Industry Snapshot: Electronics

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Is the latest gadget a hit or just hype? Will that newfangled gizmo be cutting- edge for a year or obsolete in a month? Fickle buyers and unpredictable lifecycles can short-circuit the consumer electronics supply chain.

Last December, parents nationwide queued outside stores in the early morning hours and hovered white-knuckled over their laptops in eBay bidding frenzies, all in hopes of securing rare Nintendo Wii game systems.

The public experienced firsthand one of the chief challenges of the consumer electronics supply chain: accurately anticipating demand.

Among the many categories of electronics merchandise, high-velocity and high-value consumer goods present the most vexing and dynamic supply chains.

Some aspects of consumer electronics are more fashionable than fashion; their volatility can be even more severe, their lifecycles shorter, and their margins thinner than that of designer apparel.

Yet from these challenges emerges real innovation. Out of necessity, consumer electronics supply chains have been pushed to the bleeding edge and are forging new paths for sourcing, production, distribution, logistics, and even financing strategies.

Every supply chain is unique, but some pressures across the consumer electronics supply chain are common. These include:

  • Strong retail price pressure—mobile phone prices, for example, decline as much as eight percent per quarter, according to AMR Research.
  • Products where shelf life can be far shorter than production cycles.
  • Rapidly changing customer demands.
  • Relatively fixed production and logistics constraints.
  • The need to balance product innovation with feature rationalization.
  • The need to become more global.
  • Distribution to multiple sales channels, each with their own logistics needs.

Consumer electronics companies are addressing these challenges by enhancing their ability to understand, analyze, and respond to the market.

"Manufacturers are aggressively driving cost out of the supply chain and improving service to customers," says William Conley, Jr., president of ATC Logistics & Electronics (ATCLE), a 3PL based in Fort Worth, Texas.

Supply chain investment is focused on "understanding what's happening and why," Conley says. "Manufacturers are determining how they can mine information to make new products."

HOT TOPICS: Top-of-Mind Issues In Consumer Electronics

Rebalancing Global Sourcing: Electronics companies are moving from a focus on low labor cost to total landed cost, and that can mean shifting production closer to the target market.

India, Russia, and Vietnam are drawing attention, joining Mexico, Brazil, and Canada as attractive alternatives for production—particularly for companies employing postponement strategies or customizing product for specific markets.

The total cost of ownership approach "considers managerial resources, organizational structuring, manufacturing competencies, intellectual property, and of course, logistics," says Adam Pick, principal analyst for EMS/ODM market intelligence services at iSuppli Corp., an El Segundo, Calif., consulting firm specializing in electronics supply chains.

Companies are also using flexible network designs to manage the variability of electronics goods.

"They're looking for a blend, with some dedicated, static points and other smaller operations that can be leveraged when demand is high," says Lonny Warner, vice president, High-Tech Industry Group for Menlo Worldwide Logistics, headquartered in San Mateo, Calif.

Increased Collaboration. Effective forecasting is the best defense against under- or over-production. Electronics leaders are enhancing their ability to collaborate by sharing forecasts. But there is still plenty of room for improvement.

"Forecasting to actual demand is the greatest challenge electronics companies face," says Steve Sensing, vice president of high-tech/electronics at Ryder System, Miami, Fla. "The challenge is driven by long manufacturing-to-retail outlet lead times."

At the core of most electronic products is a chip, and the way semiconductor manufacturers approach forecasting—with uncertain yields and a reverse bill of materials—is very different than for finished products, according to Dean Strausl, executive director of the Electronics Supply Chain Association (ESCA), based in Los Gatos, Calif.

Semiconductor makers "take optimistic forecasts from OEMs and merchandisers and build what they think they need to build," he says.

Therefore, electronics companies across the supply chain must work together to find a comfortable middle ground.

"In the increasingly volatile game of high-tech, collaboration may be the only offensive move left in the playbook," states Collaboration in High-Tech: In Search of the Elusive Win-Win, an October 2007 paper by AMR Research.

Product Lifecycle Management. Fickle consumer tastes and brand loyalty mean new products often fail. And those that do succeed may soon be rendered obsolete as newer products hit the market.

To increase a product's chance of survival, electronics retailers are tapping product lifecycle management solutions to reduce production cycle times, balance the relative costs of transport modes against product size and weight, market demand, and margin opportunity. Planning for end-of-life issues is also becoming part of the design stage.

"A company might launch a cell phone with a projected life of six months, and it could last six days, or it could stay on the market for two to three years," says Ryder's Sensing.

