Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
The last time you made an outsourcing decision did you consider the Blizzard of ‘08 in China? Of course you didn’t. Why would supply chain managers have a better crystal ball than the weather forecasters, who didn’t see it coming until it was too late?
Unlike weather forecasters, supply chain managers need to consider the worst case risks of their decisions even if they can’t predict when the risks might occur. If the Blizzard of ‘08 caught you off guard, it says something about your risk management assumptions.
China’s worst weather in 50 years (a series of storms in the past two weeks) has tied the infrastructure in knots, stranding millions of migrant workers who were traveling to visit their families to celebrate the lunar new year, shutting power plants due to delayed coal deliveries, and snarling a rail and highway system already on overload.
As for the impact on the electronics industry, the only evidence is anecdotal. Technology Forecasters consultants have heard stories of lost productivity, delayed shipments (weeks not days), and suppliers not returning calls or emails.
The implication for risk management is clear to Jon Gilbert, TFI logistics consultant and principal of the Gilbert Group:
“When you outsource to a foreign country you’re not just buying the capabilities of the plant, but the whole distribution network in that country, and the infrastructure that supports it. We should not be surprised when we hear about large-scale transportation interruptions in China from this snow storm because their infrastructure is challenged even under normal conditions.”
“Reduce excess inventory,” is the electronics industry mantra when planning supply chains, but the flipside is having too little inventory due to delays caused by weather, fires, earthquakes and human-caused destruction. The challenge is to find the proper balance between the risk of excess inventory and the risk of being caught with none.
At this stage in the industry’s maturity, it is easier to take inventory out of the system than to be more cautious; supply chain managers get incentives for the former, not the latter. At the very least, they need to ask the right questions. Our experts can help.
How do the decision makers in your supply chain balance inventory risks? We’re interested in hearing from you.
With the dollar weaker than it has been in years, is there any reason to consider Central and Eastern Europe for outsourced electronics manufacturing?
There is: Although each outsourcing decision ought to be made on its own merits, the low-cost nations that once comprised the Soviet Union and its satellites should be considered, especially when the end market is Europe, the way Mexico ought to be considered when the end market is North America.
“Discussion of China versus Eastern Europe seems anachronistic to me,” Charlie Wade, a senior consultant at Technology Forecasters, told the recent TFI Quarterly Forum in San Jose. “The better point of comparison is Mexico to Eastern Europe.”
Wade, who conducted TFI’s recent research, “Outsourcing Trends in Central and Eastern Europe: The Second Wave,” presented the highlights at the Quarterly Forum.
Wade talked to 14 electronics industry executives in nine nations during a tour in October. Another 17 phone interviews with electronics executives rounded out the primary research, which builds on TFI’s earlier research in Europe.
Like any region, Eastern Europe has its issues. Among them: Cost competitiveness, supply of skilled labor, corruption and protection of intellectual property, local management skills, language differences, and the regional infrastructure.
Nonetheless, Wade concludes in the report: “After analyzing the many factors that define each European country’s competitiveness, it becomes apparent that Central and Eastern Europe together with the Baltic States are positioned to become the manufacturing center for the continent, serving the business and consumer markets for all of Europe.”
He says the region is “poised for growth” citing such features as direct labor and facility cost lower than Western Europe, locations central to the European consumer market, a growing consumer population itself, appeal to foreign investment, government support, modification of local laws, and improving infrastructure.
For his specific recommendations for EMS companies, ODMs and OEMs, be sure to read the report. (TFI’s Outsourcing Navigator can help you make sourcing decisions.)
As always, we’re interested in your reactions.
Has your company made any New Year’s resolutions yet? If you need some ideas, try one of these offered by Technology Forecasters consultants. Or share your own with us.
Think Lean: In 2008, wherever your company is in its adoption of Lean principles, extend them. If one manufacturing site is already Lean, take Lean to other sites. If all plants are Lean; bring Lean to non-manufacturing operations. If you’re 100 percent Lean, globally and every other way, start applying Lean to your supply chain—pick a key supplier or three and Lean the processes among yourselves.
