Hi Tom, Patroller, all,
This article probably belongs on the ECM thread, but since Jabil seems to get most of the few ECM posts these days, I'll put it here. More on inventory control & ECMs.
Good luck to all,
Sam
Supply chain chaos blamed for severity of downturn
By Robert Ristelhueber and Jennifer Baljko Shah
EBN
(11/15/01 17:13 p.m. EST)
An out-of-control supply chain is largely to blame for the worst downturn in the history of the electronics
industry, according to recent comments made by a number of industry executives. And the growing role
of contract manufacturers in the industry is being fingered as one of the main culprits.
“There's a general illusion that inventory management is much better today than it was,” said Wilf
Corrigan, chief executive officer of LSI Logic, Milpitas, Calif. “And it's worse. It's worse because you
have several layers now in the pipeline, and it's not really under control.
“Because of the emergence of these new external manufacturers, it means that inventory is kind of out of
sight, out of mind. Supply chain management has clearly deteriorated,” Corrigan added.
He said that 10 or 15 years ago, when more companies were vertically integrated, inventory control was
often in the hands of a single manager. But today inventory also winds up in the hands of EMS companies
and distributors channeling products to them. “So instead of one single inventory, there are two maybe
three inventories in series,” Corrigan said.
“One thing that was different in this cycle was that there was a much higher percentage of outsourcing
among our customers,” agreed Rich Templeton, chief operating officer at Texas Instruments. “The result
was that things got very overheated.
“Everybody was worried only about capacity and how much they could buy in 2000. There wasn't the
attention to detail, attention to forecasting, and knowing where the inventory was at different points in the
cycle.
“So that's clearly one of the things that amplified the demand and inventory growth that we're paying for
now as an industry. And that's got to tighten up,” Templeton said.
Some contract manufacturers agree with those conclusions. “EMS companies have done nothing but
added complexity to the supply chain,” said Kevin Burns, executive vice president and chief materials
officer at Solectron Corp., Milpitas, Calif.
“We are not adding value to the supply chain in the ways we should, given where we sit in the supply
chain.”
Part of the problem is that internal IT operations at many of the EMS companies have been developed in a
piecemeal fashion or part of a patchwork quilt that came along with acquisitions, therefore managing data
is difficult, he said. On top of that, the roles and responsibilities of trading partners are not as clear because
they are still evolving, he added.
To help counter these issues, Solectron is developing a “Design For Supply Chain” strategy. The key
elements of the program center around putting better systems and tools in place that not only allow for
better access to information, but better ways of making decisions based on that data.
“We want to be able to use the information for smarter decision-making capabilities,” Burns said.
Bullwhip effect
“The bullwhip effect is still paralyzing every stage of the supply chain,” said Hau Lee, director of the
Stanford University Global Supply Chain Management Forum.
Lee, speaking at the recent SpinCircuit conference, was referring to how information is distorted as it
passes through different layers of the supply chain. The practice of misreading data cues has a great deal to
do with the wide excess inventory and allocation swings occurring in the semiconductor industry.
“In the boom times, orders are placed, factories are running at full capacity, and manufacturers quote
longer lead times,” he noted. “Customers see the lead times getting longer so they ratchet up their orders
and build up their safety stock. And manufacturers see that as stronger demand.
“That's exactly what happened last year. The industry has a myopic view of the supply chain and a myopic
view of the future.”
Tightening the supply chain
A large part of that distortion took place in the communications sector, said Steve Appleton, CEO of
Micron Technologies, Boise, Ida. “The computing sector has been through a number of (down) cycles
before, so even though they do a lot of outsourcing, they have very tight supply chains.
“Networking communication customers had very little experience of this type of contraction occurring,
and as a result there was not nearly as tight a supply chain management. Their charter was get more out as
all costs and make sure you don't miss the shipment because of a lack of inventory.”
Communications companies appear to have learned from the debacle and are reforming their supply chain
practices, Appleton indicated.
Another reason for the inventory imbalance may lie in the business models different parts of the supply
chain have adopted, said executives and analysts at the recent Semiconductor Supply Chain Association
conference.
For example, models used by OEMs and EMS companies tend to revolve around inventory asset
management and strategies designed to improve the velocity of parts moving through the supply chain,
said Mike Gray, senior manager of global supply chain strategies at Dell Computer Corp., Round Rock,
Texas.
Different priorities
Semiconductor suppliers, however, put considerable resources into research and development and building
fabs, and therefore, look for greater returns from their capital assets, he added.
This puts pressure on the push and pull activities occurring in the supply chain; OEMs and EMS
companies want to pull inventory only when they need it, whereas chip makers want to push it into the
pipeline as quick as possible to recognize the sale, Gray said.
“In the case of semiconductors, you have a depreciable asset and the cost of entry is huge to bring up a
fab. But you have a depreciation schedule that is probably the largest single cost,” Gray said. “What you
worry about is utilizing that asset, because it really has an impact on your bottom line.”
“We [OEMs] have a very different view. It's our inventory assets that we are worried about,” he said.
“We have depreciating assets so we worry about the velocity of that asset. We have rapid and precise
transitions of those assets, because if you don't we end up with excess or obsolete parts.”
Since the focus on returns and asset management is centered around different things, that changes the
priority that is placed on strengthening supply chain strategies, added Vinay Asgekar, an analyst at AMR Research Inc.
“EMS companies [and OEMs] have a different kind of supply chain. It's more discrete manufacturing.
But upstream at the component level, it is more process oriented,” Asgekar said. “None of the CEOs in
the semiconductor industry look at supply chain as a strategy; innovation and technology are still leading
strategies. Among EMS and OEMs companies, innovation is still important and companies want to make
sure they have a time to market advantage, but supply chain is gaining momentum. It is becoming more important to them.” |
