Ingram Micro Passes On HP Costs to Customers, Still Cleaning House

HP/Compaq has said it will pass on those increased operating costs to its distribution partners, said Foster. The new charges will directly impact the distributor's gross margins, but Foster wouldn't elaborate further, only to say the costs will be passed down to resellers.

"We've been clear that we cannot absorb these costs," he said.

Ingram Micro will watch gross margins closely and take a quarter by quarter look at the overall impact. In the meantime, as quite possibly a result of the pricing issues, the company is seeing increased business from other manufacturers that have similar products and services to HP/Compaq.

While large reseller accounts may end up purchasing directly from HP/Compaq, Ingram Micro said HP has made it clear that it will depend on its distributor partners to reach the SMB market. "You can't beat the efficiency of that channel," said Ingram Micro COO Mike Grainger.

Ingram Micro is also still cleaning house with its $45 million profit enhancement plan to drive improvement and operating efficiency, executives announced at the company's recent earnings call. The company is completing plans to consolidate warehouse and corporate facilities and reduce its workforce, which numbered 13,000 worldwide in the third quarter, down 500 from the previous quarter, executives said. And the distributor's recent product management reorganization played a key role in its financial performance, executives said.

"By 2004, we intend to be the best performing company in our industry," Foster said. "We have made it clear that we intend to be the leader in every way."

Already, Ingram Micro has reorganized its credit department by establishing field credit teams that are located near the distributor's largest customers. Ingram Micro has also begun leasing corporate office space in Buffalo, N.Y., and Santa Ana, Calif. In Buffalo, the distributor has consolidated its operations from two buildings into one.

"I'm pleased with the [cost reduction results so far, but they are not enough," said Foster. The company will continue to focus on profitable growth as it looks for more cost-reduction opportunities. For example, a reorganization is underway at Ingram Micro's Latin American operation and the company closed a Frameworks facility in the Netherlands.

Ingram Micro's profit enhancement program is expected to generate $160 million of annualized operating income improvements by the first quarter of 2004, executives said. Major-program costs are expected to total about $140 million, of which about two-thirds will be recorded in the second half of 2002. In the third quarter of 2002, major-program costs charged to operating income were $45.1 million before taxes.

Including the program costs, Ingram Micro posted a net loss of $8.3 million or 6 cents per share for the third quarter of 2002, compared to a net loss of $13.3 million, or 9 cents per share, during the same quarter last year.

Excluding the program costs, net income was $20.1 million, or 13 cents per share, compared to $5.4 million, or 4 cents per share, excluding reorganization costs and special items, during the comparable period last year. First Call anticipated 11 cents per share. Third-quarter sales totaled $5.6 billion, a 4 percent decline compared to the $5.83 billion one year ago, but a 4.6 percent increase sequentially.

Also excluding program costs, gross margin increased 18 basis points, operating margin increased 32 basis points and operating expenses as a percent of revenues improved 14 basis points, compared to last year.

For the fourth quarter, Ingram Micro expects sales to range from $5.75 billion to $5.9 billion, with net income before any major-program expenses and other special items ranging from $26 million to $29 million, or 17 to 19 cents per diluted share, the company said.

SupportNet Zips Up Linux Deal with IBM and eOneGroup

In this industry, it's standard practice to repackage old products with new technology to create new profitable opportunities. Take distributor SupportNet, the IBM-centric division of Arrow Electronics, and its latest push with IBM iSeries servers. SupportNet recently forged an agreement with IBM and eOne Group, a vertically focused ISV, to create a Linux-based iSeries package that meets demand for the platform's "growing popularity" in online retail POS environments and Web-serving applications, said SupportNet executives.

Linux has been around for years and iSeries even longer. But bringing them together with eOne Group's eOneCommerce application creates a stable, flexible e-business solution that is easily integrated into existing networks and starts saving money within six months, said eOne executives.

"People are looking for e-business applications that don't take a lot of expense in linking up with their legacy applications," said Eric Williams, executive vice president, SupportNet. While end-user IT budgets have not opened up enough to cover major euipment purchases, SupportNet says companies are willing to spend a little money to save a lot. Enter low-cost Linux-based solutions.

As examples of the possibilities, SupportNet and eOne Group point to a deployment in progress at zipper manufacturer YKK USA, a subsidiary of Marietta, Ga.-based YKK Corporation of America. YKK creates more than 1,500 different zippers, but lacked a Web portal that would enable customers to place and track orders in real-time online. The company's goal was to find a low-cost solution that gave customers the sales information they needed. Since YKK was already an IBM AS/400 shop, the decision was easy.

EOne Group worked with Springfield, Ill.-based reseller Levi, Ray and Shoup for the YKK deployment. The solution has already saved the zipper company one body in its call center, and the phase two order entry solution is still in progress, said Steve Romweber, vice president of channel development at eOne Group, Omaha, Neb.

Romweber said it was too early to provide any cost-saving estimates for YKK. But he was able to point to similar solutions designed for the Tommy Hilfiger clothing company, Bic pens and Omaha Steak Company. Bic reduced its order processing costs by 60 percent, and Omaha Steak increased sales by 100 percent while cutting costs by 40 percent, said Romweber.

Williams readily acknowledges that there's a select group of VARs in the industry with the skill set to sell Linux-based iSeries solutions, especially with eOne Group's application. But SupportNet believes opportunities exist in the SMB marketplace for VARs with e-business solutions that cut operating costs, generate ROI quickly and integrate easily into existing networks.

The market for Linux-based solutions is expected to continue to grow. EOne was told by its IBM representative that the vendor expects a 40-percent increase in Linux sales over the next few years, said Romweber.

"A lot of people are talking about Linux as a low-cost alternative," said Williams, whose philosophy is that applications, like eOneCommerce, will continue to drive Linux deeper into the marketplace. VARs simply need to increase their knowledge of Linux, iSeries and their e-business potential. SupportNet has put together training programs to get VARs up to speed. Earlier this fall, SupportNet hosted educational Webinars for 70 reseller, consultant and end-user participants.