Go Green: Keeping in mind that Green (the environment) is Green (profitable, competitive, etc.), take stock of your State of Green, and establish a five-year roadmap for eliminating waste and becoming more environmentally efficient, including at least three Green goals to accomplish this year. (We’ll have more to say about environmental roadmaps in the months ahead.)
TCO: This one’s especially for OEMs. Location is everything in real estate, but not in electronics manufacturing. Total cost of outsourcing (TCO) is. With the dollar weak and the price of oil high, TCO is a moving target. Resolve to consider each individual outsourcing decision on its own merit, based on TCO. (Need help with TCO? See TFI’s Outsourcing Navigator).
Rising markets: This one’s for EMS companies. Resolve to investigate at least one new market where outsourcing penetration is still relatively low — medical, defense, industrial, instrumentation, etc.
Outreach: Reach out once a week to a customer, supplier or supply chain expert. This regular effort may help with your own supply chain challenges, create an opportunity to help a partner resolve a challenge and build a diverse pipeline of inputs for a stronger supply chain.
If you’ve got your own resolutions, we’d like to hear from you.
Everyone agrees supply chain risk is a growing issue, but how to manage it, that’s the big question. Douglas Kent, principle at eKNOWtion and senior supply chain consultant for Technology Forecasters, offers a preview of new insights into supply chain risk management soon to be spelled out more completely in a white paper by the Supply-Chain Council (SCC).
Specifically, Kent writes, the SCC’s risk management Special Interest Group will offer a new definition of supply chain risk management as a starting point to understand and mitigate risk. The group has taken a further step by proposing a method for measuring risk. Kent says the SCC expects to incorporate the topic of risk in the next release of the Supply Chain Operations Reference (SCOR) Model — version 9.0 due in March 2008.
As outsourcing grows and supply chains become increasingly complicated, with more partners, leaner operations, shorter lead times, zero inventory and other efficiency traits, they also become more vulnerable to even minor disruptions. With this in mind, practically everyone is thinking about risk these days, as we noted recently.
“Supply chain has a significant impact on the company’s value,” Kent writes in eKNOWtion’s December newsletter. “The ability to measure risk is necessary for us to manage it. The SCC has taken a major step forward in terms of standardizing the definition of SCRM and provides its members for the first time, the ability to calculate Value at Risk and consider this new metric in measuring end-to-end supply chain performance.”
According to Kent, the SCC defines Value at Risk as “the sum of the probability of events times the monetary impact of the events for the specific process, supplier, product or customer.”
The full white paper will soon be available on the SCC web site, and on the eKNOWtion web site.
While we’re on this topic, Kinaxis, a strategic partner of Technology Forecasters, always has interesting things to say about managing risk and disruptions. For example: Its blog of Dec. 13 on how supply chain risk can impact shareholder value.
Statistics don’t lie, but conventional thinking might lead to the wrong conclusions about customer ratings. You tell us.
At its Quarterly Forum in San Jose, California, last week, Technology Forecasters reported the results of the 2007 edition of its “EMS, ODM and Distributor Report Card: Customer Satisfaction Survey.” On five criteria OEMs gave their EMS and ODM partners mostly boring grades – a lot of C’s and C+’s, few A’s and no F’s. The results are consistent with OEM ratings from previous TFI studies.
And, perhaps adding insult to injury, most OEMs did not consider their primary EMS or ODM partner to be “best in class,” except on one of the criteria graded —responsiveness to change.
What shall we make of this?
The results caused a rousing discussion among TFI members at the Forum. One conclusion: OEMs are loath to give their supply chain partners anything higher than average marks because they want to keep the pressure on them to deliver better, faster, and cheaper. Some OEMs represented at the Forum agreed this could be the case.
The grades also prompted an interesting reaction from the EMS folks at the Forum: If an EMS company is getting all A’s, maybe it ought to be paid more by the customer. Think about it. If the EMS is getting C’s, then maybe the effort and expense it is expending is just right. Forget about “delighting the customer” when margins are razor thin. There’s some kind of weird logic to that.
