With the accession of many eastern European economies to the EU, trade is set to increase exponentially in this region. Not only will the domestic economies prosper, but it is anticipated that many more multi-national manufacturers will relocate their production facilities from the developed western economies to this low cost and increasingly highly skilled region. Heading this trend has been the hi-tech industry, which has already embraced this move to the developing regions of Eastern Europe as well as the Far East.
Such developments in manufacturing strategy are apparent for both Original Equipment Manufacturers (OEMs) and Electronics Manufacturing Services (EMS) companies and are, in part, seen as a reaction to the general downturn in the hitech industry and the need to improve supply chain efficiency.
Whilst core activities such as research and development, initial testing and pilot manufacturing remain in the west, mass production of generic product in the east is growing at a significant pace.
The commercial benefits of such strategies are well documented and include: lower employment costs; attractive set-up or ‘sweetheart’ deals; tax incentives associated with Free Trade Zones allowing manufacturers to avoid duty and value added taxes; and the potential for market growth in the actual regions themselves.
The great conundrum
Inevitably such change continues to have a major impact on the overall supply chain. Manufacturers must grapple with the conundrum of greater distances between their core manufacturing base and end customers and an increasing demand for customised products. The ever-shortening lifecycles of such products merely adds to the complexity; today, the standard lifecycle of a PC hard drive for example, can be counted in months or even weeks, rather than years.
To prosper in this complex arena, manufacturers have started to look at developing an integrated supply chain strategy. This includes aligning manufacturing processes with the more traditional logistics processes of transportation and warehousing and involves the development of final assembly and configuration centres within the region of consumption.
These centres receive generic products from the manufacturing base and manage the final assembly and customisation of the end product only at the point of customer order. The benefits of this include: significant reduction of inventory holding; decreasing the number of obsolete products in the supply chain; and increasing the speed to market for products.
Whilst this process in itself is not a new phenomenon, the emergence of third party logistics (3PL) organisations in this arena is now becoming increasingly commonplace as manufacturers collaborate with their logistics provider to align supply chain processes to maximise benefits available.
The typical services currently being offered by 3PL’s within this service field, include:
- Secondary manufacturing – just-in-time preparation or integration of semi finished product before it is shipped to the distributor, dealer or end user.
- Configuration, including ‘localising’ a product for a given marketplace – configuration activities include ‘localising’ where a product is adapted to make it country specific and ‘customised’ to make it customer specific.
- Quality testing and product screening – the testing of product against agreed test scripts from OEMs to ensure 100 per cent compliance to manufacturers’ standards and to protect the brand reputation.
- Rework projects – providing short-term upgrades or modification capacity for medium to large volume products often found as a result of screening activities.
- No Fault Found Screening – testing product returns for faults before sending off to repair vendors
- Repair and refurbishment – repair or refurbishment of products as part of the after-sales service.
Technical service operations
Across Europe, Exel works closely with several leading technology customers to deliver technical service operations. One example has included the development of a centre managing the assembly of high-end laser printers, repackaging of inkjet pens and kitting of tape drives. More than 15 production lines are in operation, ranging from high speed, almost fully automated lines to low volume manual lines. Exel works on a variable price per unit and is therefore continually pushing to improve the process.
Structural improvements, such as designing new production lines which are more efficient, redesigning the warehouse flows, producing units just before they are shipped, organisational improvements and different personnel policy, has led to enormous benefits including streamlining and speeding up the processes. Many of the changes have been developed by Exel and drawn from other areas of the global business, where they have been seen as ‘best practice’.
To keep costs down, low stock levels are maintained. This highlights the continued trend within the hi-tech sector of a move toward integrated ‘build-to-ship’ centres rather than ‘build-to-stock’. And this is where a committed 3pl can play a significant role.
In Belgium, Exel has developed a service centre for another technology customer to provide assembly, configuration and testing of tape streamers, CD-ROMS and DVD’s for the core western European markets. The ‘value add’ of such technical services can be extended to include the quality testing of product prior to despatch. Such testing, done at batch level, ensures suppliers conform to manufacturer requirements prior to delivery to end customer and mitigates the likelihood of Dead-On-Arrival (DOA) instances and associated costs of return logistics.
Once the product has reached the end customer, problems can and do arise. Returns management and reverse logistics can cause significant commercial and logistical headaches for any organisation. This is about to get worse for many hitech manufacturers with the legislation that will fall out from the WEEE Directive and subsequent requirements for manufacturers and retailers to take responsibility for their products ‘from cradle to grave’ including collection, processing and disposal.
In March 2003, the WEEE legislation became effective, giving all EU member states 18 months to adopt this policy into their national law. In December 2004, the Directive will become effective, meaning that waste that has previously been classified as WEEE will become the individual producers’ responsibility with the producer needing to finance this process from September 2005 and meeting all designated recycling targets by September of the following year.
Such legislation will burden these organisations with increased costs; the integration of technical services within the reverse supply chain may, however, reduce this burden.
The traditional approach to reverse logistics involves engineers or end users returning product to a central point – this can be a regional, country or theatre facility. Here categorisation of product and distribution of the faulty item to a designated repairer, via road or even air transportation, is effected prior to its return to the sales channel.
But repair costs can be high, especially for a product that has only minor faults, and the additional transportation element to and from repairer can further increase overall costs.
By adding screening centres into the process prior to repairer involvement, significant benefits can be realised. Integrating refurbishment and repair processes in the same location as the screening centres takes the concept further. When returns are received direct to the distribution centre, operatives can screen the product and categorise in one of four ways: no fault; refurbishment required; repair required; and beyond economic repair.
If no fault is found, the item can be returned directly to the customer without the costs involvement of a technical repair crew. In some instances no technical fault is found, however a small amount of refurbishment is required – this may be cleaning, repackaging or minor repairs that can be managed at service centre level prior to dispatch to the customer, or in repair situations, the item can be forwarded to an authorised repair agent.
The screening and refurbishment process not only reduces transport and repair costs within the supply chain (typically 40 per cent overall), but increases the speed at which product is returned to the market with subsequent benefits of reduced inventory holding and improved customer service to the end-user.
In conclusion, the integration of technical services into the traditional processes of the hi-tech supply chain can offer significant benefits to organisations looking to further improve their supply chain efficiency in both the pre and post sales channels. Logisticians with screwdrivers are fast becoming a common sight!
Jonathon Breden, director of product development, technology for Exel can be contacted via email at Jonathon.firstname.lastname@example.org
- Whilst core activities such as research and development, initial testing and pilot manufacturing remain in the west, mass production of generic product in the east is growing at a significant pace.
- In March 2003, the WEEE legislation became effective, giving all EU member states 18 months to adopt this policy into their national law. In December 2004, the Directive will become effective.
- By adding screening centres into the process prior to repairer involvement, significant benefits can be realised. Integrating refurbishment and repair processes in the same location as the screening centres takes the concept further.