Electronics Logistics: Tech Transport TLC
Moving delicate, high-value electronics requires choosing packaging and transport modes with tender loving care.
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Revenue from sales of consumer electronics will reach an estimated $209.6 billion in 2013, according to the Consumer Electronics Association. All those smartphones, e-readers, HDTVs, and other popular consumer devices represent just a fraction of the high-tech electronics sector. The category includes just about any product that processes data, whether it's used to produce music, diagnose cancer, keep planes aloft, or perform thousands of other tasks.
Such a vast variety of products relies on an equally vast variety of supply chains. Here's how smart shippers and their partners handle the specialized needs of electronics logistics.
High-tech electronics manufacturers face one looming challenge: the growing need to manage cross-border trade. Seventy-four percent of U.S.-based senior-level high-tech decision makers responding to a 2012 UPS-sponsored survey expect to increase exports of their companies' products during the next two years.
"The increase has been driven by changes in sourcing strategies, and demand for high-tech products among the growing middle class in emerging markets," says Alantria Harris, high-tech segment marketing manager at UPS in Atlanta. U.S.-based electronics manufacturers expect greater demand for their products in India, the Middle East, Africa, Brazil, other parts of South America, Eastern Europe, Korea, China, and elsewhere in the Asia-Pacific region, according to the report, Change in the (Supply) Chain Survey.
Electronics manufacturers already participate in a global marketplace. Given an even greater need to ship product internationally in the future, these companies will have to ensure they have reliable operations in each market where they source components, manufacture products, and distribute to customers.
"Businesses need to establish a presence in their current markets, and examine new markets," says Harris. "Ensuring they have the right transportation providers and suppliers can help minimize risk."
A third-party logistics provider with global capabilities—including access to transportation in many markets, connections to customs brokerage networks, and the ability to optimize transportation modes—may also help an electronics firm meet the challenges of operating in a global marketplace.
Speed vs. Cost
In addition to the challenges of operating in a global market, the speed with which newer, more-capable products push older ones out of the market also puts pressure on supply chains.
"Research and development drives the electronics business," says Jason Cook, managing director in the operations consulting group at Accenture. Electronics manufacturers focus on generating revenue by developing innovative products and getting them into customers' hands fast.
"It's a time-sensitive supply chain," he adds.
Shelf life plays a big role in shippers' transportation decisions. Mobile phone manufacturers, for example, typically keep a handset model on the market for just six to nine months. If a company transports handsets from the manufacturing site via ocean carrier, those products could spend 10 to 20 percent of their product lifecycle in transit.
"Time to market becomes a premium on those products," Cook says. "As a result, shippers tend to use more air freight."
Shipping products from Asian manufacturers to the United States often takes 30 days by ocean—about 10 times as long as the two to three days it takes by air. "But air can cost up to 10 times as much as ocean," Cook explains.
In addition to the need for speed, several other factors may prompt shippers to choose air freight, despite the cost. One such factor is the shipment's value. When introducing a new product, a consumer electronics manufacturer might need to ship freight worth $10 million, $20 million, or more. That's a lot of inventory to tie up for a month.
"Products that have a large channel fill requirement tend to favor air freight because of the inventory investment that original equipment manufacturers (OEMs) make while their product is in transit," Cook notes.
Business arrangements between OEMs and retailers often favor expedited transport as well. OEMs don't usually get paid for electronics until those products arrive in customer distribution centers. That could make air freight well worth the extra expense.
Also, the right pricing strategy can remove the sting of that cost. "If freight terms in their customer contracts allow manufacturers to cover the costs of these transportation services, they're more likely to expedite," Cook says. "They get the benefit of accelerating their revenue cycles, and they recover their investment."
They also give customers extra value by getting the product to market faster.
On the other hand, OEMs that use postponement strategies might opt for ocean freight. These are companies that, for example, don't load software onto their products, or don't do the final assembly, until it's time to ship units to specific customers.
Because these manufacturers don't need to forecast how many units with a specific configuration their customers will need, postponement makes supply chains more flexible.
Companies that ship product into a market, then hold it for final assembly or configuration, often can afford longer transit times, letting them enjoy the cost advantages of ocean transport.
"If they're not postponing—if they're putting product straight into the market—they tend to use air," says Cook.
The choices aren't always simple. Many electronics OEMs use ocean carriers, many use air, and some mix the two.
"For example, they might use air freight to fill the channels, but bring replenishment product into the market by ocean," Cook says.
Whatever mode companies use to ship high-tech electronics, they must make sure delicate products arrive intact. That makes handling and packaging important concerns.
One company that has given much thought to packaging in recent months is Cox Communications, the third-largest provider of cable and broadband services in the United States. A quest for packaging to better protect its products in transit was a major component of a recent 18-month supply chain transformation initiative, says Ian Burgar, director of customer premise equipment (CPE) operations at the Atlanta-based company.
The term CPE refers to set-top boxes, cable modems, gateways, and other products cable companies provide to end users, plus business-oriented equipment such as phone systems. Some equipment customers receive is new, but much of it is returned by other customers when they no longer need it, then refurnished by the cable company. This "churn inventory" gives cable company supply chains a large reverse logistics component.
Cox buys its products from major OEMs such as Cisco, Motorola, and Arris. New equipment and product returned by customers flow into four regional distribution hubs in Chesapeake, Va.; Baton Rouge; Wichita; and Phoenix.
