There was a time when companies such as Nokia, Sony, Philips or Toshiba would develop a product range, plan their distribution channels, schedule marketing campaigns and deliver the final packaged items to their retailers and resellers. It was a simple supplier-managed end-to-end supply chain. It required little more from logistics service providers than movement of products from factory to distribution centre to retail outlet. Over time, the scope of customer needs has broadened.
Today hi-tech manufacturers increasingly fall into two distinct camps: those that manage their own R&D, production and marketing and those that are primarily brand organizations and therefore outsource all other functions to specialist contractors such as Original Designer Manufacturers (ODMs), to allow them to focus purely on sales and marketing activities.
It is a shift that is creating major new opportunities, and challenges, for logistics service providers. Not only must we develop new skills in customisation and kitting to match the demands of both consumers and marketeers, but we also must keep ahead of global production trends – providing capacity and infrastructure in the latest low-cost markets which these ‘brand managers’ identify as ideal manufacturing hubs.
As well as this major split in corporate style, the hitech industries are also developing a value chain that is shifting from products to services. Today a basic printer for a PC may cost as little as €50 – but the ongoing need for toners, cartridges, and specialist paper or service contracts adds substantially to that figure. Hi-tech product lifecycles are no longer simply about a single marketing or sales event, but about all the add-on accessories and services that could be incorporated during the years the item is in use. Moreover, when the product reaches end-of-life, there is refurbishment or disposal to manage as well, to ensure compliance with European environmental legislation.
Product and services logistics thus have quite different requirements. In the product space, we have three clear trends to contend with. The first is that products need to be brought to market faster, using a flexible and cost-effective approach. These drivers are encouraging traditional hi-tech producers to outsource either R&D or production or both.
Secondly, there is the inevitable impact of globalisation. In recent years, the focus for production has been determinedly on the low cost region of Asia Pacific. However, as oil and transport costs rise, the equation balancing time-to-market, transportation costs and low cost labour has shifted and many hi-tech companies are now bringing production closer to home. In many cases, that means Eastern Europe. The low wage border is continuing to shift eastwards – from the Czech Republic to Ukraine, for example. As wages rise in these eastern corners of Europe, so too does demand for consumer electronics. Moving production to these areas not only cuts costs, but also provides goods for the local market without additional transport expenses.
Real cost advantages
Again, it is an area where the logistics service providers can bring real benefit to hi-tech companies. To establish factories, distribution channels or warehouses in these areas is an expensive business. By acting on behalf of a number of clients, the logistics service provider can develop the necessary infrastructure far more cost effectively, thus delivering real cost advantages when such activities are outsourced.
Alongside the impact of globalisation is the need for market- or sector-specific products. Instead of a single generic line, companies are increasingly fragmenting their product offerings to appeal to various sub-sets of the global market. This may mean a different logo, bundled software, promotional offer, packaging, customised user manuals, or associated accessories. Kitting out these offers can be a labour intensive business and is another area where outsourcing can prove cost-effective.
Carried to its ultimate conclusion mass customisation could mean a slightly differently packaged product for every customer – a demand which Dell already appears to satisfy by allowing customers to configure their own PC purchases online, albeit from a controlled range of options.
In practical terms, it means configuring products as downstream in the supply chain as possible. Hi-tech manufacturers are therefore demanding ‘postponed manufacturing services’ from logistics service providers so that the product can receive its final customisation as close as possible to final despatch.
A third trend in the product logistics space is for greater collaboration between primary and secondary suppliers. As discussed earlier, the number of manufacturers taking responsibility for their entire production and marketing operations is diminishing. This means that they need to form close partnerships with device manufacturers, electronics assembly companies or systems integrators to develop and bring to market the final product.
While there are still many specialist suppliers in these sectors, the ‘control tower’ function of sourcing and factoring the various partnerships is another growth area for logistics companies. Many have the global reach and expertise to manage such relationships and can often contribute skills in product assembly and kitting as well.
Alongside these three key trends is the need for hitech companies to reduce risk. Today, very few are willing to see major investments in new manufacturing regions, products, or distribution infrastructure as they can significantly affect their balance sheets. Outsourcing removes this need for capital expenditure, shifting cost to the operational budgets and so safeguarding shareholder value.
The three major trends in product logistics not only affect specialist logistics service providers. We are already seeing Electronics Manufacturing Services (EMS) companies, for example, moving to Eastern Europe and taking on the risks of inventory collection and fulfilment. These companies have had to increase their responsiveness to end-user demand to meet the need for just-in-time manufacturing. In their turn, these EMS operations are also dependent on slick inbound logistics to improve cost efficiencies.
A shift from product to services
While product logistics in the high tech sector is presenting particular challenges, so too is service logistics. As I stressed at the outset, the hi-tech value chain is shifting from products to services. In this column last month, my colleague Jasper van der Wulp outlined the case for outsourcing spare parts supply/management. Service logistics in the hi-tech sector, however, covers much more than spare parts.
Our world is shrinking, and the gap between rich and poor nations is sadly as wide as ever. Hi-tech companies play their part by refurbishing a great deal of equipment, no longer needed in the West, for the emerging markets in Africa. Collecting these goods, repairing and refurbishing them, and then delivering them to the remoter corners of the globe, presents yet another opportunity for logistics service providers.
It may sound straightforward but collecting and delivering large items of computer or electronics equipment to the upper storey of high-rise office blocks can be far from easy. Transport distribution services with their cranes and heavy lifting gear are highly specialised and an essential requirement for much of the hi-tech marketplace.
Equally, in Europe we are only just beginning to appreciate the full implications of the WEEE directive. Current focus is largely on the B2B sector but before long the need to manage end-of-life disposal or refurbishment of B2C products will start to be addressed by the regulatory authorities. Already companies like Dell are offering to collect and dispose of your old PC when they deliver a new one. We will no doubt see similar developments throughout the hitech marketplace – a trend that will put even greater demands on those transport distribution services with the need not only to deliver a new uninterruptible power supply tower or industrial printer to the 10th floor, but also to collect legacy kit, which may well be heavier and more cumbersome.
Environmental issues are becoming a major concern for us all and the need to re-use valuable components from hi-tech equipment that has reached the end of its life, will certainly increase in future. Some of this returns processing, as Jasper van der Wulp outlined in this column last month, can be handled within spare parts management programs. Other processing will need more dedicated procedures. In both cases, managing hi-tech products throughout their entire lifecycle is set to become more complex.
At a time when many hi-tech producers are focusing purely on core brand marketing, functionality and reliability of product or service will be yet another area where logistics service providers can develop specialised and profitable operations. Erwin Metz is senior vice president, Technology Sector EMEA at DHL Exel Supply Chain. He can be contacted at email@example.com.
- Hi-tech manufacturers fall into two camps: those that manage their own R&D, production and marketing and those that centre on the brand and outsource other functions
- Hi-tech industries are developing a value chain that is shifting from products to services. Hi-tech product lifecycles are no longer simply about a single marketing event but about add-on services