Technology Forecasters, Inc.
Strategic Environmental and Manufacturing Consulting
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.
Join TFI’s Bruce Rayner and Christopher Janssen, General Manager of Quarterly Forum Member GPC Electronics as they discuss a new way to manage the risks of global manufacturing in this TFI Webcast, “Beyond Contract Manufacturing: Outsourced Business Management.”
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.
“Sixteen Tons” was a hit song in the ’50s about the plight of coal miners. The left/right reference was to “one fist of iron and one of steel.” Nearly five years since the European Union passed the Restrictions on Hazardous Substance (RoHS) Directive, the lyrics seem appropriate to the plight of electronics companies being hit with a barrage of toxicity-related requirements.
One fist is “government:” Argentina, Australia, Brazil, China, Japan, Korea and Switzerland - and individual states like California - are just some of the localities implementing toxicity directives. Some of them address many more substances than EU RoHS. For example, Canada will restrict several hundred substances. The EU’s Registration, Evaluation, Authorization and Restriction of Chemicals Regulation (REACH) Directive, which took effect June 1, 2007, will eventually restrict up to 1,500 substances.
The other fist is “customer:” IBM, Nokia, Philips, Sony — every very large company that I’m aware of has its own substance list.
What’s going on?
In 1930, one million tons of chemicals were produced worldwide. Today, the figure is 400 million tons. Some of these chemicals pollute our air, water and soil; others impact our brains, kidneys and livers. A recent study (pdf) monetized environmentally attributable toxicity costs in regard to disease and disability for several states. For example, in Washington, the figure amounts to about 1 percent of the state’s economy.
Will it end? No, a threshold has been crossed.
What to do? Recognize that our industry is midway through a 30-year macro-shift that rivals the adoption of Total Quality Management practices in the 1980s and will shortly be an equally critical condition of doing business.
The biggest obstacle to successfully navigating this macro-shift is not money, time or the right software, but the “do-the-minimum” mindset that says: “We can skate by. Settle for Y/N certificates. Disregard all those directives. And pray our customers never require us to know the amount of every substance in our products.”
Instead, take a lesson from companies, including several GoodBye Chain Group customers, that have had an “aha” moment: The requirements are not about any individual substance; they are about broader materials of concern in their products. They are about treating substance data with the same precision as financial data. They are about reducing liability as well as toxins. And they are about innovative designs that generate employee pride as well as corporate revenue.
A series of recent encounters suggest a software development with substantial impact on the hardware business.
First, a professor of computer science at Georgia Tech called me to talk about virtual machines. He runs three operating systems — OS X, Windows and Linux — on an Apple MacPro, and uses his favorite tools from each environment, cutting and pasting seamlessly from Word 2000 running on XP to iPhoto running on OS X and so on.
Then I asked a friend who runs a department at a high tech marketing company whether virtual machines make a difference. “Are you kidding?” he said. “I used to buy ten PCs and ten Macs for a new team. Now, I get fifteen Macs and run them as PCs when necessary and I need fewer administrative resources.”
The success of VMWare proves that he’s not alone.
Next a consultant for 3Tera called. He had a hard time explaining what this early stage virtualization company does. The easiest part to grasp is “clustering.” They can link any number of servers together and treat them as a single virtual machine. Drain on CPU resources is minimal and managing the system is pretty easy.
The dramatic part is this: Their software can virtualize all the functions of a client’s network — take the firewall, the storage arrays, and other hardware and reproduce them in software. The client can tweak the system, then press a button and the virtual network propagates to the whole network. One of their clients is a large hosting company. The hosting company used to add one system administrator for every ten new servers; where 3Terra is deployed, it adds one for every hundred new blades.
Now consider this. Vanu makes a radio that runs in software for cell phone base stations. Bug fixes and upgrades can be deployed remotely to a carrier’s base stations.
What does it all mean? Clearly software is going to give more power to low-cost, generic machines. A complex device like a firewall currently needs much more than a CPU, but if it can be run in software on generic machines, then many markets now served only by high mix, low volume specialists might fall prey to the high volume ODM.
