*NEWS*INGRAM MICRO ELIMINATES 1,400 JOBS

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Ingram eliminating 1,400 jobs
Distributor of personal computers faces competition, lack of demand
SANTA
ANA, Calif. – Ingram Micro Inc., one of the leading distributors of
personal computers, plans to eliminate 1,400 jobs to combat tougher
price competition and slack demand.Market experts Ingram Micro, like
other middleman PC distributors, has recently been squeezed by
manufacturers’ price-cutting and increasing direct sales to
consumers.”I think this is a continuing trend,” said Matt Sargent, an
analyst with ZD Market Intelligence in La Jolla, Calif. Distribution
and support firms like Intex and Inacom have been facing similar
problems, he said.”These companies are going to have to get away from
selling boxes … and focus more on services and become a partner with
manufacturers,” Sargent said. “They’re doing that already, but they
need to focus more on it.”Investors apparently approved of Ingram’s
plan, sending shares of Ingram up $1.13, or 6 percent, to $19.75 on the
New York Stock Exchange.PC makers like Dell, the direct-distribution
pioneer, and Compaq are selling more computers themselves, and they
have been slashing prices.Ingram Micro officials played down the
direct-sales trend, citing instead slow demand overseas, domestic price
competition and concerns about potential Year 2000 bugs.
Ingram
Micro, with sales of $22 billion last year, expects to start seeing
savings from the job cuts in the second quarter of 1999. Chairman Jerre
L. Stead said most of the job cuts would come in U.S. operations.”Many
near-term factors, including Year 2000 fears and continuing economic
issues, are creating cautious buying trends in Europe, Latin America
and Asia,” he said.”In addition, there is intense margin pressure,
primarily in the United States, which is related directly to increased
price competition and not related to changes in the way computers are
brought to market,” Stead said.Last year, Ingram Micro began
redeploying employees and eliminating positions overseas through
attrition, said spokeswoman Kathleen Janson. Those positions are
included in the 1,400 jobs being eliminated, she said.
Ingram Micro
is realigning its sales force and creating a merchandising operation
that joins its purchasing, vendor sales and product marketing departments.Company officials said they expect net sales for the first
quarter this year between $6.5 billion and $6.7 billion, an increase of
26 percent to 30 percent over last year.Net income was expected to be
between $40 million and $45 million, not including one-time costs
involved in the reductions. That amounts to 27 cents to 30 cents a
share, well below the average estimate of 42 cents predicted earlier in
an analysts’ survey by First Call Corp.As of September 1998, Ingram
Micro had more than 14,000 employees. The company and its subsidiaries
operate in 31 countries and distribute more than 200,000 products.

Ingram Micro Cuts Costs Despite Profits
For
the first time, Ingram Micro Inc. is outsourcing some job functions
overseas. The $25 billion distribution giant is also in the process of
laying off 550 employees and has just reshuffled a handful of
executives to consolidate its Canadian and U.S. operations. Ingram is
continuing to shrink the campus of its once-sprawling Santa Ana,
Calif., headquarters from three buildings to one, a process it started
four years ago. Sales and technical support are being consolidated at
Ingram Micro’s Buffalo, N.Y., location.Typically, these types of
changes occur in response to a crisis. That is not the case, however,
with Ingram Micro.In fact, Spierkel, who was previously co-president
and once ran the company’s European operations, is taking over under
far more pleasant circumstances than those faced by his
predecessor.Kent Foster, who handed Spierkel the chief executive role
but remains as chairman, took over the company on the eve of the
dot-com implosion of 2001 and the sharp decline in the overall IT
market that followed. Distributors were hit hard; Ingram Micro’s
revenue eventually stabilized at its present $25 billion after peaking
at more than $30 billion.

In the lead and moving ahead
“Our
goals are straightforward: be the best and most efficient source of IT
solutions for our customers,” Spierkel said. “Our associates know this
is job one, and as such, everyone [at Ingram Micro] is involved in
driving change in the company. This is particularly important when the
company is executing well. It ensures we stay ahead of our
competition.”In the first quarter of this year, Ingram Micro reported
revenue of $ 7 billion and net income of $42.4 million, the highest
since 1999. For the second quarter, the company expects revenues to
range from $6.7 to $6.9 billion, with net income ranging from $41
million to $46 million.Credit Suisse First Boston even predicted at the
end of May that the second-quarter results and outlook of Ingram
Micro’s main competitor, Tech Data Corp., of Clearwater, Fla., will
“pale in comparison to chief rival Ingram Micro.”A big factor in that
prediction is the Asian IT market, where Ingram Micro does 17 percent
of its business. While demand has dropped in Europe and remains modest
in North America, Asia is growing at double-digit rates. Tech Data has
no presence in Asia.

