When the electronics industry booms, so do the fortunes of the distributors that supply manufacturers like PC makers with the parts they use: microcontrollers, memory drives, power supplies and optoelectronics. But the corollary holds true as well: When sales in the PC and aerospace industries slip, it's the suppliers who feel the crunch almost immediately, glumly watching their earnings slide as their customers crank up their demands.
That's tough for those on the receiving end. As suppliers like Avnet Electronics Marketing have learned, many of their customers equate tightening their belts with tightening their inventories. That means they cut their own stocks to nothing—or nearly nothing—then demand that their distributors fill their orders at warp speed. At the same time, they place smaller orders and do it more frequently. Some customers now order the same part two or three times a week—and large customers will order a part two or three times a day, reports Jim Smith,senior vice president and director of operations for Avnet Electronics Marketing.
Because they carry virtually no safety stocks, Avnet's customers cannot give suppliers much leeway on delivery. Smith says that to win a "qualified supplier" designation with many of its customers, Avnet must guarantee delivery within a window that stretches from what he calls "three days early to zero days late." The window shrinks even further if you want to be a "preferred supplier," he adds.
Of course customers expect that speed with no sacrifice in accuracy and no increase in cost—a demand that's forced suppliers like Avnet to focus hard on their productivity levels. "Our challenge is to take the standard eight-hour work day and make it look like 16," Smith wryly observes.
Given its customers' reluctance to hold inventory, Avnet also has to make some tricky forecasting calls,balancing the risk of stockouts against the risk of getting stuck with inventory that could become obsolete virtually overnight. It has little to go on when creating those forecasts: In the electronics industry, historical data are not necessarily the best data for building forecasts."Looking in the rear view mirror while driving 80 miles per hour is unhealthy," Smith asserts. "We com bine historical information with customers' forecasts. We collaborate with suppliers to build forecasts. That way we're able to look at lead times and trends and make informed decisions.On the customer side, we're trying to work with customers to assure that the product sets they choose are easily available."
So far, at least, the company has succeeded in maintaining that delicate balance. The Electronics Marketing group, which is the largest operating group of Phoenix, Ariz.-based Avnet Inc., reported $5 billion in revenue in the fiscal year that ended in June.The group's core business is distributing semiconductors, interconnects, and passive and electromechanical components to electronic original equipment manufacturers, contract manufacturers and other businesses in 64 countries around the world. It currently serves more than 50,000 customers in the aerospace, military, industrial control and instrumentation industries, among others. Avnet is becoming increasingly active as a distributor of electronic components in the automotive and small appliance industries as well.
In the last few years, Avnet has been diversifying its business model, expanding beyond distributing electronics parts. Today, it provides other services, including engineering and design support as well as providing a lot of physical value-added services, Smith says. "We'll modify products to fit a customer's bill of material or identify it for processing in their plants. About 70 percent of our product goes out of the DCs modified in some way."
On the move
Faced with these challenges, Avnet Electronics Marketing's made substantial changes in its distribution operations in recent years. Where it once had 22 DCs, including six large centers, the group now operates 14 facilities, with two major locations. The two major locations are a 440,000-s quare-foot facility in Chandler, Ariz., and a 200,000-square-foot DC in Dallas. The Chandler facility has 326 employees, while the Texas operation has 356. Despite the added freight costs resulting from longer lengths of haul, Smith reports that centralizing operations has allowed the company to cut the cost per transaction by a considerable margin.
Those large facilities require sophisticated management systems. The Chandler facility, for instance, has 80,000 SKUs and processes 10,000 line items a day. The smaller Dallas DC has 50,000 SKUs and processes 5,000 line items a day. That volume and the small margin for error create enormous complexity.
To manage that, Avnet implemented the MOVE warehouse management system from Optum—a big departure from what had formerly been a largely manual operation. The WMS has been orchestrating operations in the large DCs since January 2001, when it was fully implemented.
Under the new paperless system, bar-code readers track inventory throughout the DC. When inbound products arrive, the system directs put away to take full advantage of cube within the DC. On the outbound side , the sys tem sends information to a wireless radio-frequency (RF) device. It has also helped keep picking tasks manageable: "With more than 400,000 square feet, the picks per order could be excessive," Smith says. "The system allows split picks independent of orders, which we aggregate on the outbound."
The process has proved so accurate that Avnet's been able to eliminate physical inventory counts. That's made everybody happy, Smith says. "When we had to do physical inventory, it took four months.We had to shut down product lines one at a time for 10 days. Now that we've eliminated the physical inventory, customer satisfaction has increased because we don't have to shut down operations."
In the bag
How does a typical order move through the system? Scott Garrett, director of warehousing operations, provides a rundown. "Once an order is entered in the mainframe, it goes through a number of checks," he says."When all those gates are passed, it's then downloaded into the WMS. The system tells the operator the location, then confirms the location. The operator scans the "license plate" bar code on the box and the system says to pick X number of parts and put the balance back on the shelf."
Small parts are placed in a bag, which is then sealed. The system automatically prints out the unit container label. That label includes the purchase order number, the part numbers and the quantities. The bag then goes into a tote. "The license plate in the bag is married to the license plate on the tote," Garrett explains. The tote is then routed to the next location, eventually making its way to a direct ship, aggregation or special handling area.
The system walks the operators through the packaging requirements. A shipping label generated by the system is automatically applied, and finally the shipment is diverted directly to the back of a truck.
"We have just over three miles of conveyor system in the building," Garrett says. (The conveyor system was designed and installed for Avnet by material handling consultants Fortna.) "All the picking locations feed into a main distribution loop. Once an order goes into packaging, it goes through a second distribution loop."
Garrett says that receiving activity, which follows a similar process, begins at 5 a.m. in the Chandler DC. License plates are applied as goods are received, and then the WMS takes over to direct putaway activities.
"When we open the DC in the morning, we have no idea what's coming our way," says Smith. "We receive 3,000 to 4,000 shipments a day, which may come in with unique demands for receiving, picking and reshipping." Yet its customers still continue to push the envelope: Avnet recently received requests to extend the shipping day, allowing customers to order later and still get quick shipments. The distributor was able to respond to that demand, Smith reports. Orders now can arrive as late as 6 p.m. and still meet cutoffs.
In fact,the system enables Avnet to turn inventory quickly, with a large portion of inbound goods being shipped the same day. But speed isn't everything; the system must be flexible as well. Garrett reports that the system meets this requirement, allowing the DC to shift order priorities on the fly. "We can make a hot order the next pick in the warehouse," he says.
Smith believes the new system gives his company a huge competitive advantage. "We can turn products extremely fast," he says. "Under the old way, we were lucky to find the packing slip. This system allows us flexibility by sequencing orders based on business rules we've put in place. If Scott wants to change the rules for a certain set of products, he can do so. It gives us a lot of flexibility."
"The system has helped us improve our accuracy tremendously," Garrett agrees. "The other thing is that we've been able to mine data and capture activity.We can drill down to the individual operator or a particular area. We've coupled that with incentive systems [for employees]. We've linked those together for quality and productivity."