A PC Giant Steps Out of the Shadows

By P.J. HUFFSTUTTER

Oct. 5, 1998 12 AM PT

TIMES STAFF WRITER

For years, Ingram Micro Inc. has made its fortune not by producing things but by acting as a giant middleman between the manufacturers and sellers of personal computers. To most, the Santa Ana company’s operations are invisible, obscure and downright boring.

But they are far from small.

With $16.6 billion in sales last year and a market capitalization of nearly $6.9 billion, Ingram not only is the largest PC company in the Southland, it also is bigger than all but two of the state’s technology titans: Hewlett-Packard Co. and Intel Corp.

Now high tech’s back-room big boy wants to be heard. With a new e-commerce business plan, Ingram is expanding into manufacturing and redefining the assembly line. It’s also becoming a virtual warehouse for Internet-based resellers.

The shift comes at a time when computer retailing in the U.S. is dominated by direct sellers such as Dell Computer Corp. and Gateway Inc., as well as large national chains such as CompUSA Inc.

It’s a gutsy move for Ingram, considering that distributors already fight for razor-thin margins. But with the promise of billions in new revenue, Ingram sees its future in Internet commerce.

“This is a fiercely competitive industry,” said Shelby Fleck, senior technology analyst at Morgan Stanley, Dean Witter & Co. “To keep their lead over their competitors, Ingram has to move in this direction.”

The build-to-order business has become one of the hottest segments for hardware manufacturers in the last couple of years. The trend was sparked by the success of Dell, which has been able to reach both the consumer and corporate markets. Because every computer is made to order, Dell doesn’t stock parts that are more than 8 days old. By keeping its inventories down, Dell and other direct sellers can cut down on administrative and storage costs. Out go the middlemen, in comes a stronger bottom line. Traditional manufacturers such as Hewlett-Packard and IBM Corp., in an effort to compete, have followed suit.

Theoretically, this should be bad news for companies like Ingram. Who needs middlemen when manufacturers have direct contact with their customers, either in person or across the Internet?

As it turns out, nearly every player in the PC world needs someone like Ingram to act as the “umbilical cord of communication” between these two groups, said Jerre L. Stead, Ingram’s 55-year-old chief executive.

Someone has to house all of those expensive components. And when retailers and resellers need a part, they want to be able to get it the next day--even if the order is placed as late as 5 p.m.

From Warehousing to Manufacturing

Size counts when it comes to a distributor’s catalog of inventory. Ingram carries 145,000 products--from PC to telephone parts--from more than 1,400 vendors. Only 25% of the company’s annual revenue comes from the sale of personal computer parts.

“Let’s say you’re in a Fry’s [Electronics store]. In the future, you’ll literally go to a kiosk and configure an entire home center,” Stead said. “‘That kiosk will be connected live from Fry’s back to us,” where the order will be assembled.

In March, Ingram opened its first build-to-order plant in Memphis, Tenn. The facility, one of 11 set to launch by 1999, is designed to make customized notebooks, desktops and PC servers for Compaq Computer Corp., HP and IBM, among others.

Ingram’s plan, known as “channel assembly,” is to store partially built machines that still need microprocessors and memory chips. These two components are the most vulnerable to price changes. When an Ingram customer needs a particular machine, it orders the PC and cuts down on the reseller’s operating costs because it’s not storing a lot of prepaid inventory.

PC makers such as Dell and Gateway insist such a tactic can’t match the efficiency of their build-to-order technique. Yet that hasn’t stopped distributors from reinventing themselves into manufacturers from shippers. Ingram started cranking computers out of Memphis this spring, as have competitors Tech Data Corp. and InaCom Corp.

“Everybody’s obviously latching on to this as a much more efficient way of doing business,” said Tim O’Malley, a spokesman for IBM. “Forty percent of our commercial desktops for the U.S. market are [final-] assembled in the channel.”

Web Site Becomes More Important

This future, insists Stead, can blossom only with the help of the Internet. Ingram has long used computer networks to link resellers to its telemarketers, who would take orders and reel off technical information to curious customers.

