Cool Stuff, Blazing Speed

What Air Jordans were to the 1980s and 1990s, iPods and cell phones are to this decade. Consumer electronics products are undoubtedly the hot new status symbols—especially among teens and young adults.

“Consumers are looking for cool stuff,” notes Todd Thibodeaux, vice president of industry relations for the Consumer Electronics Association, Arlington, Va. “The younger demographic, in particular, has a hunger for new features.”

Feeding that enormous hunger makes it easier for new competitors to sate the industry. As a result, “consumer electronics companies innovate or die,” Thibodeaux notes.

In the past, mainframe computers, medical and defense applications, and large central telecommunications switching systems dominated the industry.

Today, however, the electronics industry is “becoming consumerized,” says Dean Strausl, executive director of the Silicon Valley-based Electronic Supply Chain Association. The industry is all about consumers, and providing them with cell phones, PCs, iPods, BlackBerries, video games, and kids’ toys.

As electronics companies race to fill consumers’ desire for the latest new gadgets, they have many hurdles to overcome. These include:

Shorter life cycles. “In the early 1990s, electronics companies introduced new products once a year,” Thibodeaux says. “Now they introduce new models throughout the year.”

As a result, “product life cycles are very short,” notes Ed Feitzinger, vice president of worldwide logistics for Hewlett-Packard Co., Palo Alto, Calif. “For some HP products, for example, the life cycle is only three months, as retailers seek even newer offerings that deliver a competitive advantage.”

Because their products have such short life cycles, consumer electronics companies “need to make sure they manage their inventory efficiently,” Thibodeaux says, so they don’t get stuck holding obsolete material.

Thanks to strong sales, sophisticated planning systems, and improved product flow management, the sales-to-inventory ratio is dropping.

“Sales-to-inventory rates used to fall within the two- to three-month range, but that has slowly whittled down,” Thibodeaux says. “We now have a scant few weeks of inventory.”

Security. Consumer electronics are coveted items, and easy targets for theft. Flat panel TV displays, for example, “are not very big and the boxes are a reasonable size, making them easy to handle. They’re greatly in demand, and would be easy for a thief to sell,” Thibodeaux notes.

Product theft is “an enormous issue for Hewlett-Packard,” Feitzinger says. “We have to stay ahead of various gangs targeting the product.” It’s not easy.

“Thieves are clever. They look for weak partners in the supply chain, then try to infiltrate them. HP maintains a large security operation, and works closely with its supply chain partners to prevent theft,” Feitzinger says.

Reverse logistics. “Returns continue to be a big problem in many different ways, costing the industry more than $10 billion a year,” Thibodeaux notes. “Legitimate returns make up only a fraction of the total number of returns. Often, products are returned because they don’t work the way consumers thought they would. The consumer then assumes the product is defective.”

About 10 to 12 percent of all products sold are returned, Thibodeaux says.

The bottom line. “We’ve set the consumer’s expectation that product prices only go down, not up,” says Greg Shoemaker, Hewlett-Packard’s vice president of central direct procurement.

In some cases, adds Thibodeaux, “there’s between three and 10 percent deflation in the cost of the products and their components.”

Add thin margins to the mix, and it’s no wonder some consumer electronics companies are struggling.

Sanyo Electric Co., Osaka, Japan, for example, has been hard hit by falling prices and increased competitive pressures. In July, the company announced that it is restructuring, and expects to cut costs by $628 million in three years by streamlining its logistics, procurement, and manufacturing operations.

Consumer electronics companies looking to boost their bottom lines increasingly recognize the importance of logistics and supply chain management.

“Logistics used to be an afterthought; it was a fairly small expense as recently as 10 years ago,” Feitzinger says. “Today, however, logistics costs are growing very significant as the cost of products continues to drop.”

In addition, logistics represents a major point of contact with the customer. As a result, Feitzinger says, “consumer electronics companies now view logistics as exceptionally important.”

One of those companies is Hewlett-Packard, which provides technology solutions to consumers, as well as businesses and institutions globally. With more than one billion customers in 178 countries on five continents, HP’s supply chains are long and complex.

(HP is currently streamlining its corporate organization. The company announced in July that it plans to reduce its regular full-time workforce by 10 percent over the next year and a half. While the majority of staff reductions will be in support functions such as IT, HR, and finance, other reductions will be made inside business units, “in areas where work can be reduced by improving processes and re-prioritizing existing tasks,” according to an HP briefing.)

