It’s reassuring to know that high tech firms have to do as much work on their supply chains as the rest of us. SKU proliferation and over-complexity are as much a fact of life there as in any other industry. Speaking at the i2 European High Tech Day in Munich in October, Dr Hagen Wenzek, IBM associate partner for the global electronics industry, revealed just how important the issue was for the global computing giant: ‘44 per cent of IBM’s total market capitalisation is driven by the supply chain.’ Does your board of directors know how important you are? IBM is unusual, in fact, in having a high-profile supply chain director, in the shape of Bob Moffat.
Greg Kinsey, managing partner, electronics industry at IBM Business Consulting Services, did a survey or CEOs in late 2003, 50 of them in the high tech sector. The emphasis had shifted from the cost reduction of the early years of this century to ‘responsiveness and flexibility’. The biggest fear, Kinsey added, was ‘commoditisation’.
For another participant in the High Tech Day, Dr Ulrich Weingarten, senior director, planning and supply for semiconductor manufacturer Infineon, the major pressures include greater product complexity, reduced time to market and shorter ramp-up and ramp-down cycles, with cycle times compressed to less than a year. Prices are dropping and can collapse suddenly, once technology becomes obsolete.
The high tech companies are rewriting the rules of business as they go along, moving to ‘on demand’ business with companies no longer willing to lock themselves into huge contracts but instead buying services like IT on a ‘pay by the drink’ basis. There is also a school of thought that IT doesn’t matter any more, or at any rate not IT for its own sake. IT directors are no longer treated like gods. Gone are the days when CEOs would sanction the purchase of the latest computing and software toys – sorry, tools – without thinking. ‘We’ve all got software we’ve never taken out of the box,’ Weingarten said.
Complexity may be a necessary evil in this business, Dr Wenzek added, but that doesn’t mean that efforts should not be made to contain it. For instance, in 1996, IBM had a total of 540,000 active part numbers – though sometimes variance may be due to nothing more than a different label or packaging. ‘We had to manage all that stuff and there are great tools to help you do that, but we did need to get rid of all the complexity.’
So IBM took a leaf out of the car-makers’ book by rationalising its parts base and encouraging its designers to use common parts and platforms as much as possible. ‘Parts re-use had to be embedded in the DNA of our product developers.’ Not an easy task (as Marcus Reijonen, solution manager at Nokia noted: ‘Changing the mind of an engineer is very difficult’) but the reward was 62 per cent of parts reused and a year to year cost reduction of around $175- 250m. IBM even used financial incentives, for example setting an 80 per cent target for the proportion of preferred parts used or a 15 per cent target reduction in the number of unique part numbers. ‘You need measurable goals as far as possible.’ It also has a successful preferred supplier programme, the top ten vendors now accounting for 80 per cent-plus of procurement.
Dr Wenzek continued by saying that the underlying technology in computers, mobile phones, PDAs and the like could become increasingly standardised across brand names, with manufacturers competing more on design than the underlying technology. ‘The customer lock-in could become less of a technical one.’
Managing complexity and getting goods to market on time is what the high-tech industry is all about, says MatrixOne UK managing director Peter McQuade. ‘High tech firms face similar problems to those of other manufacturers. The critical problem is how to get maximum efficiency from the design process, often in a multi-site, multi country enterprise. (Companies have a follow-the-sun approach, leading to widely scattered manufacturing and research bases.) Most firms do not actually make much themselves and rely on contract manufacturers to produce components like chips or software. It’s important to share vital information with these subcontractors. Moreover, ‘a lot of firms have time-to-market issues and only a limited window when their markets can be sold.’
The big squeeze
Take mobile phones – which MatrixOne knows something about as it works with several big names like Nokia and Philips. There’s a constant challenge to squeeze in more technology all the time, which can create a very complex supply chain, as well as manufacturing process. ‘So it’s very important that all these people all over the world have a single source of the truth. Decisions to make changes to products often have to be taken quickly and what used to take weeks is now down to days or even minutes. But it’s also important to be able to do it accurately,’ said McQuade.
These days, every component in a product can affect the performance of others. ‘That is where mistakes are often made’ – and it’s often the reason for those annoying amendment slips in operating instructions or for video recorders, mobiles or computer components.
There are also many more components – the term components can include software programs as well as things like chips or screens – in today’s high tech gadgetry. Even something as small as a mobile phone can contain thousands of sub assemblies. And the number is increasing.
