The high-tech supply chain has had, over the past few years, to transform itself from one based primarily on the needs of business to one dictated by the more capricious needs of the consumer market. Ryan Kraudel, high tech and electronics director at GXS says: ‘It’s really consumer purchases that are driving the market and an important, but under-reported inflexion-point was reached in 2004. That was when private consumers purchased more high tech products than corporations did.’
Manufacturers find themselves with ever-narrowing windows in which to get their products to market before they become obsolete. The Nintendo WII is a case in point – it’s not actually any more technically advanced that its rivals, but its motion sensor has captured teenage imaginations and it is the product of the moment – until, of course, something else comes along in a few months’ time.
It’s this increasingly volatile demand that is leading to inventory being shifted further up the supply chain to people like contract manufacturers, says Kraudel, and it’s not just inventory that is moving further up but product design as well. The past half dozen years has seen the emergence of ‘original design manufacturers’ who have taken on the concept and design of consumer electronics and they are becoming increasingly important in areas such as MP3 players and laptop computers.
The original equipment manufacturers have become, essentially, brand-owners and they need to be careful that they don’t end up being squeezed out of some markets altogether, says Kraudel. Already, US retailer Bestbuy is selling ‘own brand’ electronics in its stores.
In this cut-throat market, you can lose not just your market share, but virtually your entire business overnight, if you’re not careful. McKinsey produced an interesting report a few years ago on the ‘topple effect’ which showed that leading companies are finding it harder and harder to remain in the top spot – IBM, which dominated the world computer business back in the 1970s only survived by substantially reinventing itself.
While many components in computers and high tech are made in the Far East, manufacturers use many different supply chain strategies. Dell may have led the way with its assembly platforms in Europe, which mainly put together components shipped in from outside the EU but since the company ceded the top spot to rival Hewlett-Packard, there are signs that it is having a rethink under its new president of global operations, Michael Cannon. Analysts say that the one-time CEO of contract manufacturer, Solectron, may use third parties more for its assembly operation.
Fujitsu Siemens also uses an interesting model, as Peter Esser, executive vice president for volume products and supply operations explains.
While Fujitsu Siemens does buy in components from the Far East, ‘we do have own manufacturing facilities in Germany, in Augsburg and Soemmerda.’ That Fujitsu Siemens hasn’t outsourced as much as some other companies in the sector is explained partly by the desire to maintain jobs in Germany but also by the need to remain close to its customers in the EMEA region, particularly in the business segment. ‘A lot of our customers have very specific needs, and it’s also prompted by their desire to maintain continuity of supply,’ says Esser. Banks for example want a guarantee that they can continue to obtain supplies of certain certified components, and this is much easier to achieve if the supplier is locally-based.
Supply chain is a very important weapon for Fujitsu Siemens in its battle for market share. ‘And it’s not only market share,’ says Esser. ‘It also affects bottom line results, and if you do it wrong, if you end up with waste, you can lose a lot of money.’ Keeping control of inventory is key for computer companies – he calculates that 85 per cent of the cost of a typical PC is actually in materials and components.
Fujitsu Siemens decided some years ago to build only to order rather than to stock. ‘Of course, we do buy in components, and these we control very carefully, checking inventory levels daily.’ The company has developed sophisticated mechanisms for gauging future consumption using predictive data from its sales organisation. If necessary, it takes steps to shift slowmoving stock and, likewise, takes steps to cope with shortages of key components.
The latter does happen from time to time in the computer world. ‘For example, in the first quarter of this year there was a global shortage of Ram memory (random access memory).’ What happened was that a surge in popularity of MP3 players and similar had created a run on demand for certain types of memory which ended up affecting the entire high tech sector, because similar memory is used in many other sectors of the market.
Again, it’s a good illustration of how the computer market is being ‘consumerised’ with all the and volatility that that entails. ‘The market is not as predictable as it was,’ says Esser. ‘We have analysts looking at these factors all the time, but even the experts get it wrong quite frequently.’
Managing spares inventory and, indeed, management of the repair or replacement function itself, has been exercising the minds of the leading electronics companies. In fact, management of the spares inventory has become as big an issue as that of the OEM supply chain.
ServiceBench Inc, which provides web-based service management applications in North America, has just opened an international headquarters in Europe. The company, which already has service management contracts with manufacturers and retailers like Whirlpool, Sears and IBM, is now making a major push into, initially, north-west Europe.
ServiceBench CEO, Michael Dering, explains that the problem in this segment of the business has been that the process has involved negotiating four or five different databases, between the manufacturer, distributor, retailer and the service organisation. What ServiceBench does is provide a hosted web-based solution to manage the whole process including the technician’s schedule, getting the right part to where it is needed and, also, analysing the data.
Chris van der Harst, managing director of ServiceBench in Europe, adds: ‘You can’t predict everything in spares and servicing, but if you can capture the information up front, you can get the data into your system much more quickly. And then you can think about feeding information into a warehouse management system.’
Mark Cockings, central Europe president of ERP specialist IBS, says that one of the industry’s chief concerns has been minimising and rationalising spares and support inventory. ‘A lot of the larger organisations are looking at this on a pan-European level and how they can manage inventory of spares on a regional basis.’ They have identified fast and slowmoving streams and, in the case of the latter, centralised stocks of spares and rely on high-speed transport links to get items quickly to where they’re needed. It’s the economics of holding, say, 20 items centrally rather than having one each in 200 branches.
