- Description and history
- Group structure and developments
- Markets and competition
- Strengths and resources
- Strategy
- Operating performance
- Financial review and capital structure
- e-Commerce
- Enterprise Business System projects
- Pension
- Risks
- Corporate and Social Responsibility
- International Financial Reporting Standards
Electrocomponents plc is a high service industrial distributor operating in 26 countries and selling to most of the remaining countries of the world. The Group offers a wide range of products representing a one-stop shop for customers who are typically R&D or maintenance engineers in business. The products are of good quality and all are generally held in stock. There is then a highly efficient delivery process to ensure that the products are despatched the same day that the order is received and delivered to the customer soon after.
This product and service offer is relevant to a wide range of customers from both manufacturing and service sectors. Customers know that Electrocomponents will be able to supply all of the products that they need at short notice. Therefore, they rely on the Group for low value, unplanned requirements. The average order value is generally less than £100 but the number of customer contacts is very large and their demands are diverse. This means that the Group manages tens of thousands of orders per day.
The Group offers its products using several different media including paper catalogue, e-Commerce, CD-ROM and trade counters. It also offers several channels via which customers can place orders including e-Commerce, telephone, fax and at trade counters.
The Group started as Radiospares in London in 1937 selling spare parts for radios. Throughout the 1950s the product range was widened to include more electrical and electronic products. In 1967 Radiospares was floated on the London Stock Exchange as Electrocomponents plc. Throughout the 1990s the Group expanded into other markets, widened the range of product technologies offered and increased the number of services offered to its customers. Almost all of the Group’s expansion has been organic with the notable exception of Allied, which was acquired in July 1999.
Group structure and developments
As the Group expanded internationally using the UK business model in the 1990s, the new businesses grew autonomously and so the operating practices differed. To ensure more coherence and control, the matrix organisation was implemented in 1996 and the Group Processes were developed to support the individual businesses. The Processes allow the businesses to all benefit from the same expertise in product selection and purchase, catalogue development and production, information systems and supply chain support giving cost and other benefits.
The second step from 2000 onwards was to align the selling and marketing activities of each business more closely. This reduced the divergence of the businesses and allowed them a better sharing of successes and experiences. This has been combined with increased investment in selling and marketing across the businesses.
Finally the Group has embarked on a project to implement new enterprise business systems. The existing legacy systems were largely installed in the early 1990s and just as the operating procedures developed in different ways, so did the systems. Similarly, the systems used in the UK were developed for the UK business and were not designed for the UK functioning as the hub of an international group. A “template” for the new Enterprise Business System (EBS) was created from the best practices across the Group that would allow the Group to operate in a more integrated and effective way than was possible with ageing legacy systems.
This template was designed with a SAP-centred enterprise management structure for Europe with a similar but more limited framework (given the smaller businesses) for Asia based on JD Edwards (now Peoplesoft). The EBS Europe applications include stock management, customer relationship management and warehouse management together with core financial and logistics functions. The Asia EBS has been implemented successfully in South Asia, Australasia and Hong Kong whilst in Europe, France was the first implementation with the UK next. The progress and financial impact of this project are discussed in Enterprise Business System projects later in this review.
The high service distribution “model” is in very differing stages of development in the markets in which the Group operates. The UK market is relatively developed and customer needs are met through several competing distribution channels with differing service levels. There is only one competitor to RS offering a similar “high service” across a broad product offer. By contrast there are several hundred electrical wholesalers, hundreds more industrial wholesalers and also retailers. Customers will select which of these alternatives offer the service that they need at an acceptable value. Customer research in the UK and Continental Europe has confirmed that the primary alternative to RS for the customer is a local wholesaler. The wholesaler will typically have a smaller range and lower product availability, but typically has lower costs and lower prices than the high service providers. The wholesaler usually has established long term relationships with their local customers. When the wholesaler fails to provide a product, the customer will turn to RS. In electronic and electromechanical products RS is more often the supplier of choice given our strengths and the limited presence of wholesalers in these product areas.
The wide range of customers served by RS in the UK means that RS is affected by trends in the wider economy. Over many years, there has been a decline in UK manufacturing, offset by the growth of the service sector and this has been mirrored in the sales mix of RS UK. A typical situation for RS has been the loss of a long standing, loyal, manufacturing customer who has purchased regularly, sometimes daily. The customers in the manufacturing and service sectors have similar needs and a large part of the product range is equally relevant to both sectors. However, a new customer takes time to become as loyal and to order as frequently as the established customer who may have lost their job. Therefore, although customer numbers may not change significantly, the average number of orders placed by customers will fall and so sales decline until the order frequency is rebuilt.
Continental Europe represents an opportunity for significant growth as our sales would have to increase sevenfold to reach the same level relative to the regional Gross Domestic Product as achieved by RS in the UK. Our actual sales growth in recent years has been hampered by similar forces to those experienced in the UK, notably the general decline of manufacturing. Whilst catalogue distribution is already well adopted in the electronic sector, electrical and industrial products are traditionally served by wholesalers and more specialised distributors who operate in specific countries.
In North America there is a distinct split between the distribution of electronic and electrical products and industrial products. Allied operates primarily within the electronic/electrical market where there are four national catalogue distribution companies, of which Allied is the third largest. However, Allied also competes with about a thousand smaller, local or narrow distributors. Again the basis of competition is service where the extensive local sales branch network of Allied, supported by a large product offer and good logistics, are important advantages.
