As the electronics industry becomes ever more global, it gets increasingly fragmented. This seeming contradiction is nonetheless true because globalization is generally viewed from the perspective of the worldwide reach of multinational corporations.
This approach ignores the fact that, these days, successful electronics companies are not vertically integrated. Instead, they depend on relationships with other companies to design, source, manufacture and market their products.
Although the supply chain is a well-understood concept, the term is something of a misnomer because chain implies a sort of straightforwardness. But the fragmented nature of global sourcing of commodity electronic products is anything but straightforward. It is so dynamic, in fact, that it is not much of an exaggeration to say that every product in a component supplier's portfolio has its own supply chain. To secure a competitive edge in this harsh sourcing environment, relationships must be maintained. Trust is paramount.
Managing a dynamic supply chain is a formidable challenge for all stakeholders. But world-class companies are coping and turning a profit because they understand how to manage the nuances of multitier supply chains. There are three things that are driving the trend toward such chains:
Global competitors. The emergence of world-class EMS providers, OEMs and original design manufacturers (ODMs) makes a global network of relationships mandatory.
Digitalization of functions. The migration of component technology to digital implementations means they can be replicated quickly using software. Also, specs for commodity parts move at Internet speed.
Information transparency. To optimize efficiency and operating margins for the entire chain, data must be shared more freely and with many more companies than ever before. Intense global competition puts continuous pressure on these margins.
Companies concentrate on core competencies to achieve a competitive edge. But, at the same time, they must avoid being perceived as a "one-trick pony." The results are the same around the world: some brand carriers and OEMs, particularly in the PC industry, are shedding their manufacturing and design assets; EMS providers such as Flextronics Corp. are migrating toward design as a differentiating characteristic; and ODMs are competing with EMS providers for market share.
To cope effectively, corporate structures, strategies and policies must reflect the transformations that change drivers have wrought. Local representatives must be given negotiation flexibility, sourcing information must become more transparent and a dynamic network of multitiered, multifaceted relationships must be maintained.
An example of a typical multitiered supply chain is shown in the figure on page 16. It differs radically from the linear supply chains of a few years ago, in which a component supplier negotiated with an OEM (where the design originated) on component price and quantity and the OEM negotiated with the EMS provider on manufacturing costs.
The distinguishing characteristic in the figure is that each of the players has a relationship with most of the others. Information flows relatively freely among them. The EMS providers are the nexus for much of the communication because, in most cases, they purchase the commodity components.
In this example, the U.S. IC firm is creating a board-level reference design built around a multimillion-gate chip. The reference design targets the needs of a specific U.S. OEM. The component supplier is designing a peripheral chip set for the reference design in its Portland, Ore., design center.
To assess local requirements, the design center must keep its lines of communication open with not just the IC house but also with its Asia Pacific sales and marketing group. Also, it must understand the OEM's and EMS providers' specification and pricing requirements. To do this, it works closely with its U.S. marketing group. Conversely, the OEM, IC company and EMS providers must keep abreast of the design tweaks from the component company if they are to maximize the profit from each board.
This nexus of communication channels is required because with the exception of the system-on-chip on the board, the bill of materials (BOM) is not set in stone. OEMs and EMS providers allow access to reference designs for multiple vendors, and the EMS providers negotiate for the best price. So, each step along the way, from design to manufacture, is a BOM decision point. Qualification is no longer a one-stop affair.
In short, today's supply chain is a network. Timely information is important and relationships are critical. The goal of the component supplier is to understand and anticipate what the other network nodes need. This can be as simple as knowing whether an EMS provider uses a just-in-time inventory model or works on inventory and consignment. It can be as ambitious as building a local design center near the EMS provider. In this disaggregated world, change is constant, so relationships must be synergetic and permanent.
One consequence of all of this is that the component supplier needs to reform its unidirectional sales support structure to a multitiered support organization that works around the globe with regional strengths. All the various parts of the supplier organization interact at different points of the life cycle of the component in that specific application of the OEM with a number of different parties, as indicated in the figure on page 16. The challenge for the supplier is to make those different actions into a smooth process in its organization.
Likewise, the OEM and EMS provider have to stay in touch with all the involved parties and the suppliers behind them in all phases of the life cycle of their application.
These multitiered relationships can be quite an effort for all parties. It's a reason that OEMs and EMS providers want to reduce the number of involved suppliers and, likewise, why suppliers are trying to limit their direct customers. In many cases, smaller customers are served by global distributors that team up with the suppliers.
Another critical success factor for choosing a supplier is how easy it is to work with, connect to, and interact with in the different phases of the life cycle of the application. The supplier needs a clear identity in terms of brand awareness, consistent corporate values and well-articulated capabilities, such as scope of operations and product portfolio, so all the players in the supply chain understand its strengths correctly.
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