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1. INTRODUCTION
This section focuses on an extremely important, dynamic, and controversial part of the design process: component and supplier selection and qualification. The selection of the right functional components and suppliers for critical components in a given design is the key to product manufacturability, quality, and reliability.
Different market segments and system applications have different requirements.
Table 1 lists some of these requirements.
2. THE PHYSICAL SUPPLY CHAIN
In the electronics industry the exponential growth of ICs coupled with competitive pressures to speed time to market and time to volume are placing increased demands on the supply chain for materials and components movement and inter company information exchange. New tools such as Internet-based software and emerging supply chain standards such as RosettaNet and others developed by industry collaborations hold the promise of improving supply chain efficiencies and reducing cycle time.
(coming soon) TABLE 1 Requirements for Different Markets and Systems
Complex and high-performance products, just-in-time delivery, and the in creasing sophistication of procurement systems necessitate the optimization of efficiency and effectiveness in analyzing the manufacturability of new designs, capacity planning, yield prediction/management, and inventory controls. The supply chain is indeed undergoing numerous and substantial changes simultaneously to improve operations, financial, and delivery performance. These fundamental changes in supply chain structure lead to a challenge: how to effectively manage the supply chain while increasing the collaboration between partner companies and delivering what the customer wants.
Fundamentally, a supply chain is responsible for delivering the right product at the right place at the right time for the right price. This requires close linkage between all parties across the supply chain. Figure 1 shows a high level supply chain for an original electronic equipment manufacturer (OEM) from raw materials to the consumer, including the necessary high-level wraparound communication requirements. This figure is easy to understand from a conceptual perspective. But practically the supply chain is a complex integration of the inter linkages of many companies across widespread geographical locations that is in a state of constant change-a work in progress. A more detailed supply chain flow including logistics, freight, and myriad other interlocking activities is shown in Figure 2.
FIGURE 1 Supply chain for electronic equipment manufacturer with communication
requirements included.
FIGURE 2 Detailed supply chain diagram showing logistics, freight, and systems
inter connections.
The complexity of supplier/partner interrelationships, linkages, and dependencies-from wafer fab to finished IC and shipment to channel or product manufacturer and assembly into the product and shipment to the user-requires much care, relationship management, and attention to detail. It all starts with the selection of the right component part and the right supplier.
3. SUPPLIER MANAGEMENT IN THE ELECTRONICS INDUSTRY
3.1 Overview
The velocity of change is increasing world wide. The only constant is that we will have to continually reevaluate and change everything we do to adapt to these changes. Some of the drivers, or agents of change, include Increasing processing power. The processing power of the microprocessor is doubling every 18 months ( Moore's law).
The technology driver is changing from the PC to networking and wireless applications.
Increase in electronic commerce.
Instant global communications.
Booming growth in information technology (i.e., the Internet).
Smarter markets.
Customization of products (lot size of one).
Creation of virtual companies.
The resources of many individual expert companies are being brought together to design, manufacture, and de liver a specific product for a specific marketplace and then disbanded when the project is complete. This involves "coopetition"--cooperating with competitors.
Microenterprises (small businesses created by individuals or groups of less than 20 individuals) will lead in the creation of jobs worldwide.
Change isn't easy. Michael Porter, writing in The Competitive Advantage of Nations, states that "Change is an unnatural act, particularly in successful companies; powerful forces are at work to avoid it at all costs." You don't bring about change by changing individuals. According to Michael Beer of Harvard University, "You must put individuals into a new organizational context, which imposes new roles, responsibilities, and relationships on them." How do we anticipate, respond to, and manage the change, specifically as it relates to the supply base and supplier relationships? These agents of change bring about demands from the marketplace that have a profound impact on both the customers and the suppliers of components used in the design and manufacture of electronic equipment. In today's competitive electronic equipment market--be it industrial, consumer, telecommunications, or computer--the pressure is on to Increase performance, resulting in more complex products with exponentially escalating design development and test development costs.