In 1996, Ingram launched a Web site to reduce this burden on its 1,380-person call centers, where at least half the calls are requests for price and availability. The site is designed specifically for resellers such as CompUSA that take Ingram deliveries, then sell the products to the public.

The site now handles 11,000 orders each month from resellers, and the company’s goal is to double that number by next year. To help do that, Ingram has developed a trio of software products that allow its resellers to set up shop on the Net.

The new product line, called Prime Access, has three components: the actual design of the Web site, a live connection to Ingram’s catalog of available products, and an e-commerce software program that allows customers to place orders online.

Eventually, a computer reseller will be able to launch a site that lets the public browse through Ingram’s warehouses and order what they wish. But the Ingram brand won’t be anywhere on the site.

The move marks the first time Ingram is creating technology that will be used by the general public, but the company sees itself as lurking in the background. The goal is to make these online resellers look and feel bigger--and therefore more respectable--to the consumer.

Spinoff Company Has Grown Quickly

Before being spun off as a public company in November 1996, Ingram was part of family-run Ingram Industries Inc., which wields an enormous amount of influence in the retail channel. A significant chunk of the public’s favorite consumer electronics products travels through Ingram Industries warehouses.

Ingram Entertainment Inc. ships one-third of all home videos, according to industry analysts. Ingram Book Group handles about two-thirds of the books that travel from wholesalers to retail shops.

And then there’s Ingram Micro. The world’s largest distributor of microcomputer products, it has historically served two groups: those that produce computer products, such as IBM and Microsoft Corp., and those that sell these products to the public.

Ingram, formed from the combination of two smaller resellers in the early 1980s, became dominant through its pursuit of efficiency. The company’s previous chief executive, Linwood A. Lacy, is credited with assembling a talented team of managers and investing in a distribution system that competitors envy.

His replacement, Stead, made his name as a turnaround star at AT&T; Corp. His teamwork philosophy--Stead’s business card reads “Head Coach”--has won him kudos from both employees and analysts. A sterling silver whistle from Tiffany’s, a gift from business friends, is tossed on the corner of Stead’s desk.

Since the company went public, Ingram’s share price has nearly tripled, from $18 in its initial public offering to $49.06 on Friday. Such growth is surprising, as Wall Street has long shied away from computer-distribution stocks because of their low margins.

Although profit nearly doubled last year, Ingram’s net income of $193.6 million, or $1.23 a share, represents only 1.2% of its annual sales.

Ingram’s 40% annual growth rate far outpaces most of the rest of the technology industry, including networking (25%), software (20%) and hardware (15%). The company’s work force has more than doubled in two years to 14,000, thanks to an aggressive hiring spree and the acquisition of nine distributor companies.

Battle Among Three Giants

Such consolidation has turned the distributor market into a battle of three giants, Morgan Stanley’s Fleck said. Ingram is the leader in the U.S., followed by Tech Data and CHS Electronics Inc., the top distributor in Europe and Latin America.

Analysts say that even Ingram, as successful as it is now, should be wary of a lull in production, particularly now that the company is expanding into manufacturing. Like the PC makers, Ingram needs to monitor buying trends to be able to quickly cut back its inventory if orders start to slow.

To accomplish this, the company has shifted its corporate approach from being “pushed” by vendor needs to being “pulled” by customer buying habits. Stead’s idea is pretty simple: Give resellers faster access to the goods stored inside Ingram’s warehouses and make it easier for clients to place an order.

“It’s become really clear that folks like us had to do more” to keep customers, Stead said. “We’re just getting started.”

Times staff writer P.J. Huffstutter can be reached via e-mail at p.j.huffstutter@latimes.com.

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Strength in Numbers

Since 1994, Ingram Micro’s sales have more than doubled and its profit has more than tripled the impressive growth, fueled by aggressive acquisitions has made the company No. 1 in thewholesale computer products industry. A look at Ingram Micro:

Headquarters: Santa Ana

Chairman/CEO: Jerre L. Stead

Business: Wholesale computer products distributor

Employees: 12,000 worldwide

Status: Public

Exchange: NYSE

Ticker symbol: IM

Friday’s stock close: $49.06, down $1.81

SOARING SALES, PROFIT

Sales (in millions)

1997: $16,582

Net income (in millions)