Getting Ready for the Rebound: Leaning the EMS Supply Chain
Perhaps better than any other manufacturing sector, the electronics manufacturing services (EMS) market understands the impact of the bullwhip effect.1 Small changes in end customer demand can result in large variations in orders placed upstream. Customer orders may be buffered to ensure inventory availability in times of short supply. In time, these and other sources of variability, coupled with delays in the transmission of information up and down the supply chain, can cause the entire network to oscillate in very large swings. This amplification of variability as one moves along the supply chain is referred to as the bullwhip effect.
As service providers, EMS companies are in the business of reacting quickly to customer requirements. Designs from original equipment manufacturers (OEMs) must be rapidly incorporated into production and supply plans, plant layouts must be quickly adjusted, and high-volume delivery of differentiated products must proceed like clockwork. And since EMS companies serve the electronics industry, all this must be accomplished while weathering a notoriously cyclical market. The ability to speed the flow of information and reduce variability is critical for EMS success - and now more than ever, as the global economy appears ready to rebound.
A Lot at Stake
EMS has always been a difficult, low-margin business - worth about $90 billion in 2003, according to market researcher IDC, with each percentage point improvement in margin representing $900 million in cost savings. Finding a way to maximize the positive results during the good times is critical for survival during the bad times.
"Companies in the automotive industry were forced to adopt lean business practices because of diminishing margins, and competitors such as Toyota forcing them to follow suit or face demise. The high-tech industry, much like the automotive industry in the '80s, is at a crossroads. Innovation alone will not cut it," explains Manish Modi, senior director for Oracle's manufacturing solutions. "Companies need to adopt lean principles and embark on the journey to eliminating waste to stay in business. Similar to the automotive tier 1 suppliers, the EMS companies will face the most pressure to become lean."
Peaks and troughs "... have been the tradition in the electronics industry for the last 30 to 40 years," says Dan Shunk, the Avnet professor of supply network integration at Arizona State University. Nothing could be better than a return to economic prosperity, of course, but a market swing - even when it's an upswing - brings new pressures and challenges.
As growth resumes, "Shareholders are going to put incredible pressure on CEOs to make money," warns Shunk, "so they need to get ready now to make the most of any good times to come." A 2003 report from IDC agrees, noting that 2003 and 2004 should prove to be more successful for the EMS industry, but they will also highlight which vendors have positioned themselves well. As this forecast suggests, surging demand isn't always good news, particularly coming in the wake of periods in which spending has been pared to the bone. But it can also be a catalyst for change, says Shoshanah Cohen, a director at Pittiglio Rabin Todd & McGrath (PRTM). Cohen notes that seeing a light at the end of the tunnel is enabling EMS companies to start focusing on building consistency in their processes before capacity becomes limited again. "EMS companies don't want to go back to the rush rush rush approach that characterized the dot-com boom," she says, "and the recent uptick is making them more comfortable investing in the infrastructure that will help them be better suppliers."
Key Issues EMS Companies Face
To make the most of better times, smart EMS companies have been preparing for the rebound. They're designing processes that will not only allow them to handle surging volumes, but will ensure their long-term viability in an inherently cyclical market. And many are embracing the tried and true principles of lean manufacturing in order to optimize production and enshrine continuous improvement as a corporate mission. Others are considering adopting lean as a way to gain competitive advantage in a reviving economy and are now pushing lean out to their extended supply chain in order to address a raft of challenges that include:
- A new demand surge in a highly cyclical market;
- Heightened customer expectations;
- The need for process consistency;
- The rise of new lower-cost competitors; and
- The downside of globalization.
Surging Demand. The EMS industry's track record at responding to past fluctuations in demand is not encouraging. At no time was this more evident than in the recent downturn when EMS companies went from a period of severe shortages to being forced to write off hundreds of millions of dollars in inventory. For the upcoming cycle, EMS firms must anticipate being short on capacity and think ahead about how to allocate that capacity to customers, notes Shunk.
Demanding Customers. In the good old days, EMS companies could afford to be choosy about which customers were worth lavish attention. Boom times spurred heavy investment in production capacity, specialized equipment, and ordering and tracking technology. The subsequent downturn forced them to pull out all the stops to secure sales, even from customers previously considered less important. OEMs have come to expect excellent customer service, and ever-shortening product lifecycles increase the premium on practices that can ramp products quickly and respond nimbly to variations in supply and demand. Technology companies want all this, while limiting their inventory exposure and delivering to customers quickly.
Process Inconsistency. Not so long ago, EMS companies were rushing to find capacity and expanding at a rate unlikely to be repeated any time soon, resulting in collections of facilities tied together only by a common corporate parent. Assimilating new companies and facilities, and achieving consistency in how the overall supply chain is managed takes time and a great deal of management attention. In the mad scramble to service surging customer requirements, there was little time to focus on the refinement of existing processes. Falling demand exposed the weaknesses resulting from disparate processes and systems; these have become limitations to future growth that need to be addressed.
Greater Competition. Competition is also unrelenting, with the line between the $90 billion EMS market and the $25 billion original design manufacturer (ODM) market blurring. Increasingly, ODMs are hungrily eyeing the EMS market. It's a new source of competition that EMS firms cannot ignore. That means even greater pressure to respond quickly and efficiently to OEM requirements.