Reduce product development and test costs.
Focus on core competencies and outsource everything else.
Reduce cycle time, design time, time to market, time to volume, and product life cycle.
Reduce inventories. Increasingly build to order (BTO) rather than build to stock.
Increase quality.
Lower prices.
Exceed changing customer expectations.
Some unique organizational structures that add their own twist have been created to address these requirements in dealing with the supply base. All tend to complicate the relationships with the supply base. They include the following:
Industry consortia of competitors representing a given market segment (such as computer, automotive, telecommunication, and semiconductor, for example) have been formed to develop common areas of focus, requirements, and guidelines for suppliers of that industry segment with the benefit of improved supplier quality and business processes and reduced overhead.
Commodity (aka supply base) teams consisting of representatives of many functional disciplines own the responsibility for managing the suppliers of strategic or critical components.
Many traditional job functions/organizations will have to justify their existence by competing with open market (external) providers of those same services for the right to provide those services for their company (e.g., Purchasing, Human Resources, Shipping/Logistics, Design Engineering, Component Engineering, etc.). A company is no longer bound to use internal service providers.
Why has managing the supply base become so important? The largest cost to an OEM is external to the factory, i.e., the suppliers or supply base. It has been estimated that approximately 60% of the cost of a personal computer is due to the purchased components, housings, disk drives, and power supplies. Therein lies the importance of managing the supply base.
Companies are taking the supply base issue seriously. In today's competitive environment, original equipment manufacturers are continually evaluating their supply base. Nearly all companies have too many suppliers, not enough good suppliers, inadequate measurements for supplier performance, and supplier problems. They are evaluating their supply base to determine ...
1. If they have the right suppliers
2. Which poorly performing current suppliers are incapable of becoming good suppliers
3. Which poorly performing current suppliers have the potential of be coming good suppliers with OEM cooperation
4. How good current suppliers can be helped to become even better
5. Where can more good suppliers be found with the potential to become best in class for the components they provide
The OEM must develop a comprehensive and thorough process to select those suppliers whose technology road maps and business paths align themselves with those of the customer.
World class customers require world class suppliers! Their destinies and successes are interrelated. Today's OEMs must adopt a supply strategy in conjunction with the company's business strategy-competition demands it! This requires a partnership/alliance with selected strategic suppliers encompassing all aspects of product development, manufacturing, delivery, and follow-up (i.e., across the supply chain). In effect, the suppliers and customers become mutual stakeholders in each other's success. This type of relationship Component and Supplier Selection 173 cannot be managed effectively for a multitude of suppliers. The result is a reduced supply base to a vital few manageable suppliers. Concurrently, suppliers are be coming much more discriminating in selecting strategic customers with whom they wish to partner and support as part of their business strategies. They are reducing their customer base; it's too costly for them to deal with bad customers.
Supplier-OEM relationships are a critical part of successful business processes and are receiving increased attention because of the added value they bring to the design and manufacturing equation. As such, much energy is expended in nurturing these relationships, which are developed at the microorganizational level, i.e., person to person. What does this require? A new method of dealing with suppliers:
Suppliers are selected with a strategic viewpoint in mind.
Careful selection is made of a few critical suppliers. Relationships with a broad supplier base cannot be developed, managed, and given the nurturing required to be successful.
Selected suppliers are treated as family members with their failures and successes tied to your failures and successes; this is the essence of mutual stakeholders. It should be a closely intertwined seamless relationship, one where it is hard to tell who is the customer and who is the supplier.
Open kimono relations-there are no secrets.
As a result, the following issues are extremely vital in supplier management:
Commitment to the relationship; Trust; Constant, open, and accurate communication; Honesty and integrity Shared values, goals, and objectives; Common ground; Cultural fit/match; Complementary and parallel technology road maps; Notice that most of these are soft relational issues dealing with basic values and human relations issues.