We’re interesting in your comments. Be sure to identify whether you’re from the OEM or EMS side of the equation. Are C’s and C+’s the sweet spot from everyone’s perspective?
On this, the day before Thanksgiving, one thing we’re grateful for is experts who study a topic and reach similar conclusions, especially concerning the future of electronics supply chains. There’s something reassuring in this. Either great minds think alike or we’re all eating from the same bowl of stuffing. You be the judge.
Exhibit one: At a recent supply chain conference in Silicon Valley, Prof. Haul Lee, a supply chain expert at Stanford University, suggested the 21st century supply chain must be agile, adaptable and aligned among partners. Based on his research, he’s been espousing this theme for years, most prominently in a Harvard Business Review article of October 2004 entitled, “The Triple-A Supply Chain.”
(A free version can be found here.)
His analysis: Rising demand and supply uncertainties require agility; shorter product and technology cycles need adaptability, and outsourcing and multiple supply chain partners –customers and suppliers from end to end — require alignment. By “alignment” he means win-win-win arrangements among all partners. “Instead of company to company competition, we are now in an era of supply chain to supply chain competition,” Lee said.
Exhibit two: In a recent blog posting, Kinaxis, a strategic partner of Technology Forecasters, brings to our attention recent research by CAPS Research, A.T. Kearney and the Institute of Supply Management that identifies four areas supply chain managers must tackle in the years ahead: Delivering more innovation from suppliers; contributing more broadly to revenue generation; anticipating and managing supply risk to ensure business continuity, and expanding the breadth and impact of cost management efforts.
Exhibit three: At Technology Forecasters, our own research and analysis strongly suggests the need to extend Lean principles outside the single enterprise and across all supply chain partners. In our judgment this is just starting to happen, and is the direction electronic supply chains must move.
We think there’s a great deal of commonality in these three exhibits. Perhaps they track with your own thinking. While you’re finishing up that turkey and dressing sandwich, drop us a line and let us know.
Quartz Events recently asked 50 supply chain executives what concerned them most. Three topics were top of mind: Lean, green and visibility.
The informal survey, taken in September to help Quartz determine topics for the supply chain and materials handling trade shows it organizes, verifies what the organization has been hearing for sometime now.
“These are three areas I see consistently challenging supply chain executives as they focus on profitability, efficiency, and conscientiousness of our impact on the environment,” says Toby Harris, event director for Quartz.
Hardly a month passes now without something like Quartz’s survey to confirm that lean, green and visibility are increasingly important strategic thrusts for the electronics industry. Technology Forecasters has been consulting in these areas for years, and many of you know I wrote a book entitled, “Lean and Green.”
Electronics industry executives have a lot on their plates, but I hope they have room (even with Thanksgiving dinner coming) for these three main courses in their strategic thinking: Lean, green, and visibility.
Here’s an offer to our OEM and EMS clients: In March, I will speak at the Supply Chain Operations Private Exposition (SCOPE) East in Philadelphia on the topic of “‘Reduce to Grow’ is the New Imperative: For Profitability and Environmental Gain.” Other presentations will address lean and visibility.
If you already have lean, green, and visibility on your plate or if you think you should, I recommend you attend. SCOPE is by invitation only for senior executives in supply chain management, logistics and operations. As a speaker, I have 10 complimentary passes for our clients and contacts. Go to the SCOPE East site, click on Attendee Registration, and insert this invitation number: SCE1920
You can find out more about the event there, too. The pass includes access to all sessions and the exposition, and complimentary overnight accommodations at the Loews Philadelphia Hotel, plus lunches and a banquet.
How important are lean, green and visibility in your supply chains? Let us know.
Stanford University researchers recently completed a study on the return on investment from outsourcing the technology infrastructure for supply chains. The sample size was small, but the results worth a look.
Barchi Gillai, research director at Stanford’s Global Supply Chain Management Forum, found that when companies outsource some or all business-to-business e-commerce technology and processes, the benefits on average amount to more than twice the cost.
