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Supply ChainBoom and Bust

Carlos Blandon Sergio Reveles

Tom Koplyay

Presentation: TOWARDS A MORE RESPONSIVE SUPPLY CHAIN: A STRATEGY DIMENSION

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AgendauMandate & Scope

u Introduction

uSupply Chain in High Tech

uProblem Statement and Causes

uRecommendations and Action Plan

uEvaluation

uConclusion

•This is our agenda base on a Mandate, Introduction, etc.

•We want to address with this agenda all the challenges, trends, current situation in the Supply Chain in the high tech and take a look at it from a Case Analysis perspective.

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Mandate & ScopeuObjective:

n To study the strategic aspect of SCM

n To establish recommendations for SCM

n To provide final comments

•Our mandate is to come up with general and realistic recommendations for potential best practices in dealing with supply chain partners in the High Tech sector, given the current challenges and trends that industry confronts.

•We all know that effective supply chain management within an organization has proven it can drive cost reductions while increasing customer responsiveness, but organizations face a new challenge: How will companies achieve competitive advantage in a world where supply chains compete with other supply chains.

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IntroductionuGreat importance in general

management studiesn Definition

n Evolution of the Chain

n Supply Chain Management overall objectives are enterprise wide decisions

n Supply Chain as competitive advantage

•Before we get to the good stuff of supply chain, we need to know what is it?

•Since its inception about 10 years ago, the field of supply chain management has become tremendously important to companies in an increasingly competitive global marketplace. The term supply chain refers to the entire network of companies that work together to design, produce, deliver, and service products. In the past, companies focused primarily on manufacturing and quality improvements within their four walls; now their efforts extend beyond those walls to encompass the entire supply chain.

•For this purpose we would like to make an introduction of supply chain by looking at the definition, evolution and the strategic part of it to gain competitive advantage.

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WHAT IS SCM?

“The means by which firms engaged in creating, distributing, and selling products can join forces to establish a supply network with unbeatable competitive advantage.”

•It’s important to have a clear definition supply chain when a company is trying to set its strategic objectives. For this purpose we have come out with the most accurate defination “the means by which firms engaged in creating, distributing, and selling products can join forces to establish a supply network with unbeatable competitive advange”

•In the picture you can see the bigger picture of the supply chain.

•So Supply chain have to do with the following:

•Material flow from suppliers and their “upstream” suppliers at all levels

•Transformation of materials into semi-finished and finished products

•Distribution of products to customers and their “downstream”customers at all levels

• Depending on the situation, the supply chain may include major product elements, various suppliers, geographically dispersed activities, and both upstream and downstream activities. It is critical to go beyond your immediate suppliers and customers to encompass the entire chain, since hidden value often emerges once the entire chain is visualized.

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EVOLUTION OF SCMSourcing and

Logistics

Phase I

Internal

Excellence

Phase II

Network

Construction

Phase III

Industry

Leadership

Phase IV

DriverVP Sourcing

(under Pressure)CIO/Supply

Chain LeaderBusiness Unit

LeaderManagement

Team

Benefits

Leveraged

Savings

Prioritized

Improvements

Best Partner

Performance

Networks Advantage, profitable revenue

Focus

Inventory,

Logistics,

Freight, Order

Process Redesign, System

improvement

Forecasting, planning, customer

services

Consumer

Network

Tools

Teaming

Functional

Excellence

Benchmarks,

best practices

Metrics Database mining,

e-commerce

Intranet, Internet, Virtual

Information Systems

Action AreaMidlevel

OrganizationExpanded

levelsTotal

OrganizationFull Enterprise

Guidance

Cost Data,

success funding

Process

Mapping

Advanced Cost Models,

Differentiating process

Demand-Supply

Linkage

ModelNone Supply Chain

IntraenterpriseInterenterprise Global Market

AlliancesSupplier

ConsolidationBest Partner Formal

AlliancesJoint Ventures

Training Team Leadership PartneringNetwork

Processing

Internal ExternalLEVELS OF SUPPLY CHAIN OPTIMIZATION

Source: Poirier, Charles “Advanced Supply Chain Management”

•Why do this? Most of the gains achievable from an internal focus have been realized, while the opportunities that exist through cooperation and collaboration are the new frontier.

•The evolution of supply chain includes Internal integration which occurs within the organization and represents the position of most business organizations seeking improvements in their supply chains. And External integration which occurs when the business joins forces with external firms to seek network savings. Both levels together describe the evolution of supply management and become the foundation to reach operational efficiencies along with a strong strategy. The internal level have to do with gaining sourcing and logistics efficiencies to reach internal excellence (see table). External optimization has also two phases which includes networkconstruction and industry leadership.

