As supply chain management challenges go, running an electronics industry supply chain may be the business world's equivalent of playing in the extreme sports leagues. For these players, the challenge is to run lean— unburdened by inventories of components for products that could become obsolete in a flash—and to do that without sacrificing reliability. The industry's penchant for sourcing in far-flung locations doesn't make it any easier. Without stocks on hand, how can you possibly guarantee the just-in-time delivery of parts that are produced 10,000 miles away up a dirt road in China?
In the last few years, one popular method of dealing with this dilemma has been to hand off the challenges and risks to someone else, namely the supplier. Under a strategy known as vendor managed inventory (VMI), suppliers of parts and components retain ownership of that inventory up until the moment it's needed, often locating supply depots right next to the manufacturer's facilities. It's ideal for the manufacturer—which gets what it wants almost the moment it needs it—but it's not a great proposition for the supplier, which is forced to assume the burden of juggling inventory ordered vs. inventory needed.
Of course, that's not to imply that all companies using VMI are gleefully handing off inventory responsibilities to their suppliers, then running as fast as they can in the other direction. Some, like electronics manufacturer Solectron Corp., have taken a very different tack. For Solectron, which manufactures components like printed circuit boards and routers and assembles PCs and cell phones, getting lean has meant getting more, not less, involved in the part of the supply chain controlled by its suppliers. Solectron's philosophy is that it makes sense to minimize inefficiencies for suppliers, since they are a crucial part of the supply chain too. It has also managed to move toward a change in mindset about internal processes—bringing manufacturing and distribution together as a whole, treating manufacturing and logistics as part of a seamless process.
Solectron plays a pivotal role in the brave new world of efficient electronics distribution. The Milpitas, Calif.-based company counts among its customers such high-tech giants as Cisco Systems (13 percent of sales), Nortel, Hewlett-Packard, Ericsson and IBM, which all outsource production to Solectron to cut their own costs. Solectron operates around 60 manufacturing plants around the world and deals with more than 3,000 suppliers globally. "We have parts coming at us from all sorts of countries. From a supply chain perspective, keeping visibility of where our stuff is all the time is difficult," says Jim Molzon, Solectron's vice president of customer fulfillment and global logistics.
Beyond VMI
VMI wasn't providing Solectron with the kinds of efficiencies Molzon wanted, and so in the summer of 2003, the company commenced a "lean supply chain" initiative that focused on streamlining both the supply chain and manufacturing operations. The process is effectively taking Solectron out of VMI and into a supply chain where no one's trying to shove responsibility for anything onto anyone. It also, ultimately, benefits the end customer, Molzon says, by improving operations all around.
"Instead of carrying inventory just in case, we're working very closely with our customers, anticipating their requirements, and we're working with suppliers to create more of a pull environment," says Molzon. Allowing real-time information about real consumption to pull inventory through the supply chain rather than producing parts on the basis of far-ranging predictions and then pushing them into the manufacturing process is, of course, not a new idea. But it's hard to do, and it's particularly crucial in the electronics industry where delivery times on some components run as long as 45 to 60 days and the products they go into may become obsolete in the same period.
Molzon wanted to create a "pull environment" by getting information to suppliers about what Solectron's needs actually were, rather than relying on forecasts. "Forecasts are important, but the actual physical movement of components from suppliers to our manufacturing plants is more based on actual consumption," he says. "We historically had forecasts and brought inventory in on the basis of those. If demand changed, you had too much or not enough."
Molzon says he's working on "fundamentally improving the supply chain." Forecasts, Molzon says, would try to predict demand 26 weeks from now, rendering them less than perfect.
"Part of it is getting information out more quickly, but it's more about getting information out about what the actual demand is—what did we produce yesterday? What are we going to produce in the next week?"Molzon says.
All the same, for Molzon, working with suppliers to get a leaner supply chain going meant one very important thing had to happen first of all—getting his own house in order.
"The tack we took in [the] first six months was internally focused, getting our own operations lean, getting our facilities so they could act in a lean fashion. Then the supplier initiative has been in the last nine months or so."
