Margins have always been slim in distribution, where the game's about moving products, not making or selling them. So distributors of electronics, paper, and components, parts, and assemblies have gotten good at running lean operations. Their next big opportunity: Even greater efficiency--while expanding globally.

Distributors seek new ways to cut costs and time from their processes as they pick up, ship, and hand off items from one point to another. "It's always been a tough margins business on the distribution side," says Eric Gomberg, senior semiconductor analyst with stock brokerage Thomas Weisel Partners LLC. "Coming up with better systems and software is part of their strategy to continue reducing costs, become more efficient, and maintain margins."

A primary challenge in tuning distribution supply chains is that the points of origin and delivery are increasingly far-flung. "The shift of electronics manufacturing to Asian geographies should continue to accelerate. The next great growth geography is China," Gomberg says. "Having distribution capabilities [there] is increasingly important."

	Arrow adjusted its business to accommodate production in Asia. "Over time, both customers and suppliers are continuing to act more globally," CIO Settle says.

Arrow Electronics Inc. has had to adjust its business model to account for the shift of manufacturing activity to Asia. It's using enterprise data systems to detect the transfer of manufacturing activities to the region and alert its sales force to new opportunities that are created in the process. "Like companies in a lot of other industries, we're becoming increasingly global," says Arrow CIO Mark Settle. "Many companies have had inter- national operations but not always acted in a global way. We find that both our suppliers and customers over time are continuing to act more globally." When Arrow announced second-quarter revenue of $2.75 billion in July, component sales had zoomed ahead 46% in the Asia Pacific region.

At Arrow, business-technology imperatives revolve around three related concerns: global expansion, inventory management, and cost reduction. The big picture on company operations is provided by a data warehouse that's updated every day and supply-chain software from Manugistics Group Inc., which was deployed in North America last year and is being rolled out to other locations. About three-quarters of Arrow's business is in electronic components, and the remaining business is in computer products, and a primary goal is to keep its inventory turning. "Nobody wants to get caught holding inventory," Settle says.

Arrow has been able to squeeze its IT budget down to 1% of revenue by negotiating new terms with some of its telecom providers and moving to utility-based pricing on its back-office mainframe. In doing so, it replaced an IBM 390 mainframe with a newer Z series model. The newer machine has less horsepower--1,600 Mips compared with 2,400 Mips on the IBM 390--but it's equipped with 64-bit processors, which make up some of the difference. And Arrow now licenses its mainframe software from BMC Software, Computer Associates, and others based on pay-as-you-use terms, replacing fixed costs with variable costs. "The utility computing model [has been] a big advantage for us," Settle says.

That new-found flexibility factors into the way Arrow's business units plan for business technology and how they're charged for it. No longer locked into an IT budget set months earlier, business units are able to revise their IT-spending plans during the course of the year. And costs are allocated to business units according to a services model that's based on their consumption of resources such as mainframe cycles and network bandwidth.

After layoffs in recent years reduced the size of Arrow's IT department, the company has turned to offshore outsourcing for software development and application maintenance as a way of replacing some of that lost manpower without taking on the fixed costs of permanent employees. "We're very circumspect about hiring," Settle says. Arrow experimented with Linux as another way of driving down costs, but the numbers didn't add up. "We get such great transactional efficiencies on the mainframe, Linux isn't as appealing as you might expect," he says.