Linking Supply Chains to Support Collaborative Manufacuring
Every year, more and more OEMs outsource their manufacturing and assembly operations.
Most of the time, it's a move that makes sense: Manufacturing service providers
get to leverage their core competency while OEMs tighten their focus on brand
management, customer management, and product innovation.
But there is a potential downside: increasingly cumbersome supply chain management. Awkward handoffs, less-effective communications, and misaligned processes, systems, and cultures can all be consequences of an outsourced manufacturing relationship. Plus, an outsourcing model raises the number of interfaces between OEM and manufacturing service provider, so information becomes more diffuse and supply chain oversight becomes more complicated. The bottom line is that outsourced manufacturing rewards can be offset by new problems unless a different supply chain paradigm is developed in conjunction with the new relationship. This white paper looks at the supply chain challenges that accompany an outsource-manufacturing relationship, then at a collaborative - synchronized - supply chain model, and finally at an industry that is taking particularly strong measures to ensure the planful participation of each supply chain constituent.
What Often Happens
It is not uncommon for companies to shift their manufacturing assets without shifting much else. As a result - when manufacturing outsourcing is accompanied by the same basic business processes and the same old internal focus - most organizations end up facing the same old barriers. For example, two-way communication between partners and across business processes fails to materialize, so data pertaining to forecast information and product content reaches the manufacturing service provider with little or no advance warning. Thus the service provider is always reacting and never planning. And because data flows only one way, the service provider is seldom able to give the OEM updates on material or capacity availability - or even confirm that it has the most recent release of product information.
Manufacturing ownership changes can even amplify problems that existed previously. For example, service providers typically assess the accuracy of the forecast supplied by the OEM, and then add a fudge factor to increase their chances of meeting the production deadline. But when the complete manufacturing process is transferred from the OEM to the service provider, forecast and demand fluctuations are exaggerated, thereby forcing it to lay in extra inventory.
Outsourcing also complicates verification - ensuring that information is correct and consistent in the ERP/MRP system. The transfer of product information, such as bills of material and drawings, requires a new process for converting data formats, validating part numbers, and approving vendor lists. In fact, all manner of changes must be converted and validated. More often than not, this is a manual process that is time-consuming and susceptible to error. Extended times-to-market and higher levels of excess/obsolete inventory are inevitable.
Lastly, outsourcing means that OEM and service provider must devote time, effort, and money to managing the new interface. In the absence of a new governance process, those additional expenditures could negate the relationship's financial benefits. Figure 1 summarizes the supply chain complexities associated with a move to outsourced manufacturing.
Figure 1 - Supply Chain complexities are multiplied in an outsource manufacturing
relationship.
Figure 2 - Collaborative supply chains invilve more than OEM/Tier1 relationships.
Synchronizing the Supply Chain
Of course, most companies know better than simply to pitch their manufacturing resources over the wall and hope for the best. Although true supply chain collaboration may be beyond their purview, manufacturing service providers generally do send capacity and materials-availability information back to the OEM following receipt of an order. And when the OEM changes a product or sub-assembly, providers usually will report that they have (or have not) implemented the change and can (or cannot) produce the revised product. Slightly more advanced (but not uncommon) is the process of joint decision-making - working together to identify realistic delivery dates or how to phase in a product-design change.
But a truly collaborative marriage goes much further than rudimentary, two-way communication. Dialectical intersects must be formed up and down the supply chain, encompassing multiple customers and suppliers. OEMs must regularly communicate product availability, supply plans, and product content changes to distributors and other channel partners. Based on upstream forecasts and product changes, they also must communicate demand requirements to manufacturing service providers. In this fashion, members of the outsourced supply chain are assured of accurate, up-to-date information that helps them make decisions that elicit common, enterprise-wide benefits. The principal processes toward which these collaborations should be applied are:
- Planning and Scheduling: Material positioning/visibility, advanced planning/scheduling, forecasting, capacity management
- Design: Mechanical design, electrical design, test design, design for supply chain, component selection
- New Product Introduction: Bill of materials management, prototyping, design validation, testing, production validation testing, transfer to volume
- Product Content Management: Change generation, change impact assessment, product change release, change cut-in/phase-in
- Order Management: Order capture/configuration, available to promise, order tracking, exception management
- Sourcing and Procurement: Approved vendor management, strategic sourcing, supplier selection, component selection
From there, supply chain complexity grows exponentially since OEMs generally use the services of multiple suppliers, and each of them often has its own (Tier 1 and Tier 2/3) suppliers. At this point, the paramount goal is ensuring process consistency among supply chain partners and replicating high levels of information capture and sharing. Getting it done usually requires serious information technology. Using the same tools - typically supply chain planning and/or product-content collaboration software - helps to ensure the availability of standard information formats and processes, and the minimization of efficiencies. Even when different partners use different software, common standards for data, information structures, and exchanges (e.g., RosettaNet) can still drive efficiencies.