Managing suppliers presents some complex and unique issues and is different than managing a functional organization. There are no formal reporting and accountability structures, and people are typically working toward different business goals.
3.2 Historical Perspective
The traditional view of purchasing treats the supplier as an adversarial foe. There was no relationship with the supplier. The purchasing equation was strictly based on price, the lowest bidder got the business, in an arm's length and of ten adversarial relationship. There was no such thing as total cost of ownership.
The entire sourcing decision was based on an antiquated cost accounting sys tem. Delivery, quality, responsiveness, and technical expertise ran far behind price consideration. Companies felt that the more suppliers they had, the bet ter. They would (and some still do) leverage (pit) suppliers against one an other for price concessions. There are no metrics established for either the supplier or the purchasing function. Negotiated lead times were used to ensure delivery.
Purchasing was staffed as a tactical organization being reactive to Engineering's and Manufacturing’s needs, rather than having a strategic forward-looking thrust. The sourcing activity was treated as an unimportant subactivity of the Purchasing Department, which was more internally focused than externally focused. The main focus was on activities such as manufacturing resource planning and inventory strategies. Purchasing was essentially a clerical function with no special skills or technical education required. It was viewed as providing no competitive advantage for the company.
Internally, Engineering generated the design essentially without utilizing the suppliers' technical expertise, Manufacturing's inputs, or Purchasing's involvement. Then Engineering would throw the specifications over the wall to Purchasing. Purchasing would obtain competitive quotations and place the order with the lowest bidder with guaranteed lead times. Every functional organization at the OEM's facility operated as an independent silo (Fig. 3) doing its own thing, as opposed to today's use of crossfunctional teams. The entire organizational structure was based on doing things (activities) rather than achieving measurable results, i.e., firefighting versus continuous improvement. All in all, it was a poor use of everyone's intellectual resources.
FIGURE 3 Traditional supplier communications. Everyone operates in separately
functioning silos.
3.3 Core Competencies
The need for change has resulted in a review of those activities which are core and those which are context to a company (see Ref. 1 for a detailed discussion on core and context activities). To be leaders, global manufacturers must identify their core competencies and use them to build a marketplace presence and image.
A core competency is something a company does so well that it provides a competitive advantage in its targeted markets and perhaps serves as a barrier of entry against competitors. This is the ground upon which companies differentiate their products from those of their competitors. The goal of core work is to create and sustain that differentiation by assigning one's best resources to that work/ challenge. In other words, core competencies are those tasks that add the defining or unique value to a product or service. The core competencies for a given company in reality are few in number, not easily emulated (or duplicated), and provide considerable value. By contrast every other activity in a company is referred to as context. Context tasks are to be executed as effectively and efficiently as possible in as standardized and undifferentiated manner as possible. They are thus prime candidates to be outsourced. In any given business category, one company's core may well be another company's context.
Wal-Mart Low-cost distribution Employee relations Strategic management information service Supplier management of store inventory (automatic replenishment) Compaq Computer Corp., Nonstop data processing Tandem Division Design of scalable network clustering solutions Honda Design and manufacturing of small engines and power trains for a host of equipment Sony Short design cycles Southwest Airlines Low-cost on-time flights Genuine care for employees and customers Apple Computer Ease of use (original core competence)
Sun Microsystems understands and concentrates on their core competencies and uses suppliers to gain competitive advantage by going to those that have the best technology and design support structure. Sun has transitioned to a model where they consider suppliers to be an extension of their own work force, even to the extent of having supplier representatives report to work (co-locate) at Sun.
Sun believes that if suppliers are involved early and their expertise is utilized, then the final design and specifications are more in line with their (the supplier's) capabilities and core competencies, and Sun ends up getting better components with a lower total cost of ownership. Co-location also allows problems to be addressed quickly.
3.4 Types of Sourcing
Outsourcing
Outsourcing and strategic sourcing are key elements in today's supply management process. This section focuses on outsourcing in general. Outsourcing manufacturing functions is discussed in Section 7, and strategic sourcing is presented next.
