the data entry task as clerical,menial,and inappropriate for skilled and highly paid sales personnel.They were familiar with,and liked,the paper forms they had used for years,and which provided them a permanent hard copy of the order. Furthermore,the new DOE screen and transaction was somewhat clumsy and not very user friendly. In addition,it turned out,many of the older SMRs could not type well.Finally,management had not eliminated the original paper order forms,making it possible for the SMRs to continue in their old ways. During the acquisition of Schweber,Scheihing concluded that they had a superior and more user- friendly DOE system than Arrow-called "scratch-pad"-which she had integrated into the Arrow system shortly after the merger was completed.During the programming of this revised DOE system,Kaufman had asked for a number of enhancements and adaptations to be made.In January of 1992 he had returned from a one-week executive education course at a well-known eastern business school.While at the course he had become intrigued with the classes led by a noted senior professor of industrial marketing on value creation and margin improvement through more intelligent pricing mechanisms and sales force management.A result of the classes and a dinner with the professor,Kaufman decided that Arrow's on-line system should be modified to automatically monitor pricing decisions around the country.This would happen minute by minute,city by city, 6 This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics, Inc. (A) 6 accommodate the newly acquired companies. Scheihing had learned that acquired companies often had developed interesting and more effective approaches to various aspects of managing the business, which she would try to incorporate into Arrow’s processes and MIS system soon after the system integration was complete. Up until the mid-1980s, SMRs would take a call from their customers, quote the price and availability on the product ordered over the phone, and would then write the order on a paper form. The order form went to the General Manager’s desk where it sat in a wire basket, awaiting approval. Once approved, the order entry clerk entered the order into the on-line system, which then processed the order and immediately directed it to the appropriate warehouse. Orders for same-day shipment had to be printed in the warehouse by 4:00 p.m. in order to be picked, packed and given to the transportation carriers, who generally made their last pick-up at Arrow’s PDCs between 5:00 p.m. and 6:00 p.m. This process is charted in Exhibit 5. For the most part, GMs reviewed orders to make sure they met minimum gross margins, and to check for accuracy of price quoted. Only very rarely was an order rejected once taken from the customer, and prices were virtually never changed even if the SMR had used bad judgment in determining the pricing. In such circumstances, the GM usually decided that there would be more harm to customer relations in calling and trying to raise the price of an order the customer assumed had been accepted, than benefit from the potential price increase. However, discussing it with the SMR (or FSR) provided an opportunity to coach and train them in what constituted a “bad” and “good” order for Arrow. In general, a good order was one that contained only accurate information and had a gross margin as high as possible, given its contents, the state of the market, and the customer’s profile. In the late 1980s, Arrow enhanced the order entry system to allow SMRs to enter orders themselves, while on the phone with their customers (called Direct Order Entry, or “DOE”), eliminating the need for a paper form. With this system, a customer order could be “built” on-line as the phone conversation between customer and SMR proceeded. This required training Arrow’s sales force to use a new and unfamiliar on-line transaction—and to adjust their views of the division of labor involved in the order process. At the same time, under pressure from local competitors, Arrow had extended the “same-day shipment” window and began advertising that orders received by 5:00 p.m. would be shipped the same day (as opposed to the previous 4:00 p.m. cut-off time). Initially, most SMRs did not use the DOE, perceiving the data entry task as clerical, menial, and inappropriate for skilled and highly paid sales personnel. They were familiar with, and liked, the paper forms they had used for years, and which provided them a permanent hard copy of the order. Furthermore, the new DOE screen and transaction was somewhat clumsy and not very user friendly. In addition, it turned out, many of the older SMRs could not type well. Finally, management had not eliminated the original paper order forms, making it possible for the SMRs to continue in their old ways. During the acquisition of Schweber, Scheihing concluded that they had a superior and more userfriendly DOE system than Arrow—called “scratch-pad”—which she had integrated into the Arrow system shortly after the merger was completed. During the programming of this revised DOE system, Kaufman had asked for a number of enhancements and adaptations to be made. In January of 1992 he had returned from a one-week executive education course at a well-known eastern business school. While at the course he had become intrigued with the classes led by a noted senior professor of industrial marketing on value creation and margin improvement through more intelligent pricing mechanisms and sales force management. A result of the classes and a dinner with the professor, Kaufman decided that Arrow’s on-line system should be modified to automatically monitor pricing decisions around the country. This would happen minute by minute, city by city, This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics,Inc.