The next step was to pick his battles. "We're working with our key suppliers initially. We can't dedicate our resources to all of them, but with the key suppliers we have initiatives for better communication."
It's an evolution, not a revolution, Molzon says, and it doesn't mean Solectron is taking back all the responsibility for getting inventory right. "At the end of the day, there has been a pushing back onto the suppliers." But Solectron's version of lean is so collaborative that Molzon no longer considers the term "VMI" applicable. "It's a different approach to working with the supply base, making us and them much more responsive to needs in the marketplace."
Knowledge is power
These days, Molzon is working with suppliers and other partners in the supply chain to get a more realistic overall estimate of the landed cost of goods. Logistics costs typically are "baked in" to purchasing estimates, instead of being kept separate. "[Estimates] used to be based more on labor costs and the intuitive idea that it must be cheaper in China," Molzon says. "We're moving now to looking at logistics costs, duty and taxes, and we're looking at the overall duty structure, taking the entire supply chain and incorporating all the cost drivers, not just the easy ones, to find the piece cost rate."
Katherine Smith, global division representative at Costa Mesa, Calif.-based Interliance LLC, a management consulting firm specializing in foreign trade, agrees that this kind of analysis is helping change supply chain practices.
"Predictability through technology is developing into a must-have for global manufacturers in order to make the right choices. For example, if a large order comes through to a manufacturer in China and must be turned around, then shipped off to an assembler in Romania, and then to a packaging facility in Mexico for final distribution out of Irvine, California, what kind of costs are accumulated?" Smith asks. "Forecasting these puzzles in order for a company to save in operating costs is taking a primary role in the bigger picture of manufacturing and distribution."
However, what works for Solectron isn't necessarily going to work for all electronics manufacturers, Smith points out, and VMI is by no means dead. "Manufacturers and distributors can't wear a one-size-fits-all solution for their supply chain and must instead customize and take pieces from the processes that work best for them."
One way or another, manufacturers need to take ownership of what's going on in their extended supply chain. "Manufacturers are ultimately responsible for the quality of the inventory delivered to the distributor," says Smith, "and this puts the pressure on them to tightly rein in the supply chain."
Depending on who you talk to, VMI is either the way of the future or a scourge visited on hapless suppliers. To a customer that has managed to shift the ownership and responsibility for managing inventory to its suppliers, VMI probably looks like a pretty good deal. But to a supplier burdened with the costs and responsibilities of managing and replenishing its customers' inventory, it probably looks more like a headache.
Is there a way to make VMI work for both parties? GT Nexus Inc., the logistics technology firm in Alameda, Calif., has done some research on that question. The company recently released a white paper in conjunction with the Electronic Supply Chain Association (ECSA) that contained suggestions about how the electronics manufacturing industry could continue to reap the rewards of VMI by working more cooperatively with suppliers.
According to the white paper, the trouble is that many of the decisions a manufacturer makes about sourcing come from the purchasing department, without consultation with the logistics guys. This creates a fundamental conflict of interests. "Low cost, global sourcing is driven by the procurement organization and aims at cost of goods sold (COGS) reduction, at the expense of higher transportation cost and leadtimes. Conversely, VMI's champion is the supply chain organization, striving to gain operational efficiencies, based on short and frequent replenishment cycles. At first glance, these trends certainly seem hopelessly at odds," comments the GT Nexus/ESCA report, released in November 2004.
It's a tricky knot to tease apart. But at least the logistics department can work on lessening its share of costs by working with suppliers, the report says. In that spirit, it offers the following suggestions:
- Take advantage of technology that enables users to obtain more detailed tracking and tracing information on individual parts. That way, goods in transit become part of the counted inventory in a "virtual warehouse."
- Buy global freight services across your company's total transportation volume, sharing those rates with the VMI suppliers when they move the inventory.
- Track total logistics costs, including the leg involving the VMI supplier, and share and minimize these costs between buyer and supplier.
