Blurred vision

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The electronics industry offers one of the best examples of a seamless supply chain from component manufacturer to end customer.

Since near the dawn of the personal computer age, the Dell retail model has been the one most electronic retailers have tried to emulate. Hard though it is to believe now, when Dell first started in the US, it tried bricks and mortar stores before opting for its successful supply chain-led model based on telephone call centres and, increasingly, the web.

Nicky Hartery, Dell’s vp EMEA for manufacturing and business operations (also see Face-to-Face, page 40) explains that Dell has used six sigma techniques – inspired by another giant of the electronics world, Motorola – to keep one step ahead of the game. ‘If you stand still in this game, you get run over. We have a supply chain re-engineering office in EMEA with some of the brightest and best people, innovating all the time.’

Dell has refined its operation and intermeshed its retailing and production operations to the extent that an order will start to be handled by its inbound hub within two hours of receipt, compared with up to a day not so long ago. That has taken a huge amount of bulk out of the supply chain.

Almost uniquely, Dell builds exclusively to order rather than to stock and the lack of a bricks and mortar retailing operation is a big factor in the leanness of its supply chain, says Hartery. ‘In a bricks and motor operation you can have up to six months’ inventory in the supply chain and if you consider that products become obsolete every nine months, that’s a serious problem.’

Hartery reckons Dell’s obsolescence rate is ‘virtually nil’ thanks to the way the supply chain is organised. The secret, he says, is that ‘we don’t take ownership of components until we build’.

That might seem hard on the component suppliers but another refinement to the production supply chain keeps them happy. ‘Within two to four weeks we will be able to give them a clear idea of what our needs are which mitigates having bubbles of inventory of little value.’

Now, in fact, Dell is extending its lean model to other sectors of the electronics world, such as flatscreen TVs.

Dell still assembles all its European-destined product at a facility in Limerick, Ireland, though most of the components are produced in the Far East. So far, the economics of Irish assembly have been favourable. By keeping productivity in Limerick high it can still offer the velocity to market only a west European base can offer. However, Dell is considering setting up a second plant in central Europe within the next two years to serve the growing market there.

Olivier Vairon, head of supply chain at business intelligence specialist SAS says high tech retailers and manufacturers have adopted much the same techniques as the major grocers in ‘mining’ sales data. Dell is SAS’ biggest customer in the US and uses the information not only to find out what peripherals tempt a 35-year-old professional to add on to his computer but also to ensure that assembly points hold the correct stocks or components.

Multiple systems
One of SAS’ abilities is to combine information from multiple retail systems as well as the internet and present this in a single format for the customer to base decisions on.

The consumer electronic market scene has changed a great deal in the past few years, says Vairon. ‘Even in consumer electronics, at the high end a lot of people are buying online, to the extent that retailers like Dixons and Currys are suffering. There’s a lot of information available online for customers to compare prices, coupled with a growing belief you get better prices online.’

As if that were not enough, the traditional bricks and mortar electrical specialists have been squeezed by the hypermarkets in countries like France or the big grocery retailers like Tesco in the UK, all of whom tend to undercut them on price even if they do not offer quite the same range of electronic goods. The biggest seller of electronic goods in the US is not a specialist but Wal-Mart which last year sold more DVD players than anyone in the world (and updates its forecasts every half hour in a data centre that rivals the Pentagon for sophistication, according to Vairon).

In the US, the picture is a little different. As well as Wal-Mart, some of the big specialist electrical retailers carry a lot of clout, accounting for perhaps 30 per cent of some producers’ sales.

Manufacturing for the retail electronics market has changed too, Vairon adds. Dell has conquered the PC world not because of innovative products, ‘but because they are the most efficient assemblers of parts’. Other, more research-led companies like Sony are struggling to catch up, Vairon believes. Sadly, it’s not enough to have a first class R&D department to succeed in today’s market, where marketing plays just as important a part in success as the quality of the product.

The research-led firms still tend to do a lot of manufacturing in-house, says Vairon, and this has made it hard for them to emulate Dell’s structure based on arms-length component suppliers tied in to their customers with tough legal contracts.

Andrew Caveney UK, Ireland and South Africa area lead for IBM’s supply chain management practice, says that many operations in the industry tend to get built round one particular constraint, but that constraints can change over time. A couple of years ago it might have been computer chips; now it might be the availability of plasma screens. Components can move from scarcity to glut within a couple of years.