Another benefit of MatrixOne’s approach, added McQuade, is rationalising acquisition of components and other raw materials. Again, because companies in this sector have often grown by acquisition they may find themselves making goods that use common components. But again you can only aggregate your sourcing if you have a single version of the truth.
Is there a future for electronics manufacturing in Western Europe? Bob Davis, MD of Deltron-Emcon, which makes devices like switches, sensors and connectors at a purpose-built site in Scunthorpe, thinks there is, provided firms are willing to embrace change and concepts like leanness. However, in Deltron’s case the model has changed from long production lines to a cellular system, with cells operated on kanban principles dedicated to particular customers or products, plus the wholehearted adoption of lean production techniques. (Bob Davis is president of the Association of Manufacturing Excellence, originally a US body but one with increasing influence in the UK and Europe.)
Leanness is actually a simple concept, adds Robert Hemmant, global lean architect at electronics manufacturing services firm Celestica.
It doesn’t necessarily need sophisticated IT and communications though these obviously help if you’re working across time zones and continents. Toyota practiced a form of lean manufacturing using coloured cards back in the 1950s. ‘It’s all about being able to manage the supply chain to catch the market and to have as little in the pipeline as possible. In the downturn in 2001 the industry learned a hard lesson when huge inventory overhangs almost crippled the industry.’
Even in these comparatively prosperous times it is important to avoid unnecessary overproduction, given the severe shortages of raw materials like steel. Leanness has to go all the way through the company, starting with the manufacturing process, then rippling out into the supply chain and, eventually, taking in suppliers, customers and even second and third tier suppliers.
In Emcom’s case, Bob Davis mapped all the company’s existing processes and identified those points where value was added – and those where it was not, such as moving product around the site. Quality control and inspection has been integrated into the cells instead of relying on someone further down the line.
This reduced stockholding by around 16 per cent and for some customers lead times went down from four weeks to one. Fast response is important if you’re up against Far Eastern manufacturers who can produce the basic stuff cheaper but may take two months to get it to the customer. It’s important to take these sorts of things into account when assessing the true cost of components, says Davis. ‘Forecasting is not particularly accurate and if you end up with redundant stock, it’s a cost that is often not factored in.’
Most of Deltron-Emcon’s components go into larger assemblies like machine tools or factory automation systems. It’s also important, says Davis, to collaborate closely with customers when developing the next generation of equipment, which reduces the amount of redundant stock. ‘This has become more common in the past five years or so but there needs to be more coordination – and less of designers designing products that can’t be made.
Lean manufacturing also lends itself to improvements in the supply chain and logistics, says Davis. ‘It’s often seen as shop-floor but, for example, if you get lead time down to one or two days but it still takes days to process the order, what’s the point?’ So it’s important to look at lean concepts right the way through the organisation. In time, it also needs to get ‘pressured down’ to tier 1, 2 and 3 suppliers.
The message is slowly getting though to electronics sector firms, at least in the UK, though it can be a slow process. ‘Three years ago not many UK manufacturers knew a lot about lean manufacturing techniques and a lot still haven’t started the journey.’ Not everyone appreciates the amount of drive it takes to push leanness through an organisation.
Obsolescence still rife
If the logistics companies are anything to go by, the electronics industry has shaken off the post-9/11 downturn in the industry. High tech and IT, still by far the largest sector of UPS Logistics has, in most subsegments, grown back or beyond pre-dot com bubble levels, says director of 4PL operations and programme, Ian Chong. High rates of depreciation and obsolescence are as much a feature of this market as they ever were, he says. The computer makers have progressively broken down through the $1,000, then the $500 a box barrier, and even where prices are not going down, specifications are increasing. ‘Where you don’t get price depreciation, you get obsolescence,’ he says. ‘That in turn means that there is pressure on most players to have as lean a supply chain as possible.’
The shape of the supply chain has also changed. ‘Most manufacturers are now no longer dependent on a single product category.’ And there has been further segmentation within categories. Network builders used to be considered high end but that market has since segmented itself, adding medium and low ends. As a rule of thumb, the more downmarket a product moves, the less stress there is on the speed of the supply chain and, correspondingly, the more on local availability with multiple stockholding points. ‘Value is not intrinsic in the product but in its availability,’ says Chong.