One limitation of virtual machines: The extra layer of software reduces performance — a hit of 5 percent to 7 percent on a PC. Manufacturers might respond to the competition by focusing on very fast throughput devices that cannot accommodate any reduction in performance. Other manufacturers might incorporate virtual machines into design for manufacturing programs, using virtualization as a way to reduce costs.
The trend to virtual machines, however, is likely to lead the hardware industry further toward thin margin, commodity business, especially in the computer and telecom infrastructure segments. It looks like software is hot on the hardware manufacturer’s trail, and they’ll have to sprint to stay ahead.
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.
Some things are just so much common sense that we tend to overlook them. Here’s one piece of such wisdom.
Sparton Corp., a member of Technology Forecasters Quarterly Forum, has been pursuing a quality program it calls Performance Excellence — a combination of Lean, Six Sigma and common sense. For more details, listen to an interview with Spartan CEO David Hockenbrocht on our website.
Among other things, Hockenbrocht says: “When we go after excess costs and drive them down to what we believe is the lowest cost solution in almost anything, several other things happen. First, the quality of the output goes up — and that is very quickly measurable. Secondarily, the speed of delivery also goes up. We get two not so much thought about outcomes when we go after costs: Improved quality and higher speed.”
If you stop to think about it, that equation makes sense, but relatively simple concepts can get lost amid the complexities of the EMS business.
Hockenbrocht also reminds us that successful EMS companies are striving for more collaborative partnerships. Sparton, for example, is extending its Performance Excellence effort to at least one of its OEM customers. Based on a survey conducted earlier this year, Technology Forecasters concluded that adoption of Lean among partners will be the next crucial phase in driving out inefficiencies in supply chains.
Hockenbrocht also sees the sharing of goals as a key to partnerships. He tells how one customer recently invited about three dozen of its most important suppliers, including Sparton, to an event where they got to look at the OEM’s three year business plan in great detail. “I was so impressed with the openness,” Hockenbrocht says. “This is where a business partnership needs to be.”
Collaboration will be crucial to electronics manufacturing success in the years ahead. Kinaxis, a strategic partner of Technology Forecasters, always has interesting thoughts about supply chain collaboration. Its blog posting of October 4 is worth a look.
For obvious reasons, people with waterfront property might care more about global warming than people who live on mountaintops. Likewise, you’d think U.S.-based EMS companies with razor-thin margins might care more about curbing health care costs than industries with profit margins wide enough to absorb this growing expense.
Oddly, that does not seem to be the case. U.S. electronics industry thought leaders who address this problem are the exception, not the rule.
The continued health of the U.S. manufacturing base depends to a great extent on the productivity of American workers. Productivity is a function of input versus output - the cost of workers in wages and benefits versus the value they create. That ratio is heavily impacted by rising health care costs. Reining in these costs through government policy is the key to keeping the productivity of American workers high enough to justify manufacturing domestically.
In its most recent annual study of health care costs, the Kaiser Foundation reported that the average cost of employer-provided family health insurance in the U.S. increased to $12,106 per employee family in 2007. The employee pays about one fourth of the cost and the employer pays the remaining $8,825. To put that number in perspective, it’s enough to pay the fully burdened costs of a semi-skilled worker on an SMT line in China for six months.
According to Kaiser, these insurance costs have risen 78 percent since 2001. This phenomenon is widely remarked on in the automotive industry, where obligations to current and retired workers add nearly $1,500 to the cost of each American-made car.
EMS companies suffer less than automakers from the legacy of large numbers of retired, unionized workers, but in an industry with average after-tax profit margins hovering around 2 percent, an extra $8,825 per employee could make the difference between a production line staying in the U.S. or going overseas, or the difference between winning a contract and making a dime.
Several of the 2008 presidential candidates have now weighed in with health care proposals. The U.S. electronics industry has a major stake in the evolving debate over how to resolve rising health care costs. It is time to pay attention.
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