Long known for its computers and printers, the company is placing increased emphasis on consumer electronics, introducing hot new products such as a digital camera custom-designed by singer/songwriter Gwen Stefani, and the HP Games PC Console, expected to be available late this summer.

And, HP HDTV media hubs will enable consumers to bring together through a single platform digital images, music, TV, and video.

HP’s consumer supply chain stretches from Asia, where the majority of products are made, to Western Europe and the United States.

These regions have historically been the company’s biggest markets for consumer electronics, although that is beginning to change. Procurement in the electronics industry also has changed significantly over the past 20 years, notes Shoemaker.

Of particular importance for HP is the consolidation of its supply base, driven in large part by mergers and acquisitions.

“Take disk drives for example,” Shoemaker says. “Twenty years ago, there were probably a total of 50 suppliers in the industry; today there are about seven.”

Shoemaker manages nearly 40 percent of HP’s direct material spend. His group is responsible for buying all the commodities that span the entire family of businesses, including hard disk drives, microprocessors, memory, chip sets, and software, as well as less strategic commodities such as packaging, resins, and power cords. The balance of commodities—those materials specific to a business—are managed by the business units.

When capacity constraints occur—as when a particular industry is not investing at the same rate of growth as its customers—”buyers have fewer choices to pick from, and it’s harder to work around those constraints without established strategic relationships,” Shoemaker says.

Outsourcing Pressure

Consolidation in the consumer electronics industry will continue, Shoemaker predicts. “Electronics companies will face continued pressure to outsource, to perform only the most key functions that are core to success,” he says.

“This may mean continuing to develop ways to depend on external partners, to successfully leverage product breadth and materials spend through outsourcing.”

Collaborating with supply chain partners, already important, will become critical in the future. Consumer electronics companies need to answer key questions: How do we continue to develop relationships so we can share sensitive information in an environment where we and our suppliers are continually challenged by operating margins? How do we share what seems to be an ever-decreasing margin?

To be successful in that environment, “electronics companies have to collaborate, partner, increase efficiency, and figure out new ways to make that happen,” Shoemaker says.

Many consumer electronics companies are tuning into radio frequency identification (RFID) technology in the hopes of achieving real efficiency benefits. HP, for example, has been active in developing RFID standards and pilots, “moving the needle fairly quickly,” Feitzinger says.

“HP is firmly convinced that RFID will save a considerable amount of money, and that it will be beneficial for us and our trading partners. And we are convinced the time line for achieving those savings is well within sight,” Feitzinger says.

“Unfortunately, we’re reaching a point where the hype is receding, just at a time when we’re seeing opportunity on the immediate horizon.”

HP recently participated in an industry workgroup of leading manufacturers and distributors, gathered by consulting firm Accenture. The workgroup evaluated the potential of new RFID technology to enhance electronics manufacturing, distribution, and retail operations within the United States.

Also participating were Best Buy, Celestica International, Dell, Philips Consumer Electronics, Microsoft, and Texas Instruments, among others.

The workgroup identified potential short-term benefits of RFID for electronics companies, including reduced materials handling costs, and improved order accuracy, inventory accuracy, and replenishment.

Long-term benefits include improved balance of supply and demand among customers and suppliers, returns and warranty efficiencies, better on-shelf availability, and more effective merchandising and promotion capabilities.

An estimated 76 percent of RFID implementation costs would be borne by the retailer, while only 22 percent would pertain to the manufacturer, according to projections made by the group. The retailer would see 59 percent of the benefits; the manufacturer, 39 percent.

“Our findings suggest that the benefits for manufacturers and retailers are proportionally balanced based on the relative investments each party needs to make,” says Ed Starr, a partner in Accenture’s Supply Chain practice. “For example, despite making smaller investments than retailers, manufacturers would still attain benefits from improved execution accuracy, lower materials handling costs, and better visibility to downstream demand.”

Consumers Benefit

Consumers would also benefit from increased product availability, improved return and warranty service, improved self check-out service, and more convenient and rewarding loyalty programs.

The workgroup also concluded that, unlike the consumer packaged goods industry, the electronics industry is largely insensitive to tag costs. Those costs would be relatively insignificant compared to the overall price of most electronics and because of the moderate unit volumes.

