Building Better Links in High-Tech Supply Chains
L a s t U p d a t e d A p r 7 , 2009 4:56 PM EDT
As high-tech supply chains increase in complexity, they become harder to manage. Collaboration between OEMs, suppliers, and retailers is the answer. The supply chains of high-tech companies are globe-spanning marvels. Over the past 20 years, looking for ready sources of components, lower-priced labor, and talented designers and engineers, these companies have ranged throughout the world. In a highly competitive and fast-moving marketplace, they have sought to maximize their strengths and flexibility as products change rapidly and prices continue to fall. But the sprawl and complexity of such networks have made it harder to manage end-to-end operations smoothly. Many technology companies are grappling with volatility and disruptions across their supply networks, and eliminating waste from duplicative efforts is an ongoing challenge. As product life cycles shrink, we see inventory buildups in the supply chains of some companies, while others cope with rising distribution costs, on-time delivery problems, or delays in getting new products to market. In fact, high-tech companies have let complexity undermine collaboration in their supply chains: they aren't working as closely as they could with their supply chain partners--sharing information or streamlining processes--to smooth out volatility and eliminate waste. This failure is surprising. The high-tech industry creates products that promote collaboration, openness, and efficiency. We all know stories about companies in other industries such as retail and consumer-packaged goods that have improved their operations significantly by using technology to collaborate more closely with suppliers--yet high-tech companies have been slow to follow. For a host of reasons rooted in the way they are organized and compete, their executives have been less than enthusiastic about pursuing
the benefits of collaboration with their supply chain partners. This lack of enthusiasm is fast becoming more costly for OEMs. Even as product life cycles shrink, consumers are demanding products with new features (such as mobility, greater storage, and more memory) that make products ever more complex. As this complexity increases, it will become harder to manage supply networks, opportunities will be missed, and supply chain costs will rise. The path to improvement, we suggest, lies in better collaboration with suppliers. To achieve it, companies should address their internal challenges and then deal with key stress points that strain supplier relations.
Roadblocks to better collaboration Closer collaboration in the high-tech industry is an elusive goal. Difficulties arise from the specific nature of high-tech competition and markets, from cultural barriers, and from organizational flaws. In our work with clients, we find that problems in four areas often prevent successful supply chain collaboration. Managers must understand them more fully to diminish their impact. Partner complexity and churn High-tech OEMs need hundreds of components from a broad range of global suppliers, which themselves lie at the center of even farther-flung supply chains comprising second-tier companies that make subcomponents. Products generally have short life spans. One mobile-phone maker, for instance, typically uses more than 20 components from tier-one suppliers alone for products with a life cycle of only nine months. There's a very small window to make crucial decisions about a product's design, price, quality, and features, as well as to choose the right array of suppliers. Since everything must happen quickly, building deeper collaboration and partner loyalty become secondary considerations. What's more, supply chain partners often change as product designs and specifications evolve, so collaborative efforts often fail to survive from one model to the next. Silos and forecasts OEMs in many industries organize themselves around functional units. But in high technology (and other assembly industries), units such as manufacturing, sales and marketing, and product development often send conflicting forecasts of demand and production to their partners. Not surprising, supply chain responses are often based on guesswork, and forward planning is difficult. In one variation of this problem, OEM sales reps provide "lowball" estimates of demand rather than a truer picture, so they can more easily beat internal goals. Alternatively, when components are in short supply, forecasts by manufacturing functions often are overly optimistic in a play to maximize the allocation of scarce products from suppliers. Poor quality of data OEM forecasts often aren't granular enough to be useful to supply chain partners. Typically, OEMs set broad targets across a number of product lines rather than provide details on expected unit sales for specific products. That combined with rapid product obsolescence makes getting a fix on true demand difficult. Furthermore, the IT systems that capture data across supply networks often are incompatible, thereby walling off vital information and making information-based collaboration a struggle. The mobile-phone industry provides a notable example of poor data: OEM forecasts of consumer demand, provided only four months out from delivery dates, often misstate actual demand
by 400 percent. The mistrust spiral Given the intense and unpredictable nature of competition, high-tech executives often believe that they must guard information on their business plans and processes closely. This perceived need for confidentiality--OEMs reason that since their suppliers provide parts to competing OEMs, shared data isn't secure--directly affects suppliers. The mistrust extends to ODMs (original design manufacturers) as well, which are also considered risky, since they work with the OEMs' competitors, and even to retailers that distribute those competitors' products. If OEMs do provide data, it's often inaccurate. This lack of transparency makes the OEMs' projections less than believable to suppliers, which then compensate by scaling production downward. That causes additional problems if demand is unusually strong. To read the full article on The McKinsey Quarterly, click here » © 2009 CBS Interactive Inc.. All Rights Reserved. http://www.cbsnews.com/news/building-better-links-in-high-tech-supply-chains/