•We believe that High Tech companies are on phase IV of this classification, however some of the problems we identify have to do with internal aspects of the optimization of supply chain.

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Strategic View of Supply chain

Source: Booz-Allen’s SCM approach, July 2000

•So for example, on this exhibit of the supply chain management hierarchy, as you can see we are concentrating on the “what” (from the strategy point of view of the chain) objectives, policies and operating footprint have to be establish to achieve effectiveness in the supply chain and prevent major problems during downturn.

• Strategy concentrates on the long term decisions of SCM; tactical is concentrating on the medium term decisions and operational on the day to day operations of supply chain with execution been how to implement all these. We are concentrating on the to part of the SCM hierarchy.

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STRATEGIC OBJECTIVES OF

SCMu Profits

u Customer Satisfaction

u Cost

u Time to Market

u Product Quality

u Growth Rate

u Sales Volume

u Market Share

•The overall objectives of an efficient SCM are three:

•Enhanced SCM to drive corporate strategy and shareholder value

•Collaboration among partners to synchronize operations

•Technology play a key role innovative supply chain strategies

•The Internet is already having a major effect on supply chains and there is more come. One way to capture its effect is in thefollowing framework:

•The Framework for Internet Impact

•Within an Enterprise – Better Cost, Speed, Accuracy, Communication

•Across the Chain: Information Exchange – Visibility, Collaboration on Inventories and Design

•Across the Chain: Restructuring – Compressing the Chain, Changing Roles; “Virtual Resources”

•Across Multiple Chains or Nets – Auctions, e-Procurement, Exchanges, Communities

•New Business Opportunities – New Channels/Markets, Mass Customization, Truly New Product

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Key Areas of SCMu Demand Forecastingu Manufacturingu Inventory Management u Purchasingu Transportationu Warehousingu Product Developmentu Marketingu Sales

•Once Companies set up their objectives, they concentrate on the above areas. Given careful consideration to all of then to reach an optimal and competitive supply chain

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Supply Chain in the High Tech Sector

u History

u Overall Challenges to SCM

u External current situation in the SC

u Internal current situation in the SC

u Cisco, Compaq and Nortel Case

•So, what had happen in the supply chain in the High Tech Sector? To make sense of it, we will look at the evolution of it, the overall challenges, External (environment situation) and the Internal Situation in the Supply chain and not necessary a particular company. Please remember that in this industry, most of the supply chain has high level of optimization

•As an example we will take a careful look at Cisco, Compaq and Nortel

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Historyu Supply Chain Control

n Prior to the 1990’s OEM’s operated SCn Control through asset ownershipn Vertical integration (organized by product)

•In the eighties the big electronic equipment suppliers were vertically integrated. Big OEMs used to own the sheet metal shops, paint shops, printed circuit board shops, cable and wire plants, assembly plants and depending on management preferences on what was considered a priority, they used to own and run specific component manufacturing sites like specialty connectors and semiconductors.

•These were the days where management thought of controlling the supply chain via asset ownership. The companies were organized by commodity or by product with some kind of matrix reporting system to the executive team.

•Each component or sub-assembly division had it own financial goals driven by the internal business unit that was the recipient of the goods.

•The intent was to satisfy internal company demand and in some cases management allowed the component or sub-assembly division into the external market but this were not part of what was considered the core business of the division.

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20001990 2010

Systems contracts

Integrated supply

Outsourcing

E-business

Lower total cost

Reduce redundancy

Improve processes

Outcomes:

Bludgeoned channelStreamlined channelBetter channel communicationBetter channel integration

Supply chain trends In the High Tech

Sector

•In the nineties, big OEMs started the process of “divesting” what they thought was available in the market, the reasons for this divestiture process was to concentrate in the core competencies and to free up cash to fund the rest of the activities of the corporation. More and more cases of divesting happened and then big OEMs started to formulate specific manufacturing strategies.

•The new trend was to pass from a vertically integrated organization to a virtual set of entities that would contribute with a portion of the whole product. The concept of supply chain meant all the activities from start to finish in order to finish a product. This initiative was to increase intregration among partners.

•OEMs would start to consider Supply Chain decisions as strategy decisions. They would start to outsource what ever was not considered part of the core competency.

•In the late nineties, the concept of outsourcing came as a widespread phenomenon in the electronic equipment industry transferring assets to the EMS from the OEMs.

•The OEMs are in the way of becoming brand managers that use the EMS to put together the product. The degree of outsourcing will depend on the management ideas about what the future of the company is

•The theory was that manufacturing specialist, companies like Solectron,Sanmina, Celestica, Flextronics, and Jabil Circuit – could bring greater focus and expertise to projects, could develop procurement and risk efficiencies better than OEM (Outsourcing Equipment Manufacturing) and could lead in innovation if they were encouraged to do so.