Companies that undertake true reengineering efforts find that much management energy is spent in maintaining support and management processes that could better be maintained by companies for which they are the core business processes. A company must determine, enhance, and build upon its core competencies and outsource everything else in today's world. Peter Drucker predicted (in 1999) that in 10 or 15 years, corporations would be outsourcing all work that is not directly producing revenue or does not involve directly managing workers.
Tom Peters suggests that if a company cannot sell its services in a particular process on the open market it should consider finding a contractor who does just that, i.e., runs "unsalable" operations.
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(coming soon) TABLE 2 Comparisons of Top Reasons for Tactical and Strategic Outsourcing
Reasons for tactical outsourcing
Reduce or control operating costs
Reduce capital funds invested in noncore business functions
Opportunity to receive an infusion of cash as the OEM's assets are transferred (sold) to the outsource service provider
Need for physical, technical or geographical resources not otherwise available
Elimination of functions that are difficult to manage or that are out of control
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Reasons for strategic outsourcing
Focus on core competencies
Provide access to world-class capabilities
Accelerate organizational change and free valuable resources to pursue new ideas
Share risks with outsource service provider that provides for more flexible, dynamic, and adaptable responses to changing opportunities
Free resources from noncore activities for other purposes such as research and development, customer satisfaction, and return on investment
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Companies in all industry sectors have increasingly turned to outsourcing (transferring selected functions or services and delegating day-to-day management responsibility to a third party) in response to reengineering efforts of the late 1980s and early 1990s. They choose to outsource for either tactical reasons (to lower cost of goods sold) or strategic reasons (improve return on assets). Typically, OEMs that outsource from a tactical perspective focus on narrow short-term goals, while OEMs that outsource strategically have a long-term focus. Many companies originally turned to outsourcing primarily for short-term financial improvement (cost reduction). Some needed to stop a hemorrhaging bottom line because they couldn't control their own processes; they refused or were unable to address deficiencies; they wanted to get rid of a headache; or they just plain jumped on a fad bandwagon. What they often didn't do was to think of the ramifications of and support required to manage their outsourcing decision/strategy. These include removal of critical skills from one's company, the impact on the morale of both directly affected and remaining employees, learning curve loss, the ability to be innovative, and the ability to provide flexibility and fast response to customers.
Strategic outsourcing changes the OEM's way of doing business and focuses on long-term, vital strategic issues and direction. Strategically oriented OEMs seek to change their cost structure by moving fixed costs to variable costs in order to gain greatest return on assets. Those OEMs who manufacture complex electronic systems are often larger companies in volatile industries such as semi conductor process equipment. The industry volatility makes the management of people and fixed assets difficult. This leads to the natural tendency to seek out qualified partners that can materially contribute to strategic goals. Table 2 lists some of the main tactical and strategic reasons for outsourcing.
I need to point out that outsourcing is not merely contracting out. What are the differences?
1. While contracting is often of limited duration, outsourcing is a long term commitment to another company delivering a product and/or ser vice to your company.
2. While providers of contracted services sell them as products, providers of outsourcing services tailor services to the customer's needs.
3. While a company uses external resources when it contracts out, when it employs outsourcing it usually transfers its internal operation (including staff) to the outsource supplier for a guaranteed volume sup port level over a specified period of time (5 years, for example).
4. While in a contracting relationship the risk is held by the customer and managed by the supplier, in an outsourcing relationship there is a more equal sharing of risk.
5. Greater trust is needed to engage successfully in an outsourcing arrangement than in a simple contracting situation. This is because in outsourcing the supplier also assumes the risk, but the customer is more permanently affected by any failure by the supplier.
6. While contracting is done within the model of a formal customer- supplier relationship, the model in an outsourcing relationship is one of true partnership and mutually shared goals.