Employees in the DCs test and refurbish the used equipment, repackage it, and distribute much of it to primary distribution centers (PDCs) in the markets that Cox serves. The company operates a private fleet to move those units. It also uses package carriers to ship units directly to customers who do their own installations, rather than rely on the company's service technicians.
Before the transformation initiative, Cox had no packaging standards for product shipped into or out of the PDCs, either in bulk or via package carrier. Cox collaborated with the International Safe Transit Association (ISTA), a standards organization that works on packaging for transportation. "We designed bulk and direct consumer packaging to pass ISTA specifications," Burgar says.
For bulk transportation, Cox developed a carton that holds four units of any product. "Foam padding lines the bottom of the boxes," explains Burgar. "Each divider has foam padding to lock the units in place, so they don't bounce around in transit." The company also bags each product to prevent cosmetic damage.
For direct-to-customer shipments, Cox developed a single-unit carton, which it held to even higher ISTA standards than the bulk carton. Testers at an ISTA certification lab dropped loaded cartons from different angles, compressed them, subjected them to high humidity, and put them on a shaker table to simulate the vibration cargo may experience during a long truck ride.
Since implementing the new packaging, Cox spends less money on cosmetic touch-ups and certain repairs.
For the future, Burgar hopes to persuade OEMs to change their own packaging practices. Today, OEMs box and palletize their products for shipment from overseas manufacturing sites to the United States; then Cox repacks the units into smaller cartons for delivery to individual markets. Cox would like its vendors to use smaller cases that can flow through the supply chain.
Burgar also would like to replace much of the company's cardboard packaging with plastic corrugate—a greener and more cost-effective material than cardboard—because shippers can re-use it for years.
Quest for Perfection
Packaging is also an important issue in business-to-business (B2B) high-tech electronics sales. Many businesses insist that packaging arrive in perfect condition.
"If they see damage to the packaging, they believe there's possible damage to the product," says Danny Stephens, global vice president of transportation at Phoenix-based Avnet. Some refuse product on that basis, without even taking it out of the box.
With a presence in more than 70 countries, Avnet sells electronic components to OEMs, and integrated computer systems to resellers and end users. It operates two major DCs in Chandler, Ariz.—one for each product line—plus several smaller U.S. facilities.
While Avnet experiences few problems with damage in transit, greater customer focus on packaging is making the company strive even harder for perfection. "We keep carrier performance metrics, and work with our carriers and engineering team on packaging," Stephens says.
Protecting product while controlling packaging costs is a continual balancing act. So is mode selection.
For companies such as Avnet that sell components to companies that favor just-in-time manufacturing, choosing a mode for international transportation is easy. "Ninety-nine percent of our international freight comes by air," Stephens says.
But for domestic transportation, the company keeps costs down by moving about 85 percent of its shipments by truck. Exceptions occur when product arrives late from one of Avnet's suppliers, or when lack of components threatens to shut an OEM's production line.
"We are a customer-driven team, so if a customer has an immediate need, the shipment moves by air," Stephens says.
The high value of many products Avnet ships, combined with its frequent use of parcel carriers, creates another challenge: moving these valuable products.
"We have no easy, cost-effective way to insure that type of product because of the volumes we ship," Stephens explains.
The carriers that handle Avnet's bulk shipments offer liability coverage more suited to the company's needs. Luckily, Avnet rarely sees product go astray, no matter whose truck it's on.
For its bulk shipments, Avnet has cultivated relationships with carriers whose standard operating procedures align well with its own requirements.
"We ensure they're all certified by the Customs-Trade Partnership Against Terrorism (C-TPAT), and that they have secured facilities wherever they move our product," Stephens says. "We verify that they have handling procedures to support moving either electronic components or integrated computer systems."
LG Electronics—a Korea-based vendor of consumer electronics, mobile communications products, and appliances—also works with carriers to ensure that its products stay safe and secure.
"Trailer theft continues to rise in the United States, so in 2011, LG began taking steps to reduce its transit losses through a layered security approach with its service providers," says Michael Fahey, director of transportation and security C-TPAT at LG Electronics U.S.A. in Englewood Cliffs, N.J.
"We have worked over the years on detailed processes for trailer entry at our DCs, and we've created more stringent guidelines for vetting carriers," he says.
LG scans the licenses of all drivers who serve its DCs. "We also require each trailer and driver to provide a valid commercial driver's license and load number, or the driver will be turned away," Fahey notes.
The varied needs of retailers that receive electronics from LG also pose shipping challenges. "All customers require different stack heights, pallets, floor loading, and number of labels," Fahey says. "This can be labor-intensive for the DC, because the shipment must be compliant, yet it must utilize the space within each trailer."
Complying with the guidelines established by large retailers such as Walmart, Target, and Best Buy is simply business as usual, and LG has always succeeded in this area. "But now even regional retailers have compliance guidelines we must follow," Fahey says.
To meet this growing demand, LG creates a checklist of customer requirements for each order. The company measures its performance monthly to ensure it is meeting customer requirements while also maintaining its own cost objectives.
As information technology takes over more aspects of our lives, the electronics sector will only continue to grow. The special savvy and TLC it takes to ship these products safely and efficiently will become more important than ever.