It’s 4 U: Tracking Cell Phones From Manufacturer To Market

Mobile handset and device manufacturers are evolving their product lines and adapting their global supply chains to meet the ever-shifting needs of consumers.

The face of my cell phone has been cracked for about a year and a half now. The phone doesn’t blare any of those fancy ring tones. Instead, Waltzing Matilda is my standard of choice.

My battery is on its last leg, and charging my phone has become nearly as tedious as charging things I can’t afford to my credit card, which partly explains why I still have this archaic, circa-2003 cell phone in my pocket.

But there is another reason.

The world we live in is saturated with telecommunication innovation and change. Blackberries and sidekicks have become part of the IT and “it” cultural lexicons. Increasingly, though, I find myself in a technology vacuum. I see family and friends go through multiple cell phones while I struggle with volume control. And what is a “blue tooth” anyway?

Cell phone manufacturers are doing a pretty good job of bringing up to speed those of us “not in the know.” Coincidentally, they too find volume control a recurring challenge—but one literally driven by their own devices. Unlike the average consumer, manufacturers don’t have to keep fumbling with buttons to amplify feedback from the other end.

There are two reasons for this.

First, by virtue of their proficiency in designing and developing new technology and products, cell phone providers are essentially manufacturing demand.

Second, my technology purchasing habits are the exception rather than the norm. As such, the cell phone retail space has become a revolving window of new, bold, colorful multimedia.

Products come and go in rapid succession. Manufacturers, therefore, are dually charged with having to design, develop, and integrate media interfaces that pique the interest of shoppers, as well as make sure their supply chains are robust and flexible enough to scale inventory as buying habits change.

Talking About Best Practices

The rapidity of new product development and old product obsolescence, coupled with the pressure to push technology to market and compete for new users, has made the cell phone industry an evolving model for supply chain best practices.

Some cell phone developers outsource core manufacturing and logistics activities—even research and development (R&D) to an extent—and implement postponement strategies where necessary to better allocate resources and expedite time to market.

Others specifically focus their attention at point of sale (POS), leveraging technology to accurately forecast demand and share that information with suppliers and other intermediaries.

Either way, cell phone manufacturers and sellers aspire to create marketable products that hit sales channels quickly. Then the real challenge begins: trying to educate consumers like me why a Waltzing Matilda ring tone is passe.

“Cell phone manufacturers are industry leaders because they have been successful reaching out to global markets and adapting their supply chains,” says Dr. John Vande Vate, executive director of the Executive Masters in International Logistics program at Georgia Institute of Technology, Atlanta.

This reality is attributed to the very nature of cellular technology’s evolution. From the beginning, mobile handset manufacturers and wireless service providers were actively engaged in building and installing infrastructure in emerging markets where land line communication was limited.

While they recognized the market demand for wireless technology, they also saw the economic potential for outsourcing manufacturing in these areas. Now many of these companies are offshoring product design and development activities in emerging markets such as China.

“China has a highly skilled engineering workforce and labor is cheap. In addition, it is a competitive market,” explains Vande Vate. “Cellular phone companies in China add more new users in one month than some do in specific U.S. markets in one year.”

U.S.-headquartered Motorola, by example, currently employs 2,000 workers at 16 R&D facilities across China.

The diverse mix of cell phones and mobile devices currently hitting retail channels places considerable importance on how and where manufacturers perform final assemblage and customization. This, in turn, places additional stress on the supply chain, and often leads companies to seek third-party assistance.

As evidence of this increasing complexity, the outsourced manufacturing and outsourced logistics segments are crossing paths in the cell phone market.

“The shift in activities is due in part to the strategy of postponement that spreads traditional manufacturing activities further down the supply chain,” Vande Vate explains in The Ins and Outs of Outsourcing, a report he co-authored with Dr. Amy Ward.

“Motorola, for example, has more than 100 hardware configurations and 30 different software versions. Add to that customization for different carriers, languages, power cords, and batteries, among others, and the complexity becomes enormous.”

Due to product diversification, companies must expend more time and effort further up in the supply chain to customize their products to meet different requirements.

Ringing Up Third Parties

“The supply chain is slowly creeping back past kitting and packaging to assemblage. If a manufacturer can talk suppliers into owning inventory all the way through assemblage, they will do so because it defers costs,” says Art Smuck, vice president of operations for ATCLE, a Fort Worth, Texas-based 3PL that specializes in managing high-value, high-velocity serialized devices in the wireless industry.

If not, companies such as ATCLE are happy to assume these responsibilities. An increasing number of cell phone manufacturers are outsourcing operations such as high-velocity receipt and outbound shipments, customized services such as software flashing and SIM card burning, and serialized device tracking.

“If a manufacturer or wireless carrier needs to update products with a new software version, for example, it is easier to outsource that to a third party,” Smuck adds.

Serialized tracking of individual products is also an important task. “We can tie serial numbers to specific accounts and track those over the product’s entire lifecycle,” Smuck explains.

“This gives wireless carriers a detailed look at inventory disposition, as well as the ability to drill down to specific individual units, which is important for recalls. It also helps wireless operators when they need to marry a phone with an account to initiate service.”