Of course, the degree to which companies opt to standardize their processes is a strategic decision based on the business' need to differentiate itself operationally, as well as by brand management, customer management, product innovation, and so forth. Nevertheless, significant value exists in an extended supply chain that does not require the operation of multiple systems, solutions, and processes to support different OEM customers. Most manufacturing outsource implementations are not this far along, which should scream "opportunity" to companies seeking new forms of competitive advantage and greater efficiencies supply-chain wide.
Industry Focus: Supply Chain Collaboration in Electronics & High-Tech
Electronics & high-tech is in the midst of a real transformation. The industry's leading OEMs used to be vertically integrated, but in the last few years an astonishing number have shed (outsourced) their manufacturing assets. This action has produced a new kind of giant in the EHT supply chain, the "Electronics Manufacturing Service (EMS) provider." Despite the fact that EMS providers are growing by 50% or more per year, only 20% of EHT manufacturing has been outsourced to date. Thus there is significant room for further growth.
This is in stark contrast to when manufacturing outsourcing was solely a way to provide "overflow" manufacturing volume. At that point in time, actually making the product was considered a core competency. Since then, however, views about "what is core" have shifted, and the cost and complexity of capital equipment have grown at roughly the same rate as the quantity and complexity of electronics products - by leaps and bounds. In response, OEMs are outsourcing their (highly capital-intensive) manufacturing operations to increase return on capital employed, free up capital to fund growth and reduce financial risk by converting fixed costs to variable costs.
Another reality is that outsourcing provides a buffer against economic downturn and seasonality, which is a constant concern in electronics-related industries. Because EMS providers can build similar products for competing OEMs, they can handle a downturn by spreading the risk across a portfolio of customers.
Lastly, as noted earlier, manufacturing outsourcing allows EHT OEMs to focus on what they now view as their real core competencies: product innovation, customer/channel management, brand marketing, and sales.
Thinking and Acting in New Ways
Not surprisingly, the fast-maturing relationship between OEMs and EMS providers in electronics/high-tech is being watched closely by manufacturers in other industries. They're observing two particularly important things. First, the more aggressive contract manufacturing providers are morphing quickly into providers of integrated manufacturing solutions. Seeking margins that are higher than "pure" PCA build, they are offering services such as:
- Full-box build with build-to-order capabilities
- Product design and engineering services
- New product introduction
- Logistics services, such as order fulfillment, distribution, and warehousing
- Service and repair capabilities.
The other observation point relates to supply chain management: how OEM and supplier are handling the logistical challenges that accompany the migration of a major business process. After all, EMS providers are structurally different from OEMs. The net margins of EMS providers usually are 3%-4%, gross margins are around 10%, and 75% to 85% of their costs are direct materials. Compare this to the best OEMs, which enjoy net margins of 10% or higher, gross margins of 20% to 60%, and direct materials costs of 40% to 50%. These disparities have two major consequences. First, EMS providers must excel at materials management or they will go out of business. Second, OEMs have some financial room for error in the execution of their supply chains, while EMS providers do not. Either way, innovative approaches to collaborative supply chain management are essential.
Clearly, partners in the outsourced EHT supply chain have an extraordinary incentive to think in leading-edge terms about supply chain management - partly for the above reasons and partly because their future relationships are exponentially more complicated. Consider that each OEM has the potential to utilize the services of between two and 20 EMS providers, and that EMS providers may have relationships with their own Tier 1 suppliers, such as disk drive manufacturers, component manufacturers, distributors, and enclosure manufacturers. This is why many EHT businesses have become leaders in replicating capabilities across relationships - an approach we refer to as the Network Effect. Think of the Network Effect as having two broad-scope objectives:
- Extend identified/captured benefits up and down the supply chain by making it possible for multiple partners to participate in planning and execution decisions. The principal goal is visibility of information (materials availability, customer requirements, change data, design specs, and so on) by EMS providers as well as by their Tier 1 suppliers, component distributors, logistics service providers, and even customers.
- Apply standardized tool sets to drive process consistency among supply chain partners. This means using technology to cement and standardize supply chain relationships. When each party applies the same tool set, inefficiencies, inconsistencies, and redundancies are minimized across the supply chain.
In EHT, one of the leading collaboration tools is Agile Software's Agile Anywhere, which manages product content information, Bill of Material, drawings, and Approved Vendor Lists from design through end-product distribution. Basically, it enables EHT supply chain partners to speed products through introduction and into volume production by retaining centralized control over product information and change management. Agile also has a diagnostic process that helps users identify the potential benefits associated with tighter supply chain collaboration. Key benchmarks include reduced time to market and volume and reduced costs in excess/obsolete material.
The bottom line with Agile, as well as other software manufacturers and users, is that significant value accrues when standardization exists across systems, solutions, and processes. Admittedly this is a level of integration that virtually no industry has yet achieved in full. It has, however, occurred within a narrower range (i.e., with only a few supply chain partners) and several dramatic successes have been achieved in electronics & high-tech. Given the fact that collaboration is the pre-eminent key to increased business effectiveness, we can expect that soon, major strides will be taken across all industries and geographies.
