Archive for November, 2005

While at the Electronic Supply Chain Association’s (ESCA) Winter Symposium, I heard two themes repeatedly. They were China and Visibility.

Regarding China, I sensed an interesting change in everyone’s perspectives. The general concensus now is that if you’re just going to China to reduce costs, think again. China’s rates are increasing (still way below other markets), but when factoring in the logistics, transportation and other costs, the cost differential isn’t what it was a few years ago. In addition, managing operations in China is difficult. While there’s an enormous resource pool for manufacturing, there are actually too few critical management resources with the knowledge and experience needed to manage operations. They’re almost a victim of their own success. Does this mean people won’t or shouldn’t outsource to China? Absolutely not. But, the message was that there are new complications and issues and you need to think them through before making the leap.

On visibility, there seems to be this incredible appetite for visibility especially given all of the outsourcing that is taking place. Visibility directly relates to control and, thus the lack of visibility means a lack of control for the OEM/brand owner. However, the opposite is not true. Visibility alone does not automatically allow you to regain control. I’ve talked to many people that have shared stories of “information overload” and “noise” from sensing. Without appropriate tools to actually leverage the visibility to drive action, the results don’t follow.

An executive from Flextronics followed my presentation and echoed this notion. He talked about the need to leverage the human capital and ensure that you are empowering front-line decision makers with the tools they need to be responsive. Couldn’t agree more. To do so requires visibility, but visibility alone does not automatically make faster and better decisions a reality.

By Doug Colbeth, president and CEO

Everyone knows there’s been an incredible push to outsource manufacturing over the last couple of years. The push to reduce costs to increase competitiveness in a highly demand driven world has been the driving force. Companies have been evaluating their core competencies with greater scrutiny than ever so they can focus on them and outsource the execution of everything that doesn’t rank as a core competency.

For manufacturers, this has created a clearer distinction between brand owners and contract manufacturers. Brand owners view their core competency as sales and marketing over the actual manufacturing of the products, something they have substantially outsourced to contract manufacturers. In doing so, however, they have had to develop extended supply networks comprising partners that now manage the day-to-day execution of these tasks. While this has taken place, customer expectations and competitive options have continued to increase with no end in site. This creates a significantly more complex “virtual company” for the brand owner to manage–a company that still retains full accountability for performance in the eyes of the customer.

In order to achieve the full benefit of outsourcing, the virtual company needs to execute better than before. In other words, the focus on the brand owner’s core competency should actually strengthen the brand’s appeal in the marketplace. While this sounds obvious, I see many brand owners struggling with the lack of control and visibility inherent in the newly created extended supply network.

We’ve worked with a variety of global leading brand owners–Agilent, Teradyne, Lucent, Network Appliance (NetApp), Casio, Toshiba, to name a few–who have recognized that the ability to effectively manage the extended supply chain of a virtual company is essential to realize the benefits of focusing on your core competency. And, in this highly volatile and rapidly moving global marketplace, the ability to respond quickly and effectively to ever present changes is at the core of their ability to successfully achieve the desired results. While it is no longer the case that they manufacturer everything internally, neither is it the case that they can outsource and focus on their core competencies without the means to ensure success of their extended supply network. Visibility and control are essential for brand owners to deliver results, and developing skills in responding to change are at the heart of being in control.

Jennifer Read at Technology Forecasters, Inc. has a piece in EMSNow talking about supplier relationships, in particular the relationships between OEMs and EMS providers. In it, she talks about the number one reason why OEMs don’t outsource–loss of control (I talked about this in yesterday’s post here).

It’s a good piece with some good insights and suggestions for improving these critical relationships.

The folks at Industry Directions have just announced the results of research they have done on electronics companies and the challenges they face when outsourcing. The research was done in collaboration with the Electronics Supply Chain Association (ESCA).

The study finds that one of the biggest challenges electronics OEMs face when they outsource is the loss of visibility. I’ve certainly heard this repeatedly with the OEM’s I’ve talked to. But, more importantly, the loss of visibility translates to a loss of control. And, despite the fact that they have outsourced much or all of their manufacturing, at the end of the day, they are still accountable for results to their shareholders and customers. So, a loss of control creates a major challenge in terms of meeting your objectives.