OEMs, in trying to reduce their fixed operating costs, are moving towards a much more flexible procurement model. That means logistics suppliers like UPS have got to be more flexible too, says Chong, particularly in North America and Western Europe, ‘We are more caught up in postponement, where the manufacturer makes products in a ‘plain vanilla’ state and they’re customised for final consumption – in some cases by the logistics provider itself or by others at the logistics operators’ premises.’ It does mean rather different infrastructure from the traditional distribution centre, as manufacturing facilities have to be attached – not clean rooms perhaps but lowdust, anti-static environments. ‘Work typically goes on over three shifts – that’s the nature of the demand.’
The advantages of this approach are reduced inventory and a reduction in the impact of getting a forecast wrong.
Good and bad inventory
Patrick Crampton-Thomas, director of solutions at i2, talks of good and bad inventory. ‘A lot of people hold inventory in an RDC, but in reality they may need to hold a bit there and a bit higher up the supply chain.’ Companies must segment demand more precisely. ‘In fact, the ability to segment products is absolutely vital,’ and i2 offers sophisticated tools to help companies do this. Product need not necessarily be held in finished form – it could be in the form of a ‘diebank’.
Interestingly, Chong adds, the business electronics market is seasonal – not driven by Christmas or Easter but by financial year-ends. There is always a spike in the last quarter of the financial year.
Jason Hibbs, European supply chain director at logistics specialist Christian Salvesen, previously worked in electronics industry logistics at Analogue Devices. ‘I’ve shipped a few devices in my time,’ he says. Actually, a few million is nearer the mark, such are the volumes in this business.
‘Major issues in electronics are security and the repeatability of service levels. There’s an ever-ongoing pressure to move inventory up the supply chain, to cut national and regional distribution centres, but at the same time you still have to maintain the service level,’ he says. The problem, though, is that the further you move stockholding from the customer, the more difficult it is to be responsive. ‘What tends to happen is that OEMs use franchised distributors to provide flexibility, buying back product previously sold to them.’ Making use of the inventory available in the distribution channel can be an effective strategy but it does need excellent visibility of your distributors’ as well as your own inventory, to work. You also need to have the right terms of agreement in place.
Single supplier solutions
‘Electronics firms are increasingly turning to single supplier solutions for their logistics needs, 3PL or 4PL,’ Hibbs continues. ‘This can be quite demanding, given that the products can range from bulky cathode ray tube monitors to semiconductors weighing a few grammes. Logistics providers need to be able to carry out activities like configuration and combining products – for example a computer, monitor and printer. Retailers’ requirements can change almost daily in this fast-moving market.’
The other striking aspect of the electronics market is its sheer moveability. ‘When I started 20 years ago people were quite happy to build factories in California but its amazing how mobile the industry has become despite its complexity. Like the computers themselves, manufacturing equipment in this sector is reckoned to have only a four or five year lifetime before becoming obsolete.’
China, predictably enough, is expected to absorb much of the increase in high tech manufacturing over the next few years – though Eastern Europe, Turkey and Russia might have a role in the bulkier, lowervalue segment. In time, port congestion and, perhaps, increasing freight costs due to lack of return traffic might just take the shine off China’s competitiveness but that is unlikely to happen for a number of years.
If the recession in high tech had one good effect, it was to make companies think about their whole reason for being. Econcom Product & Service – formerly Econcom Distribution – underwent a real change of emphasis. General manager, Stephane Coteur explains: ‘Seven years ago, we were a classic reseller, with stocks of products.’ But borrowing ideas from the US, Econcom outsourced logistics to two specialists and the whole emphasis shifted from holding stocks and moving boxes to giving its customers what they really wanted – IT expertise and knowledge.
The company also invested in ERP software to help the split in activities, without losing visibility of stocks.
‘Obsolescence is one of the most important issues facing resellers, says Coteur. ‘Ten years ago, it wasn’t an issue. Vendors refreshed product once a year, so it was quite manageable. But now the main vendors change their machine designs every two months, so it’s become a major issue for classical resellers owning inventory.’
While the home and small office user can decide to avoid upgrading his or her machine, the pressure on corporate users is greater, especially given the constant updates to software.
The price of computers and IT has also fallen. ‘Every time we thought it had bottomed, it fell again,’ says Coteur. ‘Competition is extremely tough and margins are low. One advantage of outsourcing logistics is that at least this cost element is variable.’