 Why change now?
So why all the changes at the world’s largest IT distributor? The short answer is profit.
Ingram
Micro’s management says for the company to boost profitability and
remain competitive in a world of airtight margins and reduced vendor
incentives and rebates, it has to cut costs and increase productivity.
The
company wants to be able to invest in new business areas, as it has
done with forays into point-of-sale and digital home markets, and, more
recently, with an ISV initiative. By investing in new business areas,
the distributor gives its customers, mostly VARs and integrators,
opportunities to expand into new markets and boost their own profits,
according to Ingram Micro executives.Without the consolidation and
cost-cutting, the company’s management believes its ability to make
such investments will be inhibited.For one thing, the margin pressure
that keeps IT distributors constantly on their toes will not go away.
Vendors, under their own pressures, will likely continue to get
stingier on incentives and rebates for partners. And the 6 percent
growth estimated for distributors in the foreseeable future, while not
bad, is considered very modest in historic IT market terms.”All these
guys are under pressure,” said longtime channel analyst Benny Lorenzo,
general partner with Aspira Capital LLC in Fort Lee, N.J., and
occasional columnist for The Channel Insider.
The only way to remain
competitive in a tight-margin, slow-growth market, Lorenzo said, is to
cut operating expenses, which is what Ingram Micro is doing.Ingram
Micro expects its various cost-cutting efforts will save about $10
million this year. By the first quarter of 2006, the company estimates
its cost savings will have reached a rate at which it will save $25
million per year in operating expenses compared with the 12 months
prior to the measures. The moves will cost the company $26 million ($18
million net of tax).Tech Data Chairman and CEO Steve Raymund said his
competitor’s cost-cutting moves are designed to increase shareholder
value and operating profit.
“Apparently the only way left for them
to cut costs was outsourcing,” said Raymund, who added Tech Data has no
current plans to outsource. “We prefer to pursue automation first and
outsourcing second.”
Tech Data is doing some restructuring of its
own. The company is spending $40 million to $50 million in its
underperforming Europe, Middle East and Africa region with an eye to
improving profitability. The company has embarked on an IT system
upgrade and “harmonization” project, which, combined with the
restructuring, is expected to save $55 million to $65 million.Ingram
Micro’s outsourcing plan entails moving some job functions that require
telephone contact with VARs, such as basic tech support and inquiries
on e-commerce transactions, to the Philippines; it will move some
backroom transactional jobs that don’t require customer contact to
India. The distributor is retaining Progeon, a subsidiary of
outsourcing and consulting firm Infosys Technologies, to handle the
offshoring.
Ingram Micro executives promise not to allow any
degradation of service. Customers by and large have reacted positively,
or, at worst, with a shrug.But Ingram Micro customer Darren McBride,
president of Sierra Computers, of Reno, Nev., has some misgivings.”I
personally think the changes are a mistake, but I seem to be in the
minority,” he said. “I am not confident they can implement these
changes without impacting service. However, I think it will be six
months to a year before we even begin to get a clue.”Raymund and some
other channel insiders speculate that the overall positive VAR reaction
may embolden Ingram Micro to eventually outsource more jobs.”I think
they’ll expand it to Europe,” Raymund said. “I’m not sure how far
they’ll go.”However, Brian Alexander, senior vice president at Raymond
James & Associates, said he doesn’t think further outsourcing will
happen. Alexander added that customers have reacted positively to
Ingram Micro’s outsourcing plan because most of the functions affected
are not customer-facing.
Customers, channel observers and Ingram
Micro executives all agree on one thing: The company will have to
execute well on the outsourcing and consolidation moves or customers
will balk. Or, even worse for Ingram Micro, they’ll go shop
elsewhere.To avoid the pitfalls experienced by other companies that
have tried outsourcing, Ingram Micro is taking its time with the
transition, which will take up to nine months. Parallel operations will
run at Ingram Micro and the outsourcer before the distributor finally
pulls the switch.Channel observers and customers say they understand
the distributor’s need to manage its cost structure and seek higher
profits.And that means despite market challenges and profit margin
pressures, at least Ingram Micro can count on the support of its
customers. And that’s not a bad thing if you’re just taking over as CEO
of the company.”I feel good about where we are,” Spierkel said shortly
after Ingram Micro announced his promotion to CEO. “The company is in a
good situation.” 

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May 18, 2006 at 11:20 AM