New Financing Schemes. Supply chain operators are turning to finance companies to stretch out their Days Payables Outstanding, reduce Days Sales Outstanding, and create a lower supply chain-wide cost of capital. Nearly 70 percent of firms across industries are investigating this best-in-class strategy, according to a March 2007 Aberdeen Group research brief.

"The electronics industry is a supply chain with financially weaker tiers—contract manufacturers, for example—undergoing a significant power shift toward the large big-box retailers and mass merchants," says the report. "Companies in industries with these types of dynamics have the opportunity to drive a significant improvement in working capital and earnings, even on low-margin business."

Going Green. Regulatory and retailer pressure is driving electronics manufacturers toward green practices—from reducing use of hazardous materials to lowering emissions to recycling packaging.

Some businesses are also required to take back product when it reaches end of life, spurring development of reverse logistics and recycling programs.

"Almost all manufacturers are good at getting product out," says ATCLE's Conley. "If there is opportunity to be had in the electronics supply chain, it is in how to handle returns, reverse logistics, and asset disposal."

Renewed Logistics Focus. At one point in time logistics gave way to forecasting and outsourcing as a major focus for electronics companies, according to ESCA's Strausl.

Now that logistics costs have grown to 13 percent of the cost of an item, "we're back to tightening our belts, squeezing more cost out of logistics," Strausl says.

New transport options, such as sea-air combos, are helping meet short sales cycles while controlling costs. Electronics companies are also using dynamic routing to reallocate shipments based on the latest point-of-sale data.

"Many destinations are decided when the purchase order is cut, but much of that is based on assumption," says APL's Wang. Dynamic routing is a powerful way to shift that inventory to places where it's in demand.

Expectedly, the "last mile" is becoming an issue for high-end electronics retailers. Merge-in-transit processes and diverse distribution center operations help retailers bundle disparate products into a complete solution, such as a home theater. Then dispatch systems can coordinate delivery and installation.

Bundling "has a number of effects in terms of how the supply chain is organized, such as sourcing of goods and staging in an order-specific fashion," adds RedPrairie's Cabe.

Containing Costs. Electronics companies are under considerable pressure to cut supply chain costs, with 68 percent of high-tech companies, which includes consumer electronics, citing this as a top concern, according to a December 2007 Aberdeen Report, High-Tech Industries: The Supply Chain Executive's Strategic Agenda.

The good news: 51 percent of domestic and 49 percent of international electronics firms have already redesigned their supply chains, compared with 39 percent and 32 percent of supply chains across other industries.

It's doubtful that consumer electronics companies will ever be able to perfectly align supply with demand because they'll never know for sure whether the next Wii will take off or tank.

But anxious parents seeking to delight their kids with the next must-have will appreciate the savvy production and supply chain planning that consumer electronics companies use to feel and respond to their demands more accurately.

CASE STUDY: Palm Grabs Hold of Reverse Logistics Costs

Palm Inc.'s entrepreneurial legacy means it is always looking for the next big product innovation. But these days the $1.56-billion maker of smart phones and handhelds is plowing new ground in an area most electronics companies give little thought to: reverse logistics.

Many firms have outsourced much of the reverse logistics process, largely viewed as a cost area, and set up processes to shuttle returned products back to low-cost return and repair centers around the globe.

Larry Maye is on a three-year mission to change all that, making some decidedly against-the-grain moves to satisfy the twin challenges of containing costs while keeping customers happy.

When Maye joined Los Angeles-based Palm as senior director, global repair and logistics, the company had already shifted from the relatively low-cost customer-direct reverse logistics approach to one centered on retail partners.

Customers take their Treo or Centro back to a wireless store, which batches the returns and periodically sends them back to Palm. In the meantime, the customer gets a refurbished device as a replacement.

Maye's analysis of that process revealed one standout metric: in 60 percent of those returned products no problem is found—consumers changed their mind, wanted different models, or couldn't afford the purchase.

Even if the customer had the product for only 30 days, it can't simply be put back on the shelf. It has to be inspected, refurbished, repaired, or at least repackaged.

"I looked at the total cost of ownership and realized we could take days out of the supply chain, gain turnaround efficiencies, and cut feed stock, all by moving the initial returned-product segregation and refurbishment process closer to the customer," Maye says.

So he brought in ATC Logistics & Electronics (ATCLE), a 3PL serving high-value, serialized devices in the wireless, broadband, and medical industries.

