‘It’s phenomenal how fast a PC depreciates,’ says Lonny Warner, vice-president for high technology and electronics at logistics services specialist, Menlo. ‘$10 or even $20 a day is not impossible. You don’t get rich unless you push product through the store.
The high tech supply chain landscape has changed enormously in the past few years. Some of the data management possibilities are awesome and Warner for one is convinced that the age in which manufacturers can get a complete real-time picture of what is on hand from their suppliers, putting them in true control of outsourced activity, is just around the corner.
As head of the newly-created high tech vertical within Menlo, his watchwords are ‘flexibility and scalability’. Supply chain models are changing as we speak. For instance, there has been a trend in recent months toward more final configuration of products by contract manufacturers in Asia. A lot of this work is being done in China. A recent supply chain study by consultants Accenture found new entrants from China providing many products at lower prices.
More and more, the OEMs are telling their contractors: ‘I’ll give you a sales forecast, you fulfil orders and manage transport – and the reverse logistics – and systems. ‘
With multi-client logistics centres and flexible parttime labour, logistics firms are getting to the point where their costs are getting close to ‘100 per cent variable’, Warner says, though he admits that there are countries – in Europe for example – where this is more of a problem.
One interesting side-effect of the quest for flexibility is that the average project size is getting smaller, not bigger. ‘You just don’t need a massive shed in Amsterdam any more. The ability to manage many, flexible locations is far more important now,’ he says.
An interesting parallel to this demand for variable logistics costs is in the production process itself where, according to IBM Consulting’s Colin Leisk, manufacturers are also shying away from minimum contracts in their component buying.
Meanwhile, life expectancy in the industry continues to drop. A typical product can expect nine months during which it is regarded as cutting edge, according to Nokia. The Accenture study found that product lifecycles are getting shorter and technological advances are becoming harder to uncover. ‘First-mover advantage is vital to capturing higher margins and profit,’ says supply chain practice partner Hans von Lewinski.
Lead times from original concept to availability in the shops might be a couple of months for the latest PDA or electronic device but designing the new breed of electronic wizardry is a complex business. Speed with accuracy is the name of the game. This is easier said than done if your PCB supplier is in Thailand, your case-maker in Ireland and your chips and hard disks come from China. How to keep track of what your suppliers are up to?
Product lifecycle management (PLM) software company MatrixOne says that with strategic sourcing becoming increasingly important – and complex – for computer firms, PLM software allows processes to be easily distributed across the internet. Contract manufacturer Celestica, for instance, uses MatrixOne software to improve communications with its own suppliers.
Until recently, the main internet-based activity in IT was the purchasing of basic components but the majority firms’ costs are not in this ‘commodity’ area, explains Jonathan Gable. Rather, ‘80 per cent of the cost is locked into the initial design and it is by improving bidding and the RFQ process that value can be unlocked.’ Another issue in the design process is accuracy and traceability. Traditionally, much of the to-ing and fro-ing between design partners has been by e-mail or fax, ‘but our solution helps keep track of revisions,’ says Gable.
There are signs too that big manufacturers have realised that the supply chain and manufacturing process has become too complex. Sony recently announced a plan to simplify its products, cutting the number of items it uses by no less than 90 per cent.
Colin Leisk, a member of IBM Consulting’s electronics supply chain team, says that it is the producers of business computers that have made the most progress towards collaborative design, and consumer electronics producers the least, with the telecoms firms somewhere in-between. The consumer firms have to some extent been shielded from price pressures seen in other sub-segments of the market.
But, say Peter Lusty and Andrew Yuille, respectively chief executive and marketing director of Strategix Software: ‘People have been managing down inventory so distributors, who work at low margins, have to be hugely efficient.’ Strategix’s OneOffice product can help distributors manage their inventory, for example alerting them that the time window in which they have to return unsold stock is running out.
The proliferation of SKUs in the electronics industry can be mind-boggling. Corby, UK-headquartered RS Components which supplies spares, says that its product range runs to over 135,000 lines. Admittedly, not all these are electronic components but it is nevertheless a potential supply chain headache if it isn’t managed properly, particularly as RS now has operations in 26 other countries according to UK business development manager Keith Swabey. The company operates in places as far afield as Japan and prides itself on being able to deliver anything next day at the latest which means never being out of stock – ever.
UK supply chain manager Sharon Hamil explains that RS Components uses classifications to help predict demand. It also has systems to monitor the rate at which safety stocks are being eaten away. Stock management is further helped by buy-back arrangements with suppliers. Although efforts are in hand to reduce the supplier base, there are still around 13,000.
‘One big initiative we’re working on at the moment,’ continues Hamil, ‘is to reduce lead-time. It helps us and it helps suppliers because they get fewer amendments.’ Average lead time is 12 weeks but RS is looking for two. Stock-holding in Europe has been rationalised, and concentrating some European inventory in the UK has saved thousands of pounds, says Hamil. Obviously, that can lead to increased costs if a customer in another country needs something urgently, but that is a call the company has to make.