One retailer participating in the workgroup, Best Buy, is working with Accenture to build on the findings and to define its RFID program strategy, manage rollout and implementation, and assist suppliers with integration and compliance requirements.

“Our goal is to create a flexible, high-velocity supply chain operating with better product availability for customers at a lower total cost for the company,” says Bob Willett, executive vice president of operations for Best Buy. “RFID technology can transform the way products are produced, distributed, and merchandised. Our own operations, customers, and suppliers can share in the benefits.”

Best Buy’s major suppliers are expected to begin applying EPC-compliant tags to product cases and pallets by Jan. 2, 2006, with all product cases and pallets tagged by May 2007.

With RFID and other technologies driving continued efficiencies in the industry, it’s a safe bet that logistics and supply chain management will remain a top priority for consumer electronics companies around the world.

WANTED: Global Solution Providers

As a leading consumer electronics company, Hewlett-Packard recognizes the benefits that efficient logistics and supply chain management practices can bring to customer service and the bottom line.

Because of its complex global supply chains, outsourcing non-core logistics operations is a priority, and HP has become skilled at building strategic relationships with third-party logistics providers. HP expects its logistics suppliers to act as solution providers.

“Our challenges include pushing trading expenses down against the tide of capacity shortages and increased fuel prices,” says Ed Feitzinger, HP’s vice president of worldwide logistics. “We actively ask 3PLs, ‘What can you do to help us?'”

HP is in the process of trimming the number of logistics providers it works with, currently about 100.

“We may end up with only a handful of partners in the big regions,” Feitzinger says, for example, a few providers for Vendor-Managed Inventory and another one or two outbound providers in the United States, with a similar approach in Europe, Australia, and Japan.

“Some regional specialists are very good at what they do,” Feitzinger notes. “We’d rather work with a 3PL that’s the best at what it does than with a global provider who has weak capabilities in a certain area.”

HP will likely take a blended approach, for example, working with a regional player in Brazil, a global provider in Australia, and multiple providers in India.

To reduce the number of 3PLs it works with, HP plans to streamline and improve its procurement process, perhaps inviting three or four providers to a bid rather than 10.

The bid request itself is likely to change in order to encourage 3PLs to act more as solution providers. HP will contract with trusted providers with strong engineering skills and a full range of capabilities.

Rather than detailing specific requirements that it wants met, HP may go to two or three current providers and request that they develop a solution to a particular challenge, such as establishing a facility on the U.S. West Coast. This approach leaves more room for creativity.

“One provider may be able to capitalize on an empty facility in Sacramento, while another may be able to let us share its Ontario facility with another company. A third provider may come up with a different answer. That’s our goal,” Feitzinger explains.

HP chose to decentralize its global logistics operation.

“Some worldwide logistics organizations believe that central control results in greater efficiencies and better choices,” Feitzinger says. “But that’s not the case, as the consumer markets in Israel, Malaysia, and the southwest United States, for example, are remarkably different.”

HP’s logistics organization must be flexible enough to serve its traditional markets as well as growing consumer markets in countries such as Rumania, Bulgaria, and India.

In addition to being flexible, logistics strategies and operations must be regional—even country-based—to respond to changes among regions. HP uses a blended approach, leveraging the benefits of centralized and regional strategies.

Feitzinger heads up a decentralized logistics organization, with one person in charge of operations in each region.

“We have a common strategy, common alignment, and common information technology, plus teams that help each region replicate best practices in their area,” he explains. “Rather than have European operations do things differently than in India, we have a team that helps drive the regional flavor with consistency.”

The Next Generation of Leaders

To develop a world-class supply chain, HP focuses on training its logisticians to be world-class.

“Everybody needs to be the best at what they do,” Feitzinger says.

HP is working to build the next generation of leaders on its global team, and is currently rolling out a career road map to help individuals understand what skills they need to become managers running the largest programs in the country.

In addition, Feitzinger is working to increase the logistics teams’ analytical capabilities.

For example, “in the long term, we want our air and ocean freight managers to analyze the variances in our network, look at data, and do procurement risk management, taking into consideration such things as tripartite agreements with an airliner and a forwarder.”

To ensure that they have the necessary skills, the company is providing statistical training for its air and ocean freight specialists.