Spares holding costs can be around 20-30 per cent of total inventory costs and with the increased pressure on margins, companies have had to wring efficiencies out of the supply chain. Ceva Logistics, the new name for TNT’s Logistics arm following its sale to private investor Apollo Management to create the largest pure-play logistics company in the world, adds that you can tell a great deal about future demand patterns from the first days or weeks of sales of a new model.
Ceva says that the demands of the internet means that logisticians must be flexible, says global business development manager telecoms, Richard de Lange. ‘You need to be able to pick individual items, as well as a full pallet,’ he says. ‘And you have to be able to deliver to private addresses and handle financial transactions.’
End to end control of the supply chain is vital, adds Ceva global key account manager, Ben Leider, as is the need to capture information throughout the supply chain, even when subcontractors are involved. ‘In a word, you need flexibility,’ he says. ‘Companies are marketing a very wide range of handsets and they don’t know in advance which model will become fashionable, so you need to have alternative ways of getting product to market and to be able to rapidly scale up operations.’
Ceva can, however, minimise the technical problems as it can offer a series of modular processes such as warehouse management systems and other IT infrastructure to minimise the risks associated with change.
Implications of WEEE
Electronic manufacturers, retailers and business users have had to digest the implications of the EU’s electronic waste or WEEE directive. The effects of this vary widely from country to country, explains Jane Southworth, IT senior associate at international law firm Eversheds, which recently did some research into the preparedness – or otherwise – of UK companies. In some countries, such as Germany and Holland, there is already a well-developed recycling infrastructure and adoption of WEEE has been relatively painless. But in others, such as the UK, where the implementation of the directive was delayed because of the lack of recycling facilities, half of manufacturers and retailers were still unclear over their obligations and over half of businesses questioned had not yet put a scheme in place to dispose of electrical waste.
Of course, the best way of recycling an old computer is to re-use it as a computer. Tony Roberts CEO of the charity Computer Aid – which ships old PCs to developing countries – points out that producer compliance schemes cause their own environmental damage by dismantling or shredding working computers when they should be prioritising PC re-use as required by the new legislation.
But sometimes there is no alternative to scrapping. Logistics specialist Wincanton was one of the first companies off the mark with electrical recycling and its plant in Billingham can cope with anything except fridges – and they are handled at a separate, dedicated facility explains commercial manager for recycling, Simon Hill. The recycling service will be offered to Wincanton’s existing logistics customers, of course, but recycling will also be offered to third parties.
Everywhere in the electronics industry, though, reverse logistics is becoming more important. Maurice Daw, managing director of Unipart Technology Logistics, says that reverse logistics has become an important part of the activity at its four sites, particularly in sub-sectors such as mobile phones. ‘Return logistics has grown massively in
the past five years and I can see it getting as big, if not bigger than forward logistics. It can be a big driver in customer retention. And it’s also a factor in WEEE, as well as good commercial cost control.’
The other factor that has contributed to increased return logistics is the increase in sales over the Internet, together with the legislative requirement for customers to be able to return goods after 14 days.
‘Return logistics is complicated, and you need to demonstrate control and agility,’ says Maurice Daw. ‘It isn’t easy but if you do it well there are big benefits.’
Responsible supplier scorecards
One way brands might be able to differentiate themselves is through their green or other community credentials, Kraudel continues. Already, there are signs of this happening, with manufacturers offering take-back schemes for old gear and also starting ‘responsible supplier’ networks. Wal-mart in the US has started issuing ‘responsible supplier’ scorecards for indicators such as energy efficiency, freedom from hazardous materials or upgradeability. ‘Wal-Mart probably has more influence than any government programme,’ comments Kraudel.
Another concern that has emerged more recently has been the social performance of second and third tier suppliers in the electronic supply chain in developing countries. While this sort of concern has until now been mostly associated with the textile trade, it is beginning to impinge on the electronics industry, says Bonnie Nixon Gardiner, HP (Hewlett Packard)’s programme manager for supply chain social and environmental responsibility.
HP has been working with the Good Electronics Coalition, an international network of non-governmental organisations (NGOs) to further improve the social and environmental performance of its suppliers in China.
Other, similar initiatives are the Electronic Industry Code of Conduct (EICC), which promotes a standards-based approach for monitoring suppliers’ performance across several areas of social responsibility, and, mainly in the telecom sector, the Global eSustainability Initiative (GESI), which aims to inform the public of its members’ voluntary actions to improve their sustainability performance.
While HP until relatively recently ran a lot of its own production capacity in house, it has more recently started to outsource and has built up quite a complex supply chain. In all, it could probably identify eight tiers, though of necessity, ‘the realistic focus would be on educating the two or three suppliers, and they in turn could educate their suppliers so we should eventually cover pretty much the whole supply chain in time,’ she says.
These efforts can be broadly compared to the ‘Fairtrade’ movement in the food and clothing sectors but there is one crucial difference – whereas the food supply chain is relatively simple, dozens, if not hundreds of different suppliers are involved in building a typical piece of electronic equipment – so it may be a while, if ever, before computers start carrying the equivalent of a Fairtrade label. In time, though, ethical practices could become the norm, says Gardiner.
There is more to the movement than just ethics, she continues. Happy, well paid and well treated employees tend to make fewer mistakes, so there could be fewer faulty components under an ethical trading scheme.