(A) 601-131 and product by product,on a real-time basis,as a way to stem,and perhaps reverse,the gross margin decline that the company had been experiencing. During implementation of the revised scratch-pad system,Arrow re-trained its SMRs to use the new DOE,and eliminated most order entry clerk positions as well as the old order entry forms.Some SMRs continued to write their orders in a personal notebook by hand while on the phone,and then entered them into the DOE system during slack periods throughout the day.Most SMRs,however, used the new system as intended to enter orders on-line throughout the day.GMs were still required to review the orders,but through a new on-line screen and transaction called MGRAP(for Manager Approval).The orders were queued real-time in a "virtual"in-box,accessible only to the GM for review and release,replacing the prior approval procedure using the paper order form.(The revised DOE order management process is also described in Exhibit 5.) The Order Surge Early in 1992,Arrow's four PDCs began to lose their ability to ship all orders on the same day they were taken.The company's same day shipping performance dropped from over 94%shipped to 75% within a few quarters.Customers,and Arrow's own sales people,complained loudly as the company continued to miss the committed arrival dates quoted to customers at the time of their orders. Scheihing assumed this was the normal result of closing Schweber's three main warehouses and transferring the inventory and shipping load to Arrow's four PDCs.However,by June 1992,the Schweber warehouse consolidation was complete,and staffing and management in Arrow's PDCs had been increased and stabilized,yet Arrow's same-day shipping performance was still not back to the 94+%it had regularly maintained prior to the Schweber acquisition.The four PDC managers complained that a large surge of orders"dropped"in the warehouse late in the day,making it impossible to prepare all of them for the various freight carriers'last pick-up(usually around 6 p.m.). As a result,each morning the PDC managers were forced to change the shipping method on an increasing number of the prior days'"held-over"orders to reclassify them as "priority-next day air" shipments,at much greater expense to Arrow,to ensure they would arrive at the customer by the promised arrival date. Possible Solutions During the most recent monthly staff meeting,the executive committee had discussed the poor shipping performance issue for 15 or 20 minutes,some of it quite heated.Scheihing had described the problem as resulting from a late day surge in orders hitting the PDCs in such quantities that it was not possible to pick and ship them by the last carrier pick-up.The senior vice president of Sales had responded that"we damn well better figure out a way to handle these late in the day customer orders or we will find our competitors eating into our share.When I was a sales rep,customers always placed their orders late in the day,having spent the morning and early afternoon calling around to all the distributors looking for the best price." As he said that,Scheihing thought back to her seven years as the operations manager in the Philadelphia branch and recalled that there was some truth to his statement.In those days,each branch had its own warehouse and delivery trucks,so the late orders just meant a little overtime in the warehouse and an early start the next morning for their driver.Obviously,with the closing of the local branch warehouses and the building of the four PDCs,the situation had changed dramatically. The senior Sales vice president went on to say that"maybe all this centralization and all these acquisitions have just made us too big,fat,and slow to be responsive to the needs of our customers. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics, Inc. (A) 601-131 7 and product by product, on a real-time basis, as a way to stem, and perhaps reverse, the gross margin decline that the company had been experiencing. During implementation of the revised scratch-pad system, Arrow re-trained its SMRs to use the new DOE, and eliminated most order entry clerk positions as well as the old order entry forms. Some SMRs continued to write their orders in a personal notebook by hand while on the phone, and then entered them into the DOE system during slack periods throughout the day. Most SMRs, however, used the new system as intended to enter orders on-line throughout the day. GMs were still required to review the orders, but through a new on-line screen and transaction called MGRAP (for Manager Approval). The orders were queued real-time in a “virtual” in-box, accessible only to the GM for review and release, replacing the prior approval procedure using the paper order form. (The revised DOE order management process is also described in Exhibit 5.) The Order Surge Early in 1992, Arrow’s four PDCs began to lose their ability to ship all orders on the same day they were taken. The company’s same day shipping performance dropped from over 94% shipped to 75% within a few quarters. Customers, and Arrow’s own sales people, complained loudly as the company continued to miss the committed arrival dates quoted to customers at the time of their orders. Scheihing assumed this was the normal result of closing Schweber’s three main warehouses and transferring the inventory and shipping load to Arrow’s four PDCs. However, by June 1992, the Schweber warehouse consolidation was complete, and staffing and management in Arrow’s PDCs had been increased and stabilized, yet Arrow’s same-day shipping performance was still not back to the 94+% it had regularly maintained prior to the Schweber acquisition. The four PDC managers complained that a large surge of orders “dropped” in the warehouse late in the day, making it impossible to prepare all of them for the various freight carriers’ last pick-up (usually around 6 p.m.). As a result, each morning the PDC managers were forced to change the shipping method on an increasing number of the prior days’ “held-over” orders to reclassify them as “priority-next day air” shipments, at much greater expense to Arrow, to ensure they would arrive at the customer by the promised arrival date. Possible Solutions During the most recent monthly staff meeting, the executive committee had discussed the poor shipping performance issue for 15 or 20 minutes, some of it quite heated. Scheihing had described the problem as resulting from a late day surge in orders hitting the PDCs in such quantities that it was not possible to pick and ship them by the last carrier pick-up. The senior vice president of Sales had responded that “we damn well better figure out a way to handle these late in the day customer orders or we will find our competitors eating into our share. When I was a sales rep, customers always placed their orders late in the day, having spent the morning and early afternoon calling around to all the distributors looking for the best price.” As he said that, Scheihing thought back to her seven years as the operations manager in the Philadelphia branch and recalled that there was some truth to his statement. In those days, each branch had its own warehouse and delivery trucks, so the late orders just meant a little overtime in the warehouse and an early start the next morning for their driver. Obviously, with the closing of the local branch warehouses and the building of the four PDCs, the situation had changed dramatically. The senior Sales vice president went on to say that “maybe all this centralization and all these acquisitions have just made us too big, fat, and slow to be responsive to the needs of our customers. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics,Inc.(A) We're so organized and structured these days that we've forgotten that we are in the business of providing 'just-in-time'delivery to customers who need products right away." Kaufman had asked whether the PDC managers had fully explored all the ways of having variable staffing levels in the PDCs,such as utilizing a part-time shift of workers who would only work from 3:00 p.m.to 7:00 p.m.,or having standby workers on call for the busiest days.He also wondered if it were possible to get carriers to push back their last pick-up time by an hour or two and make Arrow their absolute last stop before heading for their terminal.After all,he said, Since we are now paying significant premiums to ship these held-over orders by priority air- freight the next day,maybe it would pay us to encourage the carriers to come later by offering them an extra fee for doing so.If I remember correctly,we pay about $3.50 for a typical 5 to 100 pound box that goes UPS ground delivery,but $15-$20 for the same box to go FedEx Priority One(guaranteed next day by 10am);that premium,even on just 5%-10%of our 8,000 daily shipments is adding up to real money. Scheihing offered that the situation was even worse since Arrow's standard policy was that customers were charged for the freight if the shipment went by normal ground methods,but Arrow paid the entire freight bill if a mistake occurred that required a premium freight method. After the meeting,Scheihing decided to make this issue her top priority.The following week she visited three of the PDCs to watch the end of day order surge first hand.The PDC visits had confirmed the order surge and the problems it created as the last carrier pick-up times approached. The PDC workforce was divided into four categories of direct labor: 1. Receiving personnel,who opened,unpacked,inspected,and loaded into storage containers the various incoming supplier shipments,and entered the information into Arrow's computer system.