In this fast-changing scenario the companies that are often most successful are not necessarily the most technically innovative but those that have the agility to adapt to a changing technological landscape. ‘There has been an unbundling of whole parts of the supply chain and what you’re really doing is managing an ecosystem of different design partners. IBM is a classic of that type of transformation.’ By ecosystem he means best of breed ERP systems, portals or the internet.

While all eyes have been on Dell’s management of its supply side, its is also adept at demand management, points out Pierre Mitchell, who heads up procurement research at The Hackett Group in the US. One trend in consumer electronics, followed not just by computer makers but also mobile phone makers, is simplification of the physical product platform and drastically reduced part counts which makes it possible to offer mass customisation relatively painlessly, he says. ‘If you’ve got 400 parts but your competitor only has 50 your supply chain will be a lot more painful to manage. It’s well worth the supply chain and procurement people talking to the product engineer and the marketing people. What are the pros and cons of offering ten supply chains – wouldn’t two do just as well and be a lot easier to manage?

Nowadays, many features can be software-based – especially in areas like mobiles or PDAs. That opens up the exciting prospect of customisation being literally in the hands of the customer. After all, one mobile phone is much like another these days physically. It’s the tariff and service package that really makes the difference.

Raja Chandrashekar, vp, industry marketing for the high tech industry group at i2 Technologies describes much of the consumer electronic value chain as ‘pretty inefficient’ with many producers holding 13 weeks’ or more of inventory at both the production and consumption ends. Dell, though, has shaken up the market and, he reckons, enjoys a cost advantage of around 10-12 per cent over its more traditionally-minded competitors.

The consumer electronics firms are learning to use point of sale information to condition their replenishment plans and are adopting varying strategies according to type of product or customer. They are also monitoring competitor actions.

All this bears some similarities to the big retailer grocers but there are also parallels with other sectors. ‘Technology is essentially a fashion item,’ explains Chandrashekar. ‘How quickly you can phase products in and out determines whether money is made or lost. One important difference from grocery is the extraordinarily high rate of new product ramp-ups and ramp-downs – up to 240 a year.’ There are also echoes of the book publishing trade in that just occasionally an electronics manufacturer finds that it has a runaway success on its hands – Motorola’s Razor phone for example. Perhaps only one in 50 products takes off like that but when it does manufacturers ‘need to be able to quickly ramp up and they need to be able to propagate data across themselves, their suppliers and their suppliers’ suppliers – in effect, they need a glass pipeline and conventional systems have not been designed to support these inter-enterprise gymnastics,’ Chandrashekar contends.

To achieve these rapid ramp-ups, adds Hackett’s Mitchell, procurement managers really must be on top of their game. He adds that electronics firms have also borrowed the idea of the multi-speed supply chain and the notion of ‘test’ inventory from the fashion trade to try and get a handle on demand.

Short shelf life
The computer games industry is equally hard to predict. Phil Atkinson, business development director at stock and sales reporting specialist Eleventeenth says one of this industry’s biggest pains is the fact that all products are supplied on a sale or return basis, coupled with the fact that games generally have a short shelf life due to the rapid introduction of technology. It’s also a seasonal business with peaks at Easter, the start of the school year and, of course, Christmas.

The beauty of the Eleventeenth solution is that it can take stock information in all file formats from retailers’ systems which it can use to help manufacturers update their forecasts. ‘Retailers and games publishers can use our system to get a view of emand, which we try to give them after week 12,’ explains Atkinson. ‘It’s also possible to take information from individual stores and achieve true granularity of data, which could be used in marketing – for example whether to mount an advertising campaign in one TV region or another.’

The system can also be used to handle markdowns – which in this business, if not handled correctly, can costs tens of thousands in lost revenue.

Despite the sophistication evident here, the electronics industry is not, ironically, always at the forefront in using technology to manage its supply chain, in Atkinson’s opinion. ‘Sometimes people like shoe retailers are much more interested in applications such as RFID,’ he says.

IBM’s Caveney says of the supply chain: ‘Supply chains have to be differentiated. Take mobile phones– for the cheap and cheerful end of the market you  just want to pump stock through without wasting time on detailed analysis of the local market but when you have product launches, you need to move to smart replenishment techniques.’  There is an art to product launches, he says. ‘In the first week, you don’t want to be out of stock. But on the other hand, you don’t want to end up with a lot of obsolescent stock, either.’