What are the advantages of outsourcing noncore work? First, as already stated, are the simple cost issues. Fixed costs are voided (they become variable costs) in that the company does not have to maintain the infrastructure through peak and slack periods. This is a big benefit for the OEM since the market volatility on the cost of goods sold and overhead costs is now borne by the contract manufacturer (CM), making the OEM immune to this market variability.
Second, there are cost savings due to the fact that the outsource service provider can provide the services more efficiently and thus cheaper than the OEM can. If the service-providing company is at the cutting edge of technology, it is constantly reengineering its core processes to provide increased efficiency and reduced costs to its OEM customers.
Third is the issue of staffing. OEM in-house service processes are staffed to cope with all possible crises and peak demand. An outsourced support process can be staffed to meet day-to-day needs, secure in the knowledge that there is adequate staff in reserve for peak loads and adequate specialized staff to bring on board quickly and cost efficiently.
Fourth are service issues. Having an agreement with a provider of a particular service gives a company access to a wider skill base than it would have in house. This access provides the OEM with more flexibility than it would have if it had to recruit or contract specific skills for specialized work. The OEM can change the scope of service any time with adequate notice, not having to face the issues of "ramping up" or downsizing in response to market conditions. Working with a company whose core business process is providing a particular service also improves the level of service to OEMs above what they are often able to provide for themselves.
Fifth, creating a good outsourcing relationship allows the OEM to maintain control over its needs and sets accountability firmly with the partnering service provider. The clear definition and separation of roles between OEM and CM ensures that service levels and associated costs can be properly identified and controlled to a degree rarely seen in-house. All of this can be done without the internal political issues that so often clutter relations between support and management process managers who are seen by their internal customers as merely service providers.
Finally, and most importantly, outsourcing allows the OEM to focus its energies on its core business processes. It focuses on improving its competitive position and on searching the marketplace for opportunities in which to compete.
Companies thinking about outsourcing some of their non-core processes have some fears or concerns. One set of concerns revolves around the loss of in house expertise and the possible coinciding loss of competitiveness, and the loss of control over how the services will be provided. A second set of concerns revolves around becoming locked in with one supplier and his technologies. If that supplier does not keep pace with industry trends and requirements and develop new technologies to meet (and in fact drive) these changes, an OEM can be rendered noncompetitive.
Both sets of fears and concerns reflect the basic reticence of business leaders to engage in long-term relationships based on the kind of trust and "partner ship" necessary to function in today's business environment. A third set of concerns revolves around the internal changes that will be necessary to effect the kind of business change that will occur when support and management processes are shed. The cost and logistics of planning and implementing changes to any process are considerable, but they must always be balanced against the opportunity of upgrading capability in another area.
Table 3 Impact of the Design and Material Issues on Manufacturing Cost at Ford
Strategic Sourcing
The old-fashioned relationship to suppliers by companies who operated in a "get the product out the door" mindset doesn't work today. This method of operation (in which technologists find what the market needs and the operationally directed part of the company makes it) was characterized by customers who
- Exploited suppliers
- Found subordinate and easily swayed suppliers
- Limited the information provided to suppliers
- Avoided binding or long-term agreements
- Purchased in single orders, each time setting up competition among suppliers
The major factor driving change in the procurement process is the recognition among strategic thinking electronics manufacturers that the largest single expense category a company has is its purchases from suppliers (typically, corporations spend 20 to 80% of their total revenue on goods and services from suppliers). Thus, it is important to view suppliers strategically because they exert a great influence on the product manufacturing costs and quality through the materials and design methodology. An example of this is shown in Table 3 for Ford Motor Company.
Material, as might be expected, is the biggest contributor to product cost. As stated before, approximately 60% of the cost of a personal computer is due to the purchased components, housing (cabinet), disk drives, and power supplies.
Manufacturing companies are increasingly finding that they must engage their suppliers as partners to achieve their strategic intent. Supplier equity is a "new asset" and in some businesses may be a core competence providing competitive advantage. Competitive advantage means an advantage a company has due to one of the five customer values: cost, quality, service, time, or innovation.