Before we rolled out the RS model to Japan in 1999, the concept of small-order high-service distribution did not exist in that market. There were isolated high service suppliers although these were generally only supplying product made within their groups. More often, manufacturers wishing to supply to customers ordering small quantities of product had to use the multi-layered wholesaler network. The business model offered by RS short-circuited much of this layered distribution network, but required a highly reliable service from the launch of the business. So far the Group remains the only significant business able to provide this service offer which has achieved considerable customer acceptance and success.
In Asia, our markets continue to develop but these are very much less developed than in Europe. In China there is very rapid market change driven by both high industrial growth and significant changes in regulation and therefore the way that business should be carried out. We place great importance on working with the authorities to ensure not only compliance, but also the development of practices that benefit the local economy. This has placed the Group in good stead and supports the building of a robust and secure business. The advantage of our position is made manifest by the way that our importing and order despatch procedures have been simplified compared to many companies. There are few companies competing with our type of product and service offer. The launch and roll out of our Same Day Offer will make it even more difficult for new followers to compete.
Brands
The Group has several major brands worldwide. The most significant brand is “RS” which is used all over the world except for North America (“Allied”) and France (“Radiospares”) where there are restrictions on our use of the brand name “RS”. All of these brands are long standing and market leading so brand recognition and brand loyalty in our customer base is high.
The Group carries out market research regularly, but in the past year we have more intensively surveyed our European customers. The results provide a consistent picture of how customers view the RS brand and gives clear confirmation of its strengths. Our scores on service, speed of delivery, product availability and “never letting the customer down” are market leading. Competitors are rated less highly on service, but are perceived to be less expensive. RS has its strongest presence with electronics engineers who buy electronic and related products.
Supplier relationships
Our relationships with our suppliers are a key strength in allowing us to maintain the high standards of product availability and supply for our customers. Through our Product Management process we purchase over 350,000 products from around 2,400 major suppliers throughout the world. Our Supply Chain process is then responsible for ensuring that stock is in the right place at the right time to satisfy customer demand and has built up considerable “know how” to achieve high service levels.
Our reach to R&D and maintenance engineers is very valuable to suppliers as otherwise the small order requirements of such customers are difficult and costly to satisfy.
We agree integrated media and marketing campaigns with suppliers to support agreed sales and customer development activities proactively exchanging information to ensure that we are meeting our customers’ expectations.
Customer relationships
The breadth of our service and product offer means that we supply to a wide range of customers from all areas of industry and commerce. Our businesses distribute around 1.4 million catalogues and have around 1.3m e-Commerce registrations. Of these, around 200,000 customers buy from the Group in any one month and around 1.2m in any one year. In this context a customer is an individual end user, typically a maintenance or R&D engineer.
The average order value is consistent across the RS businesses at around £80 to £100 although the range of order values is large. In Allied the average order value is higher. The average order frequency of our customers rises as the customer becomes more established and increasing frequency is a major goal of our selling and marketing activities. A customer will start off, perhaps only buying from RS once or twice per year. Over time this increases and there are many customers now who order regularly and often daily. For them, the Group is an important business partner, able to support their irregularly purchased or urgent product needs quickly and reliably. In the electronics and electromechanical areas we are a lead supplier to our customers needs for low volume requirements.
Customer relationships are strengthened by our service innovations. For instance, the e-Commerce PurchasingManager™ product allows many end users within a customer organisation to order and transact business in a controlled manner. The consequence is that the “end users” are able to benefit from the service provided by the Group whilst the “buyers” are able to see who has ordered what and how much it has cost and alsoto reduce their transaction expense. PurchasingManager™ is free to the customer in return for our wider access to the end users in the customers’ organisation.
Employees
The skill and dedication of our employees are major strengths. We employ around 5,000 employees worldwide: about 1,700 in the UK operating company, 1,200 in Continental Europe, 500 in North America, 100 in Japan, 600 in the Rest of the World and around 900 in the Processes. The number of people employed in the Processes is currently higher than normal due to the systems projects. When these projects have been completed, the number of employees will fall. Most employees in a business are employed in either selling and marketing (generally more than a half) or operations (around a third).
The skills of our employees are critical to the service offer, for example the ability to quickly and accurately pick product in the warehouse. Operational key performance measures are used widely to monitor and compare performances in such areas, whilst training provision is intensive. A significant proportion of the employees are long serving, for example, in our UK business the average length of service is about 8.5 years.
As described in the Chief Executive’s Review, our strategy is becoming more focused on meeting the needs of particular customer groups. Most importantly, this will be reflected by extensively developing our Electronic and Electromechanical offer (the EEM offer) to meet the needs of R&D and maintenance engineers globally. This greater focus on our strengths will also result in reducing complexity and hence cost. A detailed action plan is being implemented.
The second focus area is in meeting the “convenience” and “urgency” needs of a broader range of industrial customers, but with a market approach and resources that more specifically reflect these needs.
Greater speed of response to customer needs, more flexibility and lower costs are all requirements of this strategy evolution. The EBS systems project reviewed below provides the critical underpinning to these capabilities.
The Board believes that there will be a significant improvement in the Group’s financial results over the medium term as a result of this strategy, cost reductions and the EBS project.