The traditional electronics companies are slowly shifting manufacturing capacity out of high-cost regions like Japan or western Europe. This, as Alastair Sorbie, of enterprise software provider IFS, points out, has led to an upsurge in demand for PLM software in the sector. ‘A number of the companies we work with have subcontracted activities like engineering design work to eastern Europe. There’s a lot more emphasis on offshore than there used to be, to the extent that the only value of a company in the West is its brand and reputation.’

The supply chain and manufacturing has had to be adapted to cope with these geographical shifts. ‘We’ve seen a complete change in the market for ER, as companies have shifted to places like Costa Rica and China.’

The stock market hammering high tech sector received in the early 2000s – along with the delays in obtaining the new cellular phone licences – hastened the shift out of places like Ireland where tax breaks had been used to tempt in production plants.

Manufacturers are also getting more clever in organising their production strategies, adds i2’s Chandrashekar. Many, for instance, are using postponement techniques for high-value products like computer chips, taking a more holistic approach than before.

Caveney is a great believer in postponement strategies. Often, it will be possible to hold large stocks of cheaper items (plastic TV stands for example) at point of consumption, mating them with the more expensive items (like plasma screens) only when final configuration is determined. In a way, the mass customisation of today’s consumer marketplace is an illusion – even the most sophisticated product is an assembly of pre-produced standard modules.

The question for the old stagers of the electronics industry is whether they can shift their operations to lower cost countries fast enough for them to compete with Dell and the other aggressive teenagers of the industry.

‘It’s hard to compete when you see the money poured into marketing. I’m not sure what might change that – perhaps a portion of the customer base might be swayed by notions like corporate responsibility.’ This has certainly happened in markets such as coffee or clothing – is fair trade electronics such a far-fetched notion?

Another area where corporate responsibility might come into play is in waste and recycling. In fact, there could one day be a reaction against too-hasty or deliberate, technical obsolescence.

Commonly accepted wisdom in IT is that equipment needs updating every two or three years. As refurbished hardware specialist, US-based World Data Products points out in its literature prior to its launch in the UK, ‘Vendors promote upgrades every three years when in reality the true life of most hardware is closer to five years.’

‘In the US, there has been much greater awareness of the possibilities of refurbished equipment than in Europe,’ explains WDP sales manager for Europe, Will Richardson. ‘However, we think that the market in the UK and Europe could be close to a tipping point.’

As well as the increased awareness of the possibilities of second-user equipment, what’s also been lacking until now has been a truly efficient redistribution system. ‘At the moment, it’s a fragmented market,’ explains Richardson.

Maximum flexibility
WPI specialises mainly in servers, storage and networking hardware. When it acquires equipment it breaks them down into component parts and stores in a centralised distribution centre in the US, ensuring that it can offer customers maximum flexibility. Transatlantic freight services are so fast the company doesn’t see the need to set up a mirror logistics operation in the UK or Europe yet.

WPI’s supply chain is a little more complicated to manage – or at least different – from a firm like Dell, manufacturing exclusively from new components. A lot of WPI’s expertise lies in knowing what equipment will work with what and identifying and keeping track of the myriad part numbers. It also offers maintenance services. ‘The IT market has changed, says Richardson. ‘This is no longer the era of the big IT project.’ Private sector firms are taking a more gradualist approach to IT upgrades and, following a few well-publicised disasters, governments are fighting shy of big bang computerisation projects.

Company management – not just IT directors – are getting cannier and are realising the possibilities of second-user equipment. Sometimes, it may be possible to rotate equipment through an organisation. Perhaps the graphic designers need high-end servers but someone who only types the occasional letter will be happy with an older machine.

Of course, there will come a time when technology moves on and older equipment that is functioning well will need replacing with something faster or more powerful. The WEEE directive will make it tougher for companies with old kit – though confusion surrounds who is actually responsible – but there are still plenty of options, says Richardson. Some equipment can find a ready market in the developing world or eastern Europe, while the rest can be sold on or dismantled in a responsible manner.

Electronics is the fastest-growing waste stream in Europe, says Steve Russell, MD of Warrington-based end-of-life IT equipment specialist BTR. Evertightening European legislation – not just the wellknown WEEE directive but also the Hazardous Waste Regulations that recently came into force in the UK – has increased companies’ interest in responsible disposal. ‘We offer customers a trade-only solution and increasingly we’re working with the bigger logistics players who want to provide a joined-up service without having to become waste experts themselves.’ Barriers to entry into waste disposal are now quite high. BTR needs waste management and carrier licences for instance, and it is becoming less easy to simply dispose of old IT equipment in landfill sites.