•Finally, the Internet has open a new frontier to reach supply chain excellence,

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IT IS ABOUT $$$$$

•So the main purpose of these strategies is PROFITS……..INCREASE SHAREHOLDER VALUE

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Overall Challenges for Effective SCM

u Complex Supply Chain Network

u Complex product structure or building process

u Decentralized control/organizational “silos”

u Increasing pressure for customer service and asset utilization

u Multiple sources of uncertainties

•So, these are the overall challenges in the High tech sector

•Nonetheless, the payoff from successful supply chain management is high enough that most companies are finding innovative ways around these challenges.

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Current SituationExternal Sources of

variabilityuDemand variability

n Example: Difficulty forecasting sale

uProcess variability n Example: Unexpected downtime and yield losses

uSupply variability n Example: Supplier deliveries are late

•Variability and uncertainty are the most significant threats to a well-optimized supply chain network. There are three main external sources of variability in supply chains:

•DEMAND VARIABLILITY – Bullwhip effect - It describes how small fluctuations in demand at the customer level are amplified as orders pass up the supply chain through distributors, manufacturers and suppliers. As an example – Cisco Suppliers. Nevertheless, order fluctuations invariably become considerably larger as one moves upstream in this supply chain. (not been able to scale down)

•Common Causes of Bullwhip

•Demand Signal Processing – each stage does its own forecasting

•Order Batching – trying to achieve economies of scale

•Price Fluctuations – inducements such as “forward buys” through price reductions

•Allocation Gaming – when shortages loom, over-orders are placed through multiple channels.

• Once the causes of the bullwhip for your company’s supply chain are recognized, you can begin exploring how to lessen the bullwhip. For example, if a major problem stems from demand signal processing,then one party in the chain can take responsibility for a single chain-wide forecast of consumer demand, which is then routinely shared on a dynamic basis with all members.

•PROCESS VARIABILITY –The push-pull point – it relates to anticipated demand (forecasts) versus actual demand (firm orders). In

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Current Situation Internal Issues

uOld Vertical Thinking n Lack of Communicationn Lack of Trust and Fearn Problem Solving Methodology

uMisalignment of Agendasn Different set of goalsn Different methods of achieving goals

u Flexibility vs Predictibilityu Inventory Differences: Full vs Necessary

•Some internal factors includes the old vertical thinking and the misalignment of agendas among partners

•Old vertical thinking have to do with not been able to scale down during economic downturn resulting lack of communication, trust and problem solving methodology

•The misalignment of agendas where different goals are set by OEM and CEM (look at the slide)

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CISCOu Economic Slowdown (scale down)

n Not able to see the macro downturn (V, U, 7)

n $2.2 Billion Inventory write-off

n Steep decline of stock

u Lack of Supply Chain visibility n Misread the market (demand forecasting)

u Lack of measures with its SC partners

u Lack of alignment with second & third suppliers

•Two of the things that gave Cisco its glow were its development of a virtual supply chain with limitless capacity and its ability to provide extraordinarily high reliability to its customers. Another apparent strength was its approach to manufacturing: It didn’t build most of what it sold.

•By all outside appearances, Cisco was the picture of health and prosperity. But hidden problems were mounting. Early last year, shortages of memory and optical components began paralyzing one path of production.

•For the first time, Cisco’s supply chain began to experience the kind of growing pains that affected its earnings. When the telecommunications infrastructure experiences a severe downturn, customer orders began to dry up and Cisco neglected to turn off its supply chain. Orders went out, parts began to pile up.

•Its raw parts inventory ballooned more than 300% from the third quarter of 2000. Cisco’s problems culminated in a $2.25 billion write-down. In short, Cisco simply wasn’t able to scale up or down as quickly as it though it could.

•Downturn: oil prices, currency fluctuations, inflation, and Federal reserve policies

•Over reliance on technology and self-confidance

• Technology vs Human Judgement

•Cheap Financing distorted real demand

•Profits falling vs looking at part profitability

•Outsourced manufacturing model did not encourage frank communication and trust

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COMPAQuSupply Variability (scale up)

uShortages of equipment

uUnfilled orders of 700,000 devices

uCompaq Mi$$ the boat of opportunities

•The pocket PC, introduced under a direct sales/inventory less strategy, quickly became the company’s biggest hit. Demand for the device outpaced supply 25 times, and Compaq executives were enthusiastic about its market potential

•In late 1999, Compaq decided it needed to revive its lagging commercial PC sales. The company announced a hot new product line: the Ipaq series of handheld devices, with full color screens, multimedia capabilities and unmatched portability.