(About 18%of the workforce) 2. Storage personnel,who would take the products into the shelving or rack areas on carts,put them away,and enter the storage location into their hand-held terminals.(About 5%of the workforce) 3.Picking personnel,who would take the picking tickets and,while pushing carts through the storage area,actually pick the product,count out the correct quantity,confirm the location and pick information on their hand-held terminals,and put the product on their cart for eventual placement on the conveyor that went to the shipping area.(About 35%of the workforce) 4.Packing and shipping personnel who put the products into the shipping cartons,weighed the product,confirmed which shipping method and carrier was to be used,printed the shipping label and affixed it to the box,and put the box in the bin for the appropriate carrier.(About 25%of the workforce) The remaining 17%of the PDC workforce consisted of supervisors,maintenance personnel, quality and returns processing people,and clerical/administrative personnel.Normally this structure produced a smooth and orderly process and workflow.However,as she watched the 4 p.m.-6 p.m.period,Scheihing noted that the PDC managers threw all their available workers into the picking and packing process,which stopped activity in the receiving and storing departments.This in turn required that the receiving and storing personnel had to work 2-3 hours of overtime to complete their normal activities,which accounted for the increase in overtime hours she had noticed on the performance report. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics, Inc. (A) 8 We’re so organized and structured these days that we’ve forgotten that we are in the business of providing ‘just-in-time’ delivery to customers who need products right away.” Kaufman had asked whether the PDC managers had fully explored all the ways of having variable staffing levels in the PDCs, such as utilizing a part-time shift of workers who would only work from 3:00 p.m. to 7:00 p.m., or having standby workers on call for the busiest days. He also wondered if it were possible to get carriers to push back their last pick-up time by an hour or two and make Arrow their absolute last stop before heading for their terminal. After all, he said, Since we are now paying significant premiums to ship these held-over orders by priority airfreight the next day, maybe it would pay us to encourage the carriers to come later by offering them an extra fee for doing so. If I remember correctly, we pay about $3.50 for a typical 5 to 100 pound box that goes UPS ground delivery, but $15-$20 for the same box to go FedEx Priority One (guaranteed next day by 10am); that premium, even on just 5%-10% of our 8,000 daily shipments is adding up to real money. Scheihing offered that the situation was even worse since Arrow’s standard policy was that customers were charged for the freight if the shipment went by normal ground methods, but Arrow paid the entire freight bill if a mistake occurred that required a premium freight method. After the meeting, Scheihing decided to make this issue her top priority. The following week she visited three of the PDCs to watch the end of day order surge first hand. The PDC visits had confirmed the order surge and the problems it created as the last carrier pick-up times approached. The PDC workforce was divided into four categories of direct labor: 1. Receiving personnel, who opened, unpacked, inspected, and loaded into storage containers the various incoming supplier shipments, and entered the information into Arrow’s computer system. (About 18% of the workforce) 2. Storage personnel, who would take the products into the shelving or rack areas on carts, put them away, and enter the storage location into their hand-held terminals. (About 5% of the workforce) 3. Picking personnel, who would take the picking tickets and, while pushing carts through the storage area, actually pick the product, count out the correct quantity, confirm the location and pick information on their hand-held terminals, and put the product on their cart for eventual placement on the conveyor that went to the shipping area. (About 35% of the workforce) 4. Packing and shipping personnel who put the products into the shipping cartons, weighed the product, confirmed which shipping method and carrier was to be used, printed the shipping label and affixed it to the box, and put the box in the bin for the appropriate carrier. (About 25% of the workforce) The remaining 17% of the PDC workforce consisted of supervisors, maintenance personnel, quality and returns processing people, and clerical/administrative personnel. Normally this structure produced a smooth and orderly process and workflow. However, as she watched the 4 p.m.