The onus of the WEEE regulations will fall heavily on the IT equipment producer or importer and they cover anything from fridges to child’s toys. Some larger producers have set up their own compliance schemes but smaller firms ‘have been scratching their heads’ says Russell, ‘especially in a business where margins have become so low’.

The days when companies could hand the problem over to a back street waste disposal specialist with no questions asked are long gone, especially now the Hazardous Waste Regulations are in force.

Firms can sometimes turn their storerooms full of redundant computer equipment into revenue, though much depends on what the equipment is and the market cycle. ‘After the 2000 IT boom budgets were heavily restricted and firms have held on to older kit for longer, but now firms are spending heavily again on IT,’ says Russell.

Disposal of old equipment to developing countries is one option, though even the charities – who of course have to warehouse and ship this equipment – are fairly choosy these days. Some can be torn down into components while there are creative ways of getting rid of scrap material. A certain percentage of the large CRT monitors now becoming obsolete are crushed and shipped to European copper smelters.

The Hazardous Waste Regulations throw up another problem for the electronics manufacturer, adds Chandrashekar. How do you certify a product is lead-free if you didn’t make it yourself – a common scenario where a manufacturer may buy in most or even all of the sub-assemblies it uses. Following its acquisition of specialist company Aspect a few years ago, i2 is developing a vast reference database running to several million items.

The logistics providers that work with major electronics and IT firms have had to adapt to a changing industrial landscape, points out Charles Menkhorst, senior VP global sales and marketing for DHL’s supply chain arm, DHL Solutions. DHL Solutions has just signed up Sun Microsystems as exclusive global logistics provider for after-market service parts, rationalising its logistics suppliers and interfaces from over 30 down to just one. True global supply chain projects are different from the traditional model, consisting essentially of a number of national or regional contracts bundled together. And the electronics industry is at the forefront of such supply chain thinking, says Menkhorst. ‘Those industries that have been highly profitable tend actually to be a bit behind in this sort of thinking but in sectors like electronics margins have been under pressure, which has accelerated thinking on outsourcing.’

Under the deal, Sun will eventually migrating its IT supply chain functions to the logistics giant. It might seem strange that an IT company is willing to outsource an IT function and decommission its own system but as Menkhorst points out, ‘Sun may be a high tech company but supply chain IT systems have very different requirements and skills from its own.’

Another trend becoming clear in this sector, adds Menkhorst, is service differentiation. ‘For a bank mainframe, the computer company’s service contract may stipulate no more than five or six hours’ downtime a year.’ That entails DHL being able to deliver to site within a couple of hours from a network – in Sun Microsystems’ case – of 265 field stocking locations. But for the more routine fulfilment operations – replacing printer cartridges, perhaps -the trick is to keep costs down, for example by combining deliveries with those of other customers.

NYK Logistics reckons to have one of the highest concentrations of electronics business in the UK, as well as substantial volumes in mainland Europe. Rohan Morris, operations director for the consumer and manufacturing division, says an increasing proportion of his work is in consolidating mixed loads from different manufacturers for the major high street retailers. NYK is offering an increasingly sophisticated package of services to its retail customers including a returns service that can track by fault, SKU, manufacturer and so on. It could also offer a service for return of redundant electrical products, when the legislation finally emerges.

Many firms in many walks of life have implemented RFID projects but as a high tech firm, Philips had a particular advantage. It is developing such systems to market to third parties. It’s Star project at one of its electronic manufacturing plants in the Hong Kong region has been in operation since early this year and has been highly successful, not just from a technical point of view, but from a commercial standpoint, says Mathieu Clerkx, vp and cio of Philips Semiconductors – to the extent that he will soon be seeking board approval to extend the scheme to other plants in the Asia-Pacific area.

The system, developed in partnership with IBM, works at the pallet, carton and packaging quantity (PQ) level in what is, from a radio-frequency point of view, a challenging environment as all tagged semiconductors are aluminium-wrapped.

Significantly, Philips has an RFID board and Clerkx predicts that the technology will be rolled out rapidly, not just across Philips but across industry as a whole. ‘This technology could become a commodity in a couple of years.’ After all, he points out, the first of Wal-Mart’s deadlines is fast approaching – January 1, 2006.

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