As any manager working in the electronics industry knows, the supply chain loop offers all too many opportunities for short circuits. Whether they deal with tiny electronic components like computer chips that go into other products or finished products for consumers,like PCs and peripherals,manufacturers and distributors in this field face daily reminders that even a minor slipup can translate into a major hit to their company's profitability.
There are several reasons for their edginess. To begin with, they have to keep the inventory moving. Nowhere is profitability so closely tied to the rapid movement of inventory than it is in electronics manufacturing and distribution.
Next, they're expected to add value, lots of value. Conditioned by the likes of Dell, consumers have come to expect highly customized products for delivery within days of the order. That means assembly at the 11th hour—most likely somewhere in the distribution process.
Then there's the challenge of coordinating the deliveries of components from multiple suppliers. The greater the number of players involved, of course, the greater the chances for disaster. And with complex electronic equipment, there are bound to be a lot of players.
Distribution at warp speed
With their notoriously short shelf life, electronic products are almost as perishable as food products. The latest models can command a premium price, but usually not for long.As soon as competitors catch up, prices plummet. Clearly, the pressure's on to get products out the door as quickly as possible.
Rapid technological advance also means rapid obsolescence. DCs that don't move electronic products right out may find themselves sitting on a pile of nearly worthless inventory. Many an electronics manufacturer has been stuck with millions of dollars in inventory that can only be written off. Some never recover.
"Inventory has become the hot potato of the electronics industry," says Rob Cushman, a senior manager with Accenture, a consulting firm whose clients include semiconductor manufacturers, PC manufacturers and wireless communications providers. To keep from being caught with that hot potato, managers like Bill Apel, director of distribution for computer manufacturer Systemax Inc., are substituting information for inventory. "With real-time information, we can cut our safety stock levels," he says. "This reduces our investment in inventory and improves our delivery service to customers at the same time."
The ability to "see" inventory in the supply chain lets companies shift products or components to where they're most needed. It's not at all unusual in the electronics industry for routing changes to be made while inventory is intransit. The greater the visibility, the easier it is for DCs and other supply chain players to adjust inventory flow for maximum profitability.
The push to add value
Distribution of electronic products is much more than storing and moving boxes. In this industry, DCs routinely handle some assembly and manufacturing. "In electronics distribution, the ability to perform value-added services is very important," confirms John Davies, co-founder and vice president of marketing for Optum, a provider of supply chain execution (SCE) software."
"People look to us [for] customization," reports Jim Smith, senior vice president of operations at Avnet, an electronic component distributor."They are looking for us to perform very specific services." These run the gamut from straightforward inventory management and parts "kitting" for assembly operations to more complex steps such as build-to-order manufacturing and programming. At Avnet's DC in Chandler, Ari z., for example, electronic chips are often diverted to special areas where they will be custom programmed to meet individual customers' specifications.
Accenture's Cushman does not expect the trend to slow anytime soon. In fact, he expects the opposite. "We see the need for value-added services increasing in coming years," he says.
A matter of coordination
Then there's the coordination challenge: Pressed by demands to cut costs without sacrificing service, more electronics companies today are outsourcing various tasks to supply chain partners that can do it for less. That has the effect of spreading responsibility for order fulfillment through the supply chain—a trend known as distributed order fulfillment.
But somebody still needs to manage the process, says Cushman. "As more functions get outsourced in an effort to reduce costs, the ability to execute involves multiple partners and multiple systems." Most companies look to software as the answer. "The ability to make this model work depends on having a distributed order management and transactions management system that can sit on top of this model and provide visibility and execution coordination for all parties involved."
Keys to success
Though the challenges may vary somewhat from company to company, most electronics industry players agree that success depends largely on the following:
Jim Smith knows now that it was a big mistake. When his company, electronic component distributor Avnet, installed data-transfer technology in its Chandler, Ariz., DC several years ago, it opted to take standard software (in this case a package from Optum) and modify it to fit the facility's existing processes.
He would do things differently today. "After we implemented the new system, changes in our business forced us to go back and change the software," says Smith, the company's senior vice president of operations. "Modifying custom software is very time-consuming and often costs more than you'd expect. If we were doing it all over again, we would modify our existing business processes to fit the software, instead of the other way around."
Another disadvantage of customizing software is that you then have to customize the training manuals and support documentation, making it tougher to train multiple users, Smith continues. Then there's the dependency issue: Using custom solutions can make a user company too reliant on one individual who knows the solution well. "The more you depend on that individual," he says, "the more problems you will have if he or she leaves the company or is reassigned to another internal position."
To others about to embark on a digital adventure, Smith recommends working closely with the software vendor. Many times, vendors will upgrade their standard software offerings to meet the customer's needs, he reports. "Software that requires customization today may be the vendor's standard offering tomorrow," he says. "Software vendors are very receptive to hearing about a customer's future needs. In a sense, users are the vendor's research and development center."