Phase One of the project was establishing ATCLE's Dallas facility as a segregation center: the 3PL receives the returned product, performs an initial evaluation, and dispatches it to repair vendors as needed.

Now the company is about to complete Phase Two, separating those products by level of refurbishing required, and addressing easy level one and two repairs—fixing a scratch on the case, or installing a reflash of the software, for example.

Sounds simple, but performing those repairs in Texas—even with U.S. labor rates—takes four days out of turnaround time and reduces the quantity of feed stock required to replace products for customers.

At a rate of, say, 5,000 units a day, four saved days means 20,000 fewer units in feed stock; instead, those needs can quickly be fulfilled with rapidly refurbished devices.

"That's a significant savings for us," Maye says. Phase Two should be fully operational by April.

ATCLE forwards units needing higher-level repairs to low-cost providers in Mexico or back to original equipment manufacturers (OEMs) in China or Taiwan. Palm continues to take direct repairs for non-cellphone service contract customers.

At the same time, Maye is straying from the standard technology approach to outsourcing reverse logistics.

Instead of using the 3PL's infrastructure exclusively to manage processes, or forcing the 3PL to use Palm's—both standard practices—Maye is seeking to develop a management platform that provides Palm with full visibility and control of reverse logistics activities by requiring key data from 3PLs while allowing them to use their own preferred platforms.

That gives Palm the best of what the 3PL has to offer, while not being locked in through deeply entangled integration.

"I can use several 3PLs, and multiple types of return channels and methodologies, without adding exponentially more cost to IT infrastructure," Maye says.

Unfortunately, the kind of visibility tools and management-by-exception processes offered to the forward supply chain are not fully developed for reverse logistics, particularly via the software-as-a-service model Maye favors, so that platform is a work in progress.

But the visibility and control Palm has already gained allows the company much greater control over costs. Already, Palm buys and resells parts to its repair vendors to track and manage material usage through a partnership with Avnet.

And using a sortation facility prevents vendors from cherry-picking the easiest repairs.

Much of the payoff will come with completion of Phase Two, and even more when Maye's technology visions are realized.

"The financial benefits to Palm will be substantial," he predicts. Other benefits include increased velocity, efficiency, control and flexibility, with reduced turn-around times, fewer touchpoints and transportation legs, and reduced back-office costs.

"We're going from zero visibility to 100-percent visibility," Maye notes, significantly increasing Palm's decision-making ability. "It's a challenge to achieve this, but it is where the electronics supply chain still has a gap."

RFID's Slow But Steady Rise

RFID is well along the product lifecycle pattern known as Gartner's Hype Cycle, and the technology's "hype" is less striking than in years past.

But don't let this relative silence fool you. Electronics companies continue to explore RFID's potential to capture much-needed visibility and respond quickly to changing customer demands.

"RFID is definitely taking hold," says Chica Wang, director of global accounts for APL Logistics, an Oakland, Calif-based 3PL. "Electronics companies are quickly extending its application."

Still, many of these projects are in the pilot stage, according to AMR Research's report, What We Have Learned from Three Years of Retail RFID Pilots.

In an ongoing Best Buy pilot, for example, Monster Cable is applying pallet-level RFID tags and generating advance ship notices. Best Buy uses the RFID tags to track product through its DC, into the store, and all the way to the shelf, according to Walt Cabe, senior account executive for RedPrairie, an IT services provider based in Waukesha, Wisc.

He points to Monster's willingness to volunteer for the first pilot as a sign of the collaboration necessary to enhance RFID use for all players.

One major obstacle facing consumer products companies, including electronics makers, has been the tendency to view RFID compliance as a cost, and failing to accurately evaluate its effect on out-of-stocks.

"The impact of the manufacturer on preventing out-of-stocks is greater than most companies originally thought. Based on eight pilots, the data supports that 25 to 27 percent of the out-of-stock problem can be fixed by improving the consumer product company's supply chain response," according to AMR's report.

While the cost of RFID tagging is still high, lessons from industry pilots suggest it can be a good fit for high-value, low-volume consumer electronics goods where visibility is a make-or-break proposition.

Wal-Mart's finding that RFID pilots yielded a 16-percent reduction in product out-of-stocks at the shelf level has considerable implications for consumer goods—where high cost and lack of brand loyalty mean in-stock SKUs win the sale.

This "RFID pilot phase" is expected to continue for some time as manufacturers and retailers work out the metrics and collaborative requirements necessary to fully realize the technology's full potential.

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