-6 p.m. period, Scheihing noted that the PDC managers threw all their available workers into the picking and packing process, which stopped activity in the receiving and storing departments. This in turn required that the receiving and storing personnel had to work 2-3 hours of overtime to complete their normal activities, which accounted for the increase in overtime hours she had noticed on the performance report. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics,Inc.(A) 601-131 It also seemed to cause the warehouse personnel to start taking procedural short cuts to try to speed up the picking,packing,and shipping process.This process had been engineered to require total direct labor time,on average,of five minutes for each order plus three minutes per line item.It looked to her as if these "short-cuts,"while reducing the normal 90-120 minute elapsed throughput time of each order,were probably causing a decrease in overall labor productivity.The picking conveyors that snaked through the PDCs could take 60-75 minutes from the furthest corner of the shelving area in the PDCs to the shipping stations;employees would start hand carrying the parts around the facility to get them to the shipping stations as the carrier pick-up time approached.This created a sense of confusion,destroyed the orderly flow of personnel and parts.People would leave their stations to rush parts to shipping,causing parts already on the conveyor route to shipping to become delayed(and possibly miss their shipping time),and greatly increased the chance of quality errors(wrong part,wrong quantity,wrong customer). As she left the two PDCs in mid-week,she was quite disturbed by the sense of chaos that enveloped the PDCs,and chastised herself for not having visited the PDCs more frequently.She reminded herself of the difference between looking at a report of performance and activity,and seeing the activity first hand.She made a note to analyze overtime costs,priority next day air premiums,and to see if she could get an analysis of productivity and quality levels by time of day. She also wondered whether she was keeping"too tight"a lid on headcount authorizations at the PDCs.The staffing models being used assumed an even flow of orders during the day;perhaps they should increase the headcount,staffing for the "peak"late afternoon order surge.This would create under-utilized labor during the rest of the day,but maybe that was the price of providing 95%same day shipping service. Finally,she reflected that while the PDC managers were solid people with good experience,her discussions with them had left her uneasy as to whether they were being as creative as possible with their carriers and in their staffing strategies and workforce scheduling.For example,she knew that while UPS made its last pick-up at Arrow's Long Island PDC at 6 p.m.,the schedule at the UPS sorting terminal allowed its truck to arrive as late as 8:30 p.m.How much,she wondered,would Arrow's problem be reduced if the UPS pick-up were pushed back to 7 p.m.,or even 7:30?Or,could Arrow consider hiring its own truck to deliver directly to the UPS terminal,which was only 30 minutes away from the PDC? Moreover,maybe Kaufman was right that they could build a list of part-time workers who would come in on two or three hours notice on days with a big surge.Three of the PDCs were near large universities and she wondered whether they might have students anxious for three hours work in the late afternoon,one or two days a week.At the airport,she left a voicemail for the vice president of Human Resources to ask him to think about this. Upon returning to her office the following Monday,Scheihing reviewed her impressions and notes from the previous week's trip and surveyed the information piled on her desk in response to her data requests.There was: 1.An 18-month analysis of monthly shipments,same day shipment percentage,premium freight charges,overtime hours,and headcount in the PDCs(Exhibit 6) 2.An hour-by-hour summary of orders"dropped"into the PDCs for Monday of the previous week(Exhibit 7). 3.A memo from the vice president of Human Resources on the feasibility of hiring part-time college students to staff the PDCs on short notice from 3 p.m.-7 p.m.each day(Exhibit 8). 9 This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
Delivery Problems at Arrow Electronics, Inc. (A) 601-131 9 It also seemed to cause the warehouse personnel to start taking procedural short cuts to try to speed up the picking, packing, and shipping process. This process had been engineered to require total direct labor time, on average, of five minutes for each order plus three minutes per line item. It looked to her as if these “short-cuts,” while reducing the normal 90-120 minute elapsed throughput time of each order, were probably causing a decrease in overall labor productivity. The picking conveyors that snaked through the PDCs could take 60-75 minutes from the furthest corner of the shelving area in the PDCs to the shipping stations; employees would start hand carrying the parts around the facility to get them to the shipping stations as the carrier pick-up time approached. This created a