Tracking individual cell phones similarly enables carriers and retailers to cull important information about a phone through its lifecycle, pinpointing when a unit is shipped, received, returned, and refurbished. Conceivably, manufacturers and their customers can use this information to trend consumer buying habits and pinpoint poorly selling or defective products.

Ultimately, outsourcing these activities reduces turn and dwell times, which are important considerations given the short shelf life of most mobile devices. Postponing customization closer to the point of demand is a growing trend.

“Cell phone manufacturers today invest more time and money on localizing and customizing phones for the consumer market than they do manufacturing the hardware. This postponement strategy has accelerated the blurring of the lines between electronic manufacturing service and 3PL service,” Vande Vate and Ward conclude.

While postponement and outsourcing have proven effective strategies for some OEMs, others are taking a different tact. Nokia, for example, has radically changed the way it manages its supply chain by better responding to demand-driven signals. It is driving value by coordinating its supply chain directly and using outsourcing only as a means of adding flexibility.

In the mid to late 1990s, when consumer demand for cell phones and mobile devices began to swell, the lowest price often dictated how much and where manufacturers such as Nokia sourced product.

Devine Intervention

“One decade ago, the telecom industry began taking major technology steps. At one of these inflection points it became clear our old model of doing business wasn’t working,” says Jeff Devine, vice president, Americas operations and logistics for the Espoo, Finland-headquartered manufacturer.

At the time, Nokia was forecasting demand over the long term, engaging with suppliers over lowest cost, and building cell phones “made to stock, not made to order,” he explains. Nokia was producing cell phones based on availability of parts rather than demand, leaving retailers with product they couldn’t sell.

“We were coordinating hundreds of suppliers without real-time information. We did not have good communication upstream or downstream in the supply chain,” he says.

Facing this crisis, Nokia turned to reinvention, as it often has during its 145-year history. “We went from merely giving input to fully orchestrating our supply chain, looking at what consumers wanted and communicating that to our suppliers,” Devine explains.

This change in strategy impacted Nokia’s product and facility design, as well as the way it designed its supplier relationships. Before revamping its supply chain, the company juggled 168 days of supply, which meant if consumer demand shifted and certain products stopped selling, Nokia and its customers were left with dead inventory.

“Now we specifically look at POS data to effectively determine consumer buying habits and communicate that to our suppliers. This helps us bring value to the customer in terms of cost and product availability,” says Devine.

A Competitive Differentiator

Today Nokia operates with about 28 days of inventory, and its strategic supply chain redesign has helped it realize hundreds of millions of dollars in annual cost reductions. The manufacturer ranked fourth in AMR Research’s 2005 list of the top 25 supply chains, and is currently the largest mobile device manufacturer in the world, selling 265 million cell phones for net sales of $41.2 billion in 2005.

But the real advantage of Nokia’s supply chain redesign has been in leveraging its network to reduce costs and add flexibility where necessary.

“The industry is maturing and competition is tight, so we always need to finds ways to cut costs,” says Devine.

It also needs to be vigilant about tracking demand changes. Any subtle shift in consumer purchasing habits can have ripple effects throughout the supply chain.

Take the increasing diversification of Nokia’s product line, for instance. “Three or four years ago the price of our products ranged from $100 to $300. Today we offer devices exceeding $600, some as economical as $40, and at every price in between,” he says.

Nokia manufactures all types of devices, from voice-only cell phones to multimedia gadgets that integrate e-mail capabilities, digital cameras, and MP3 players. For high-volume, low-priced products, cost margins are tight, requiring seamless movement through the supply chain. Nokia generally pushes this type of product through its “volume factories” where low inventory and speed to market are critical to mitigating costs.

Customized, high-value devices, by contrast, require more time to be configured to carrier or market requirements and therefore need more upside flexibility in the supply chain. Nokia channels these specialized product lines through “value factories” where it has the resources and time to adapt its core product per end-user and seller specifications.

Cost considerations aside, creating a demand-driven network gives manufacturers and their suppliers increased flexibility to respond quickly to demand shifts or supply chain disruptions.

“A number of companies are now revamping their supply chains to synchronize supply directly with actual— not forecast—demand. By letting true demand dictate actions up and down the chain, these companies are transforming their supply chains into ‘demand chains’ that focus on fulfilling real orders rather than on building inventory to a level that may or may not be right,” say James P. Andrew and Andrew McDonald of The Boston Consulting Group in their paper, Synchronize Your Demand Chain.

The authors point to one specific example where a key component supplier to both Nokia and Ericsson suffered a fire that hampered production.

“The Nokia Global Supply Web, a proprietary collaborative planning tool that was tied electronically into the production systems of the supplier’s plants, quickly saw that the damaged facility was not scaling up as expected. Recognizing the magnitude of the problem, Nokia moved aggressively to redesign its affected products and to mobilize a network of alternative suppliers and production facilities,” they write.

Ericsson, by contrast, accepted the supplier’s promise that production would not be affected, and was unable to put in place an appropriate contingency plan when, in fact, the supplier misjudged its ability to stock the necessary components.