Another initiative the company has set up is an electronic purchasing manager that allows a customer to set purchasing limits for individuals within its organisation and sends out an alert if that limit is exceeded. The idea is to automate purchasing and reduce the need to funnel everything through a central buying department, while removing some of the worries about cost control – but without going to the trouble of installing an e-procurement system.
For ServiceSource Europe, which supports the products of a number of computer and peripheral manufacturers, major inventory issues include management of lifetime buys versus obsolescence, inconsistent demand due to frequent product refreshes and the uncertainty in the market due to the effects of excess production or obsolescence. Often, it has to take a decision whether to buy parts now or take a view on whether they will continue to be available. ServiceSource’s John Dalton says that the company has invested in XelusPlan software, designed to ensure service levels are met at the same time as minimising inventory. It is also making extensive use of web-based systems that allow visibility of the whole supply chain and highlight process exceptions.
There are a number of other things companies can do in inventory management. Take consignment stock for instance, which needs a different accounting system than that for stock kept within a company’s own four walls. ‘Keeping abreast of your inventory can be difficult if it’s not in your warehouse,’ says Strategix, whose OneOffice package is designed to cope with this kind of hybrid environment.
Extended, collaborative enterprises are also talking increasingly about the ‘low touch’ supply chain, whereby human intervention is reduced to a minimum. Automated restocking alerts can be fine-tuned and issuing of invoices and even payment can be done electronically. According to Strategix, Aslan already does 95 per cent of its ordering from suppliers electronically.
Spokesman for supply chain software company, Manhattan Associates, John Bird, adds: ‘Before, people looked to what they had in the warehouse but now it’s the whole supply chain. They need to collaborate and exchange information in real-time. That way, you can plan your warehousing better and anticipate what’s coming down the pipe.’
Roy Lee, senior director, EMEA marketing for business process company Sterling Commerce, says it is important for his IT sector customers not only to have control and visibility, but also to be able to make and keep ‘not only their own promises, but also those of their partners’. Visibility rather than mere traceability is the key – the ability to see what could happen as opposed to what did happen.
‘The issue now is having visibility down all these supply chains and linking everything together in a network of networks, says Lee, adding: ‘Another big thing that they’ll have to deal with is RFID. It can potentially provide a much higher volume of data, though this paradoxically is also a problem if it isn’t handled properly. Supply chains can be incredibly efficient at passing too much – or the wrong – data.’
Some of the software applications available today are incredibly powerful but they are no substitute for good human relations, says Craig Kerr, director of PRTM, a consultancy specialising in ‘companies that are in the middle of the supply chain’, including a large number in high tech and IT. ‘Success rates vary in software collaboration but it’s a more complex issue than software availability. Companies buy into the promises of more collaboration but the successes tend to be where people can devote time to making it work.’ While there are systems geared toward the needs of specific industries, it’s rare that anything bought off the shelf will be a perfect match for any one group of users’ specific needs. ‘Also, you still need people to talk to people. There’s no point in having the ability to view an updated plan every 30 seconds if there’s nobody to view it.’
And while it is useful to be able to record changes or to view the consequences of supply chain decisions, that does not necessarily mean that people will act on the information received. PRTM carried out a survey earlier this year that asked companies whether they had taken steps to improve their processes and their systems capability, or both. ‘Those that had improved their processes saw an improvement in performance as did those that had improved both. But those that had only improved systems actually ended up with decreased performance,’ says Kerr.
Increasingly, adds IBM Consulting’s Leisk, companies have appointed preferred suppliers of parts or assemblies from subcontractors which means collaboration has to include these players as well. ‘They have to manage the whole design process around a set of preferred parts – and, increasingly, to do that over long distances.’ The bottleneck very often is integrated circuits, he says. These tend to be product-specific and it can take up to six weeks for a revised sales forecast or a rework decision to be relayed back to an IC producer, mainly because of the number of players involved and the fact that many ERP systems work only in weekly cycles. Recently, though, the production arm of IBM, along with some other computer OEMs have succeeded in cutting that time to around a week.
Another upshot, Leisk adds, is renewed interest in RosettaNet, the electronics manufacturers’ standardised communications protocol used for activities such as ordering, forecasting and invoicing.
The results of creating visibility even over that portion of the supply chain from the OEM to the retailer in the UK can be startling, says Simon Joslin, general manager commercial of New Wave Logistics. Careful design and management of the supply chain can reduce ‘inventory days’; better control and planning of the supply chain help reduce the need for buffer stocks, demurrage costs at import ports and expensive warehousing in western Europe. ‘If you’ve not got visibility from when you produce goods, your warehouses may not be able to receive them and that can result in demurrage costs in port.’ NYK Logistics was able to save one company E1,000,000 in this area alone.
Interestingly, says Joslin, almost all its major supply chain customers have significantly different supply chains from the ones they had just 12 months ago. There has been a marked shift in production out to places like Turkey. Even Russia is getting into areas such as TV or cathode ray tube production.