•After the 2000 second quarter, however, demand for handheld devices in general was outpacing supply and most companies, including Compaq, Palm, IBM and Ericsson, were losing customers and orders

• unfulfilled orders of 600,000 to 700,000 devices

•Because shortages of LCD capacitors, resistor and flash memory

•Suppl iers who had their eye only on their own margins concentrat ed on

producing only those components that gave them the greatest return on

their manufactur ing investment.

•Capaci tor manufactures did respond to the shortages, running thei r

p lans three shi f ts a day, seven days a week. Al though product ion

capaci ty is start ing to expand, the pace is hardly breakneck. At pennies

a piece and with t iny commodity margins, capaci tors and resistors need

to be sold in major quant i t ies to support the kind of growth nec essary to

underwri te a ful ly responsive new factory.

•When the economic downturn hi t , Compaq bui ld up i ts capaci ty in

inventory. When they tr ied to sel l the product, none was buying,

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NORTELuLike Cisco, victim of Demand Variabilityn Econ downturn – unable to scale down

n Lack of visibility, measures & alignment

u to gain market share no matter what

uSteep competition – playing catch up

•Like Cisco, Nortel fel l vict im of demand variabi l i ty for the same reasons

•Due to fast moving compet i tor ’s, exempl i f ied by Cisco, who were

outsourcing heavi ly, and rapidly acquir ing companies and capabi li t ies to

f i l l out their product portfol ios. Nortel decided it had to bec ome more

l ike i ts competi tors. This meant swapping vert ical integrat ion for vir tual

integrat ion and using acquisi t ions to maintain a technological edge over

competi tors.

•Falling behind - no competitive advantage – play catch up with Cisco.

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Analysis matrix of SC in the H-Tech

CISCO, NORTEL. COMPAQ

Low

High

Low High

1

3 4

2

Demand Uncertainty

Supply Uncertainty

•Supply chain are unique, but it is possible to classify them generally by their stability or uncertainty on both the supply side and the demand side. Consider the following table – where would your company fit in? See Table

•On the supply side, low uncertainty refers to stable processes, while high uncertainty refers to processes which are rapidly changing or highly volatile. On the demand side, low uncertainty would relate to functional products in a mature phase of the product life cycle, while high uncertainty relates to innovative products.

•Once your chain has been categorized, you can select the most appropriate tools for improvement.

•For example, if your chain is in box 4, with a dynamic demand and highly uncertain supply, then creating a “virtual supply chain” like that of Cisco would make sense. On the other hand, if your chain was in box 1, with stable demand and stable supply, you would like to avoid the bullwhip and would use strategies to counter the bullwhip effect.

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Problem Statement

u The misalignment of objectives among partners has created impediments in the supply chain that prevents them from achieving operational efficiency and from increasing shareholder value. Given the current economic slowdown supply chains in the high tech industry have revealed weaknesses due to the inability of the partners to scale down when needed.

SR

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Causes of Problem

Causes of problem

u Design of supply chain

u Lack of practices

u Lack of focus in strategic relationship

u Organization

u Technology without strategic purpose

SR

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Recommendationu Supply chain design must be cautiously

configured.Fit between demand pattern and supply chain

Define strategy for asset ownership

u Practices

Benchmark for best in class

SR

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Recommendationu Strategic relationships

Alignment with supply chain partners

Focus on the “right” customers

u Organization

Consolidation of accountability and authority

u Technology application

SR

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RecommendationThe Benefits of Collaboration

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Action planu Crafting the project vision, developing the business

case and ensuring executive commitment.

u Managing organizational change and redesigning business processes.

u Choosing the appropriate implementation approach and methodology.

u Managing technical challenge.

SR

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Developing a strategy

u Start with the right goal.

u Strategy must enable the organization to deliver a unique value proposition.

u Strategy must define how all elements of what organizations do fit together.

u Strategy involves continuity of direction.

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Evaluation

F. Asset UtilizationW. Capital Efficiency

Cost MinimizationGrowth

SR

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ConclusionCareful attention to the supply chain design and operation can give an organization the competitive advantage needed to succeed in the marketplace.

Management should understand the consequences when making decisions affecting the supply chain configuration.

It is not about asset ownership but having the accountability at the right place and the collaboration among partners.

SR

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ConclusionuBreak Organization Barriers

uBuild Visibility into the Supply Chain

uManage SC by metrics

uReduce the decision Cycle Process (Demand and Supply alignment)

uEncourage Collaboration

uReduce problem resolution latency

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ANY QUESTIONS?