“Ultimately, Ericsson was unable to produce enough handsets to meet demand. The company lost significant market share and $400 million in potential revenue,” Andrew and McDonald conclude.

One key attribute of Nokia’s redesigned supply chain network is the visibility it drives from the POS back through the supply chain to its core and second-tier suppliers.

The Need for Speed

“Nokia tracks inventories not only for its own operations but for its suppliers as well. In addition, Nokia uses one logistics service provider to coordinate inbound transportation to each manufacturing site so it can consolidate shipments and exploit economies of scale.

The result is a flexible and responsive environment where speed is achieved by reducing days of raw material inventory,” writes Vande Vate in his paper, Speed: The Solution For Margin Myopia.

Nokia also brings a similar approach to identifying purchasing habits and product movement among its customers.

“Even though a wireless carrier may be selling our device, we still want to know what is happening at the POS,” says Devine. That information, too, is communicated back up through the supply chain.

The success Nokia has driven by reinventing the way it sources components, manufactures product, and distributes goods through various sales channels across the globe, can be qualified by the communication it drives from consumers on back through the supply chain.

As competition within the industry intensifies, Nokia’s capacity to accurately and efficiently balance shifting market demands with a scalable distribution network will help solidify its role not only as the world’s leading cell phone manufacturer, but as a supply chain leader as well.

The cell phone supply chain is both a model for logistics excellence and a catalyst for logistics IT innovation.

From this perspective, cell phone manufacturers and their logistics partners are evolving technologies and supply chains that will impact the way the industry literally and logistically communicates the needs of the marketplace to their constituents. The volatile pace of the mobile device market specifically places a premium on visibility, speed, and flexibility.

But given the expansiveness of their global networks, and their sensitivity to shifts in user demand, cell phone manufacturers are equally vulnerable. How well a manufacturer gauges the pulse of the market will dictate how it designs and develops new product—for better or worse. Capturing new users, then being able to scale inventory accordingly, will challenge manufacturers, carriers, and retailers to synchronize supply directly with actual demand.

Sticking it to Demand

Moving forward, questions loom: How will the convergence of communication technologies—per consumer demand—impact the way manufacturers source, build, and create new devices? Will Europe’s ratification of the Waste Electrical and Electronic Equipment Directive, which legislates that cell phone manufacturers (among others) be accountable for end-of-life disposal of their products, impact how U.S. companies adapt their supply chains?

And lastly, when will I trade in my cell phone for a new one?

one for all?

Demand for versatile communication products such as the Blackberry and Palm’s Treo will likely grow as the industry matures and price points drop. But will consumers forego their cell phones, MP3 players, cameras, TVs, radios, computers, and even watches for one device that does it all? If so, how will manufacturers adapt their supply networks to accommodate this demand?

Some already are. Motorola, for example, recently announced a joint venture with Legend Silicon, a Chinese company that develops demodulator chips for emerging mobile TV businesses.

The manner in which manufacturers source components, and design and build next-generation devices will similarly impact increasing efforts to recycle electronic products per Europe’s lead.

“Global manufacturers will be driven by European environmental initiatives to extract value from recycled phones, which may compel them to design new products with this in mind,” says Vande Vate.

But, as he acknowledges, it’s not just the product that is important, “it’s also about building scale so it is economical to transport these recycled parts.” This will force businesses to embrace product lifecycle management and reverse logistics as strategic initiatives. How fast and to what degree Europe’s directive will impress U.S. industry remains to be seen.

The third question is easier to answer than the first two. Now that my earphone jack no longer works, and I can’t use the hands-free contraption a savvy salesperson convinced me to buy, I am lawless while driving. So in the interest of safety, I will be forced to purchase a new cell phone…as soon as my battery dies.

In the meantime, Waltzing Matilda is calling, so I’ll have to get back to you on that.

Can U Help Me Now?

Cell phone manufacturers aren’t the only ones constrained by increasing product diversification and consumer demand. Wireless carriers are similarly challenged to shape their supply chain strategies around the growing needs of their customers, which often means outsourcing inbound logistics activities to a third-party logistics provider.

When wireless operator Virgin Mobile USA, for example, first launched its wireless prepaid products and services to a young demographic, it opted to outsource specific supply chain activities to Brightpoint, an Indianapolis, Ind., 3PL that specializes in last-mile cell phone distribution.

Virgin Mobile’s supply chain required efficiency and scalability so it could avoid unnecessary capital investments in facilities and technical infrastructure. Outsourcing allowed it to leverage a variable cost model to address needs in an unpredictable market.

Brightpoint brought a full suite of integrated supply chain services, including freight and inventory management, packaging and assembly, EDI hosting, and fulfillment services, to the table.

The 3PL currently manages inbound deliveries from Virgin Mobile’s suppliers, warehouses inventory in its distribution center, manages the packaging and assembly per Virgin Mobile’s requirements, and facilitates receipt of retail orders and invoicing via EDI. Then it ships orders to Virgin Mobile’s authorized retailers, distributors, and end users.

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