Over the years, companies have used a variety of fulfillment methods, PRTM’s Kerr continues, ranging from holding stocks of completed systems to holding unassembled components or software and starting the build process only when an order is received. Improved visibility of orders throughout the company has made this short-notice manufacturing concept increasingly viable.
SAP’s business development manager Paul Eggleton adds that Dell, with its build-to-order philosophy, caught its build-to-stock orientated competitors flat-footed and has remained the market leader in many segments ever since.
People in high tech are talking less about leanness, though it can still be an issue. It’s like tidying your office once a year and imagining that untidiness has been banished forever. Invariably, a crisis erupts and before long your desk is covered in heaps of junk. It’s for this reason that many companies are moving away from single supplier sourcing. ‘The benefit of having a fallback often outweighs the extra cost of managing more than one supplier. In other words, agility may count for more in the long term than mere leanness.
The pattern of high tech manufacturing over the past few years has been excess inventory, then recession followed by companies aggressively managing their cost base down – only now to find that, when they want to ramp up production, many suppliers are not in a position to do so.
Stability may return
The supply chain might stablilise as many technologies become mature. Improvements to devices such as PCs may well become more incremental than revolutionary, which would eliminate many issues surrounding obsolescence of inventory. Another vision of the future, hinted at by IBM’s Leisk and others, is of the physical equipment or hardware becoming increasingly standardised and all the clever thinking being in the form of the software programmes. That could bring in chain supply issues of a different sort, such as software compatibility.
But there will always be inventions. Faced with short product life cycles, says SAP’s Eggleton: ‘if you can make collaboration work it would be really good as it’s increasingly hard for a single company to retain all the knowledge needed to develop products quickly’. The OEM might retain overall management with the supplier being responsible for getting components to it within agreed timeframes.
The concept of the original equipment manufacturer (OEM) is mature in electronics and IT, to the extent that the actual equipment may never have been inside the premises of the well known branded company whose name is on the box, says Eggleton. This is becoming something of a political issue, with labour unions and local politicians becoming increasingly vocal about the flight of manufacturing jobs to the Far East and central and Eastern Europe. For instance, says Eggleton, ‘three years ago the UK made 20 million mobile phones a year. Now it’s close to zero’.
It is possible that more firms will retain some manufacturing closer to their markets playing off higher costs against increased agility and responsiveness but Eggleton is not so sure. ‘More sophisticated software to manage any difficulties, RFID and collaborative development systems will enable people to work together, even over long distances.’
Think supply chain and high tech and most people assume that the issues relate solely to megacompanies like IBM or Sony. However, the nature of high tech in many European countries is that many firms in the sector are quite tiny. Vinten Broadcast, for example, produces stabilisation systems for TV cameras. It manufactures in Bury St Edmunds and Costa Rica and has salespeople and customers in almost every part of the world.
The company needed a new ERP system but, after looking at several alternatives including the big names of the industry like PeopleSoft and SAP, opted instead for IFS. ‘We do a lot of e-business, we needed software that could run our entire business. IFS has the best functionality and geographical spread – for example Japanese language; not many mid-market systems provide that,’ says the company’s business systems manager Chris Stanghan.
Unlike many of the other systems considered, IFS was also easy to use for people used mainly to dealing with mainstream software, drastically reducing the training requirement.
Until now, the electronics industry was obsessed with newness, but pretty soon it is going to have to develop an interest in yesterday’s computers and mobile phones. The European end of life waste directive for electronic material – or ‘WEEE’, unfortunately – will force manufacturers to dispose of a proportion of old equipment ‘properly’.
It could open up fresh opportunities for distributors, says Yuille of Strategix. ‘For the distributor, it’s an opportunity to add value because most manufacturers are poorly placed to do this.’
In Europe, the amount of general waste material may be increasing by 11 per cent a year but in the electronics sector it is nearer 30 per cent. Clearly, the greater the rate of innovation, the greater the obsolescence rate (currently highest for mobile phones). However, most manufacturers simply aren’t geared up to handle end of life issues.
In its early stages, the Directive will probably require companies simply to recycle a certain amount of electronic waste based, perhaps, on their output or turnover. But in time, the legislation is likely to get more onerous and the systems used could become more sophisticated, at least for the high-end items – perhaps tracking equipment through a serial number from the factory to the customer and, eventually, back to the recycler.
Accenture’s von Lewinski adds: ‘This legislation requires an effective reverse logistics process and increasingly we are seeing RFID being evaluated as to how it can help track products.’
Strategix believes, though, that, managed properly, recycling material could actually enhance manufacturers’ profit margins, not reduce them. Maybe the gain would be only a half of a per cent or so, but in an industry where three per cent is considered a respectable margin, that could be a substantial boost to the bottom line.
For the moment, though, firms are standing back from investing in recycling operations because they don’t yet fully understand the legislation. Member states are moving at varying paces in implementing Brussels’ legislation into their national legislatures – predictably, the Germans and Dutch are in the lead. The Strategix pair warn, though: ‘People aren’t aware how fast this legislation is creeping up – the first point is in 2004.’