The study included a survey and was followed by in-depth interviews with most of the respondents. The sample size was just 25, and in various industries, not all in electronics. But the in-depth interviews rounded out the findings and provide some insight into outsourcing B2B infrastructure. At any rate, the findings are probably less interesting than some of the issues raised in the report, “Driving Business Value Through B2B Outsourcing: Improving Business Performance, Trading Partner Satisfaction, and B2B Capabilities.”
According to Gillai, benefits on average amounted to 2.5 times the costs of outsourcing B2B infrastructure. All but one survey respondent reported that their expectations for B2B outsourcing were met or surpassed, according to Gillai. The supply chains studied also reduced the number of employees needed to run complicated supply chain networks.
In the survey, 75 percent of the respondents reported improvement in their B2B technical capabilities; 55 percent reported an increase in predictability of B2B IT costs; 62 percent reported an increase in customer satisfaction; 57 percent reported higher productivity of internal IT resources.
We’re interested in the experiences Technology Forecasters members have had in outsourcing part, or all, of their B2B supply chain infrastructure. Please write a post.
We’re unaware of any major supply chain problems caused by the Southern California fires last week or the Silicon Valley earthquake this week, but these disasters remind us that supply chains are vulnerable. Ironically, according to an MIT expert, supply chains that have done the most to integrate vertically and reduce excess inventories are often the most fragile in natural disasters and manmade catastrophes.
“We are only as secure and resilient as our weakest link in the supplier network,” James B. Rice Jr. told a gathering of supply chain professionals in San Jose last week, an event planned long before the fires erupted and the earthquake hit. As director of the Integrated Supply Chain Management Program at MIT’s Center for Transportation and Logistics, Rice studies security and risk in supply chains.
Much of his research has been prompted by concerns over terrorist attacks, but his findings apply to any disruption. Last year he published an article on security that should be required reading for supply chain pros.
Rice has found that most supply chains are not prepared for high consequence, low probability episodes like fires, floods and earthquakes. He added that partners must work collaboratively to reduce risk in the supply chain by creating greater resilience, which he defines as “the ability of a supply network to sustain variations in supply and demand, and to recreate itself after disruption.”
Rice’s main message is that supply chain networks have become so complex and dispersed that no single company can possibly map out a plan. “You need to think and plan with customers and suppliers,” he said.
To help assess supply chain risk, Kathleen Geraghty, chief operating and knowledge officer for eKNOWtion and a senior supply chain consultant with Technology Forecasters, is developing a risk audit tool. “Natural disasters may be the least of your worries,” she says. “The risks we ignore or, worse, inject into our supply chains are a far more likely factor that we will confront.”
While we’re on this topic, Kinaxis, a strategic partner of Technology Forecasters, always has interesting things to say about managing risk and disruptions; check out its blog.
We’d also like to hear about your experience in achieving disaster preparedness.
Last year, TFI launched the EMS-ODM Report Card program. Our goal was to help OEMs get objective information about leading EMS providers and provide EMS companies with insight into areas for improving customer satisfaction. This year, after receiving valuable feedback from last year’s participants, we’ve expanded the survey to include electronics distributors, fine-tuned the survey, and expanded the base of respondents to get even more useful, targeted information in five critical areas:
As the outsourcing trend continues, OEMs in market segments such as medical and automotive electronics are outsourcing for the first time. At the same time, OEMs with experience in outsourcing are refining their strategies. This research will benefit both sides of the outsourcing equation by uncovering strengths and weaknesses in their relationships. And it will provide TFI will valuable insights to assist these OEMs select and manage relationships with their EMS providers, ODMs, and electronics distributors.
All participants will receive a copy of the executive summary of the results and all TFI Quarterly Forum members will get access to the complete report.
If you work for an OEM, please take some time now to complete the survey. If you work for an EMS provider, ODM or distributor, please forward this blog to your OEM colleagues. Your participation is greatly appreciated. Thank you.
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