sense of confusion, destroyed the orderly flow of personnel and parts. People would leave their stations to rush parts to shipping, causing parts already on the conveyor route to shipping to become delayed (and possibly miss their shipping time), and greatly increased the chance of quality errors (wrong part, wrong quantity, wrong customer). As she left the two PDCs in mid-week, she was quite disturbed by the sense of chaos that enveloped the PDCs, and chastised herself for not having visited the PDCs more frequently. She reminded herself of the difference between looking at a report of performance and activity, and seeing the activity first hand. She made a note to analyze overtime costs, priority next day air premiums, and to see if she could get an analysis of productivity and quality levels by time of day. She also wondered whether she was keeping “too tight” a lid on headcount authorizations at the PDCs. The staffing models being used assumed an even flow of orders during the day; perhaps they should increase the headcount, staffing for the “peak” late afternoon order surge. This would create under-utilized labor during the rest of the day, but maybe that was the price of providing 95% same day shipping service. Finally, she reflected that while the PDC managers were solid people with good experience, her discussions with them had left her uneasy as to whether they were being as creative as possible with their carriers and in their staffing strategies and workforce scheduling. For example, she knew that while UPS made its last pick-up at Arrow’s Long Island PDC at 6 p.m., the schedule at the UPS sorting terminal allowed its truck to arrive as late as 8:30 p.m. How much, she wondered, would Arrow’s problem be reduced if the UPS pick-up were pushed back to 7 p.m., or even 7:30? Or, could Arrow consider hiring its own truck to deliver directly to the UPS terminal, which was only 30 minutes away from the PDC? Moreover, maybe Kaufman was right that they could build a list of part-time workers who would come in on two or three hours notice on days with a big surge. Three of the PDCs were near large universities and she wondered whether they might have students anxious for three hours work in the late afternoon, one or two days a week. At the airport, she left a voicemail for the vice president of Human Resources to ask him to think about this. Upon returning to her office the following Monday, Scheihing reviewed her impressions and notes from the previous week’s trip and surveyed the information piled on her desk in response to her data requests. There was: 1. An 18-month analysis of monthly shipments, same day shipment percentage, premium freight charges, overtime hours, and headcount in the PDCs (Exhibit 6) 2. An hour-by-hour summary of orders “dropped” into the PDCs for Monday of the previous week (Exhibit 7). 3. A memo from the vice president of Human Resources on the feasibility of hiring part-time college students to staff the PDCs on short notice from 3 p.m.-7 p.m. each day (Exhibit 8). This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics,Inc.(A) There was no doubt that the order surges were real,and were stressing the PDCs to the breaking point(and perhaps the company's senior management team as well).But,what was causing it?She found it hard to believe that the surge was still a lingering aftereffect of operational disruptions caused by the Schweber merger.The acquisition had indeed been big,but enough time had passed, and it had never taken this long before for Arrow to successfully fold in a merger.On the other hand, maybe it didn't matter what was causing the surge,she thought;maybe for now I just need to focus on what actions are needed to get the same day shipping performance back to 95%.Should I focus on pushing back the carrier pick up times,adding permanent full-time staff to handle the daily surges, building a part-time staff to call in on short notice,or working more overtime,she mused. 10 This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012
601-131 Delivery Problems at Arrow Electronics, Inc. (A) 10 There was no doubt that the order surges were real, and were stressing the PDCs to the breaking point (and perhaps the company’s senior management team as well). But, what was causing it? She found it hard to believe that the surge was still a lingering aftereffect of operational disruptions caused by the Schweber merger. The acquisition had indeed been big, but enough time had passed, and it had never taken this long before for Arrow to successfully fold in a merger. On the other hand, maybe it didn’t matter what was causing the surge, she thought; maybe for now I just need to focus on what actions are needed to get the same day shipping performance back to 95%. Should I focus on pushing back the carrier pick up times, adding permanent full-time staff to handle the daily surges, building a part-time staff to call in on short notice, or working more overtime, she mused. This document is authorized for use only in Logistics Managment by Chung-Li Tseng from July 2011 to January 2012