Article on Compaq's Taiwanese supply chain...
Compaq: Taiwan Key To Cost Cutting
(02/15/98; 1:38 p.m. EST)
By Sandy Chen , Electronic Buyers' News
In its efforts to reduce manufacturing costs, Compaq
has discovered a secret weapon: Taiwan. The world's
largest PC company, Compaq sources a significant
amount of components, peripherals, and even finished
PCs from several of the island's suppliers.
Shares of Compaq [CPQ]were hampered on reports
that its acquisition of Digital was hurting cost cutting
initiatives in its PC business.
Compaq's total product procurement in Taiwan has
jumped from almost zero in the early 1990s to
between $3.5 billion and $4 billion in 1997, and a
projected $4.5 billion this year. Compaq's
procurement in Taiwan last year represented 13.2% of
the island's PC-related hardware production, which
stood at $30.4 billion, according to the
government-sponsored Market Intelligence Center,
Taipei.
A large share of Compaq's desktop PCs are made on
an OEM basis by Mitac International Corp. Mitac and
fellow Taipei-based First International Computer Inc.
make Compaq's sub-$1,000 PC line. The bulk of
Compaq's notebook PCs are being made by two
other Taipei-based companies: Arima Computer
Corp. and Inventec Corp.
Late last year, Houston-based Compaq began moving
toward a build-to-order (BTO) PC model, which is
resulting in big changes in the way its local suppliers do
business.
EBN recently interviewed Chao Chang, director of
Compaq International Procurement Corp., Taipei, on
the company's BTO strategy, the role of an
international procurement office (IPO) in Taiwan,
Asia's financial crisis, and Taiwan's DRAM industry.
What are the duties for Compaq's IPO in
Taiwan?
First of all, we do not issue any purchase orders
in Taiwan. Our responsibilities are divided into two
areas. First, we work closely with [Taiwan's]
component suppliers, including makers of
printed-circuit boards, cases, and connectors. In this
area, we are involved in initial vendor qualification and
quality-improvement programs.
The other responsibility is something we call alliance
operations. Today, Compaq works together with
Taiwan suppliers to develop finished [PC] products.
The examples of this program include Compaq's
relationships with Mitac and Inventec.
How does Compaq select suppliers in Taiwan?
First of all, suppliers must meet or have several
criteria: quality, technology, flexibility, time to volume,
and the ability to make improvements. The vendors'
products must be good and cost-competitive.
Suppliers must have the technology to improve their
products. Suppliers must be flexible to work under a
fast-changing market. Suppliers must be able to have
adequate time-to-volume capabilities to meet our
customers' needs.
We also have a measurement system [to qualify
vendors]. First, we have to identify who the suppliers
are [in a product category]. Then we identify every
supplier's strength and weakness. We also have our
own supplier quality-management programs. We want
to make sure our suppliers from Taiwan can meet
international standards.
Which products do you buy in Taiwan?
For finished systems, we buy desktop products,
notebook PCs, and monitors. In components, we buy
semiconductors, PCBs, connectors, cases, and power
supplies.
We buy power supplies from Lite-On and Delta, while
we get our monitors from ADI, Tatung, and Lite-On.
Because our volumes are so large, one Taiwan
supplier cannot support us.
Do you intend to buy any new products from
Taiwan vendors this year?
CD-ROMs. In the early stages, the CD-ROM
market belonged to Japan. Now this product is mature
enough to buy in Taiwan.
To our knowledge, Compaq buys little or no
DRAMs from Taiwan-based suppliers. Do you intend
to buy DRAMs from Taiwan suppliers soon?
Our DRAM suppliers mostly come from Japan
or Korea, such as Samsung. But, yes, we are
definitely considering the purchase of DRAMs from
Taiwan suppliers. In fact, I'm doing some evaluations
on this subject right now.
In Taiwan, there are two kinds of DRAM suppliers.
One includes suppliers like Vanguard and Nan Ya,
which have developed their own technology. The
other type of suppliers are the joint DRAM ventures in
Taiwan, which sell their outputs back to the mother
company.
For us to source DRAMs in Taiwan, the supplier must
have the right product, price, and technology. We also
have to make sure [Taiwan DRAM suppliers] do not
have a copyright issue. Vanguard, for example, is a
Taiwan supplier that has the right technology and has
just resolved their patent issues [with Texas
Instruments Inc.]. Maybe we'll consider them.
Do Asia's financial crisis and currency
devaluations influence Compaq's purchasing decisions
around the region?
Currency devaluations will influence everybody.
But you have to measure the advantages and
disadvantages [before procuring products from nations
that have been affected by currency devaluations]. For
example, how much of the material cost is being
sourced locally? What about other materials? Are the
materials quoted in U.S. dollars, Korean [currency]?
Compaq is making a swift move toward the
BTO PC model. What has been the reaction of your
suppliers in Taiwan in regard to this?
It was not a shock to our suppliers. Frankly
speaking, we have not encountered any problems with
our Taiwan suppliers about this.
From [our] understanding, Compaq has started
its BTO strategy. Have your suppliers in Taiwan
started it as well?
Everyone connected with Compaq has started it.
It is not a complicated process, but some problems
will occur. Where? Communication delays. So we
have electronic links with each of our suppliers in
order to avoid any problems and unnecessary
paperwork.
How are you bringing your Taiwan suppliers up
to speed in your BTO model?
We are bringing them up in phases. We are
giving them enough time to prepare and phase in the
changes.
Does Compaq prefer to work with suppliers
that have global logistics programs?
Of course. But suppliers must also be
competitive. They cannot charge a premium for [global
logistic] services. We will also help [a local supplier] if
they do not have global logistics. We have a big
factory and warehouse in Singapore. Our suppliers are
able to share our warehouse space.
Some major PC OEMs have experienced
problems in Taiwan, especially in the area of product
quality. Some OEMs claim that a few Taiwan vendors
make substandard products. What are Compaq's
general feelings about doing business with the island's
suppliers?
Taiwan suppliers have been very supportive and
flexible.
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