Global Execution. Cost control is a way of life for EMS companies. They, like so many other manufacturers, have added much of their new production capacity in areas of the world known for low labor and material rates; for example, outsourcing outside the U.S.
The Foundation for Success
Lean is the precursor to successful systems. Clearly, automating a nonvalue-added function makes no sense. We must become lean before we attempt to integrate and certainly before we attempt to automate. EMS companies are expected not only to operate efficiently inside their corporate boundaries, but also to expand this efficiency to the extended supply chain.
For EMS companies striving to do that, lean manufacturing offers a tailor-made strategy. Cohen notes that some companies dismiss lean concepts just because they have been around for decades. "There's some perception that these ideas aren't cutting edge," she says, "but nothing could be further from the truth, especially as state-of-the-art systems technologies continue to advance lean concepts. Why not take advantage of something that rests on an abundance of experience and has proven benefits and defined methods?"
Today's systems take lean concepts to a whole new level. The first place companies apply lean concepts is within their internal operations. Modern-day lean techniques include innovations in each of the six core concepts including:
- Facilitating collaboration among supply chain partners for value stream mapping. EMS companies must transform their lean thinking beyond the fours walls to the total value stream. Today's collaborative supply chain planning and execution tools help in connecting the links electronically to facilitate information exchange and instantaneous upstream/downstream activities.
- Reducing waste and redundancy through the use of standard technology platforms. For example, tools can be used to identify when multiple customers using disparate part numbers use the same part. By consolidating demand and supply planning for these parts, the company can reduce redundant planning and procurement activities. Bad data habits - such as entering information into a standalone application or not tying the system transaction to a physical move - are also sources of non-value-added activity easily addressed through a lean initiative.
- Automating the implementation of flow and balance through sophisticated simulation of the path a product takes through the manufacturing process. Such systems can identify queuing points and backtracking, allowing synchronization of the various steps of a process, elimination of variability, and throughput time reduction. Before starting production on a new product, for example, an EMS can use technology to run simulations of design features and production processes in order to test the impact of process design modifications.
- Replacing physical kanbans with electronic pull systems that communicate material requirements automatically and provide highly visible cues between supplying and consuming operations. Today's enterprise resource planning (ERP) and advanced planning and scheduling (APS) tools go far beyond the repetitive manufacturing modules of yesteryear that provided back-flushing functionality, but not much more.
- Enabling continuous improvement by providing real-time feedback on process performance versus established objectives.
- Applying the concepts of housekeeping in areas beyond the shop floor organization, especially in the context of inventory management. That means knowing where inventory is and being assured that it will be available when needed.
Global standards for processes once they have been leaned can be especially helpful for large EMS firms expanding overseas or struggling to keep their existing international locations aligned. Using a companywide suite of standard business processes and common software applications that everyone has access to, processes can be standardized and accessed from a centralized source.
Case Study
The benefits of a lean initiative can be immediate and substantial. As an example, a test equipment manufacturer received a large government order and needed to increase capacity dramatically in a matter of weeks. The company produced large capital equipment that took several months to produce. Production relied on discrete work orders in a traditional assembly line. Production control issued kits to the line and assemblers spent a significant amount of their time auditing kits and moving materials to the location where they were needed.
Management was concerned that without major changes to their operational infrastructure, they would fail to meet the aggressive delivery schedule. Making large capital investments to expand capacity was not feasible in the required timeframe; instead, the company embarked on a rapid implementation of lean techniques.
Participants in the lean initiative analyzed the workflow and defined specific tasks required to assemble each product. Production workers assisted in the design and implementation of cross-functional work cells and line balancing. The result was a much smoother flow through assembly by incorporating pull principles with significantly less overall queue time. Highly visual work instructions simplified assembly tasks and standardized work methods. Kanbans were implemented for material storage and presentation. Two bins were placed at the point of use and a turnkey materials management provider handled replenishment. Tiger teams were formed to address quality issues and implement a continuous improvement program.
With very little capital investment, the company met a highly aggressive delivery schedule while achieving these dramatic performance improvements: 80 percent reduction in unit cycle times, more than 70 percent cut in direct labor costs, and 90 percent drop in part shortages (see Figure 1).
Systems as an Enabler for Lean
Software alone is not the panacea. Cultural change driven by the highest levels of management within the company, education on the lean principles, and a commitment to adopt the principles and constantly identify and eliminate waste are the keys. But once a company has embarked on the lean journey, the right systems infrastructure and functionality could help you achieve successes sooner and achieve greater efficiency. Oracle Corporation is a provider of enterprise business solutions that has extended support for lean beyond just manufacturing to all facets of the internal operations and business interactions with supply chain partners.
Timing Is Everything
EMS firms that adopt lean internally and build the foundations needed to extend lean principles to their supply chain partners are poised to withstand competition and reap the benefits of a rebounding economy. The bullwhip will still be present, but by responding more quickly with lean processes and only performing value-added processes, the impact of market cyclicality can be optimized for financial performance on the upturns and minimized on the downturns.
Endnote
1 "The Bullwhip Effect," Hau Lee, et.al., Management Science, 1997.