This issue of visibility was a core theme at the ESCA conference where I spoke in San Jose. One of the points that I made, though, is that visibility alone is not enough. Many people believe that if you just give your people visibility all the problems will be solved. While visibility is certainly a required capability, it alone is not enough. These same front line decision makers need tools to actually drive action from the information that visibility provides. Without tools to collaborate and detail various action alternatives, taking into account a complete understanding of the impact of any action on the key metrics that the company is measuring, you still have people with a lot of information and no clear path to take the right action.

While outsourcing can drive cost savings, it does introduce a lot of operational challenges. Visibility is a key to solving them, but it alone is not enough.

IndustryWeek is reporting that AMR Research has published their annual list of the top 25 supply chains. Heading the list for the 2nd straight year is Dell.

According to AMR, faster to market and less inventory are keys to successful supply chains

I’m going to be speaking at the Electronics Supply Chain Association’s (ESCA) Catalyst 2005 Winter Symposium in San Jose, CA on Tuesday. If you’re going to be there, stop by and introduce yourself. The event focus on topics of concern to electronics OEMs and manufacturers. In particular, the conference focuses on the constant state of change that the industry faces. I’ll be speaking on how companies can turn their ability to respond effectively to this change into a competitive advantage.

Michael Bittner has written another good article at Technology Evaluation Center (TEC) entitled “Using Visibility to Manage Supply Chain Uncertainty (free registration required).” In the article, Michael details the importance of visibility on your ability to manage uncertainty.

Visibility is a critical foundation to be able to respond to uncertainty and volatility. But, as I’ve written before, visibility is not enough. Too much “sensing” without proper “response” capabilities in the hands of your front line decision makers will ultimately lead to “noise” and won’t drive the desired results.

So, visibility is really a feature that, when combined with other capabilities, can help the organization respond effectively to change. But, visibility alone can not do this given the complexity of issues related to determining the appropriate response to uncertainties in demand, supply, capacity and product.

Michael Bittner has written a good article (free registration required) entitled “Supply chain management is evolving toward Interedependent Supply Networks” over at Technology Evaluation Centers (TEC).

One of the key things Michael talks about is the need for greater sharing of information and collaboration amongst supply partners. I’ve talked to several customers in the last week or so where this theme has been core to the discussion (one customer talked about the need for a “glass pipeline” of information).

Contract manufacturers need this between them and their suppliers to be more responsive to change. OEMs actually need it more in some respects because they are now responsible for managing a virtual company that includes suppliers, 3rd party logistics providers, contract manufacturers, etc. So, while they may not directly execute these functions, they are still the ultimate point of accountability to their customers. The only way to effectively manage this complex network of partners is to provide key decision makers with a glass pipeline of information and the proper tools to respond effectively to the myriad of changes they are getting hit with every day.

I was talking to a major telecom equipment provider yesterday who, like many companies, outsources much of its manufacturing to leading EMS providers. We got on the topic of coordination between the OEM and EMS providers. They observed, correctly, that things have gone from one extreme to the other and the reality seems to be that striking the right balance is required.

The extremes are - originally everyone manufactured their own products and had full control over operations because they were both accountable and responsible. The other extreme was that companies started to outsource and some took the mentality that “its not my problem anymore” and relied on their EMS provider to produce and meet expectations.

The reality is somewhere in the middle. Yes, outsourcing places requirements on EMS providers and, rightfully, OEMs expect them to deliver and be accountable. But, the reality is that OEMs are now becoming “virtual companies” that have extended supply chains - much of which is outsourced. While this is true, the responsibility to the customer and their shareholders remains with the OEM.

In order to succeed in this environment, OEMs need control and visibility to respond to changes. Likewise, EMS providers need the same thing since their getting directly hit with their own set of unexpected changes and then getting them from their customers. To achieve this balance, each company needs to have the right information in the hands of the key decision makers throughout their organizations. Only by striking this balance can such an outsourced relationship thrive.

Symphony Consulting just published their Q4 newsletter (free subscription required) with an article entitled “The flexibility con game.”

It’s an interesting perspective talking about the flexibility agreements that OEM’s and CM’s typically strike.

Of course, one of the biggest challenges for complex, outsourced supply chains is understanding whether or not you can actually meet the flexibility agreements. The ability to simulate whether the supply chain is really equipped to flex is essential to striking such agreements and understanding what your options are at any point in time. And, of course, you must be able to rapidly respond to changes when the need to flex does occur.