Original equipment manufacturers can either focus internally on the company's operations and products or on identifying the business opportunities posed by the marketplace and translating them into products the company could make, given its processes and capabilities (external or market focus). But the latter is not enough if a company maintains an old-fashioned, rigid bureaucratic outlook.
A market-focused company needs to have a culture that is group oriented, rather than bureaucratic and hierarchical. It takes both medium and long-term views of the market and combines that with market analysis and a focus on innovation and product diversity. The basis of competition for market-focused companies is quality, lead time, and flexibility, and they engage their partners up and down the value chain in discussions regarding those competitive aspects.
- The supply strategies that market-focused companies employ include
- Vertical integration of a logistics network to integrate suppliers and customers throughout the value chain
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(coming soon) TABLE 4 Stages of Strategic Sourcing
Stage Goal Actions:
1 Minimize supplier's negative potential
2 Achieve parity with competitors
3 Provide credible support to business
4 Add supply issues to a manufacturing-based strategy
5 Preferential service from best-in-class and world-class suppliers
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Strategic decisions are made without considering supply issues.
Only problems are communicated.
Issues are price and delivery.
Institute supplier reduction programs.
Initiate cost reduction programs.
Use internal organizations to fix problems.
Active involvement of suppliers to support business strategy.
Supplier relationship strategy is formulated and pursued.
Long-term planning is established.
Anticipate supplier's new technology.
Supply issues considered up front by Engineering/Marketing/ Manufacturing.
Involve suppliers early on so they can anticipate needs and development capabilities.
Proactive, concentrated efforts to earn preferred service from a small supply base.
Long-term commitment.
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Co-makership or mutual stakeholder mindset and involvement not just in operations, but in product design and in manufacturing key components and technologies
Reduction of the supplier base to a few suppliers, tightly integrated into the business, which provides significant operating efficiency, fast time to market and cost reduction Implementation of a common information system for operations, deliveries, planning, design, and change management Outsourcing appropriate manufacturing, support, and management processes to specialist companies
What Is Strategic Sourcing? Strategic sourcing can be defined as the skillful planning of those activities from which value originates. Stated another way, strategic sourcing is leveraging core competencies for competitive advantage. It is difficult for a company to be strategic when it is buried in tactical fire-fighting and administrative issues. Both strategic processes and tactical (daily) operations are necessary, but they must be separated. Strategic processes are proactive, externally focused, and forward looking, whereas tactical processes are reactive in nature, inwardly focused on today's events and problems. Most supplier sourcing is reactive (80%), while only about 5-10% is strategic.
Strategic sourcing isn't easy to implement. There are many barriers to over come. Especially hard pressed to change are those companies who have an inspection/rework mindset based on mistrust of the adversarial arms-length transactions with their suppliers, such as government contractors. Strategic sourcing takes a lot of work to implement properly. It is neither downsizing (or right sizing as some prefer to call it) nor is it a quick fix solution to a deeper problem.
A strategic sourcing organization is not formed overnight. It takes a concerted effort and evolves through several stages (Table 4).
The goal of strategic sourcing is to develop and maintain a loyal base of critical (strategic) suppliers that have a shared destiny with the OEM. The sup plier provides the customer with preferential support (business, technology, quality, responsiveness, and flexibility) that enables and sustains the customer's competitive advantages and ensures mutual prosperity.
This sourcing strategy can occur on several levels. Take the case of a candy bar manufacturer who purchases milk, cocoa, sweetener, and packaging. In this situation there is no one-size-fits-all sourcing strategy. Milk is sourced locally (to the manufacturing plant) for freshness and perishability reasons. Cocoa is sourced at the division level because of the price leverage gained. Sweetener is sourced at the corporate level because it leverages across divisions; it is used in more products than just candy bars. Packing is sourced locally due to its uniqueness and the flexibility provided.
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