The Electronics Supply & Manufacturing Editorial Advisory Board gathered in San Jose, Calif., recently to discuss some of the most pressing issues facing the electronics industry. The discussion covered all of the top issues in supply chain management today, and then some. While viewpoints varied, the board offered perspectives that should spark a dialogue both inside your own company and with your supply and design chain partners.
The discussion was moderated by Bruce Rayner, editor in chief of Electronics Supply & Manufacturing. This online article is a longer version of the print version and includes discussion topics not included in print due to space constraints.
On what's ahead
Frank Robertazzi, vice president of sales and business development, CMI, formerly vice president worldwide distribution sales, Agilent Technologies Semiconductor Group (all comments refer to Agilent Technologies): "There are two areas that we worry about. First, when will the next downturn occur? The last one left such an imprint on all of us in the industry that we want to be prepared for the next one. Where are the warning signs, the things we can look out on so we can prepare?
"The second issue is that as the world becomes a smaller place, where product is designed in one place and manufactured someplace else, the customer is no longer a single entity. The classic question is: Is the OEM the customer or is the EMSI the customer?
"The reality is the supply chain is the customer. So what is the best way to service the supply chain that has these multiple entities in different parts of the world and how do you move the information through the chain?
"[Accepting that] the supply chain is the customer is the paradigm shift that we're all, in a variety of different ways, trying to wrestle with."
Brian Batterman, Director of Supply Chain Strategy, Plexus Corp.: "The dynamics of the industry have changed dynamically since the last peak and valley. If you look to capacity in the foundry sector, you'll see it north of 90 [percent capacity], approaching one hundred percent. You also see the equipment manufacturers coming back, and investments starting to turn up on the capital expenditure side.
"So it looks like this [recovery] is going to be sustainable. I think the slowdown in the growth rate [earlier in 2004] was an interim move because I do believe that there's been double and triple bookings within the marketplace that has not manifested itself in true demand. Therefore you're seeing a pull back in the numbers short term. But I think the fundamentals underlying the business long term are there.
"Look at what's happening with wafer manufacturing in particular, the size of the wafer, the geometry reduction, the equipment to support it that's now out of phase with technology, the labor pool that's available to produce that, and we're in for a long run, from our perspective.
"So when I want to look at what the next downturn's going to be, I'm going to watch what's happening in those base sectors in terms of capacity and what happens with [capital expenditure] spend going forward."
Michael Kirschner, president, Design Chain Associates: "So CEO's tend to not come from the supply-chain side so they don't tend to understand it, at least [not] in the OEM world. So that's a bit of a problem."
On the role of the CEO
Shoshanah Cohen, director, PRTM: "One of the things that surprises me and is a little unnerving is the [lack of senior management focus on] supply chain management. You'd think that, given all that has just occurred, it would really be a CEO-level issue and you'd have CEOs paying attention to it.
"Almost invariably, when we talk to a CEO, he or she says, 'Oh, supply chain, you need my vice president of operations.' I would have expected that it would be a CEO issue at this point.
"So many companies are locked into optimizing the standard margin on the product they happen to be making. That means [finding] the lowest cost of materials, the lowest cost of labor, the lowest cost of transportation."
Bruce Rayner, editor in chief, Electronics Supply & Manufacturing: "So they are optimizing at the product level, not necessarily at the company or supply chain level?"
Cohen: "Yes, at the product level. They're not thinking total cost. They're not thinking that they just added six weeks to get the product from point A to point B. They're not thinking what that does to their forecast."
Gregg Macaluso, vice president, UPS Consulting: "And as a result [of moving your] products all over the globe aggressively, the beneficiary of much of that strategy has been my company, UPS. Not your company. We're at a loss to explain it."
Derek Lidow, chief executive, iSuppli Corp.: "[CEOs are] making decisions on whether or not to go with OEMs or EMS, and what part of their product line they are going to rely on an ODM to do for them. These are very relevant decisions of the highest level, and the CEO is involved.
"[But] once the CEO makes those decisions, he or she views the implementation of those decisions to be something that the operations person should deal with."
Cohen: "I have yet to see a CEO get involved in a decision who says, 'I think it's strategically important for our company not to have this development capability in-house and to have it go to an ODM.' Instead, what they're saying is, 'We can't spend another 3 percent of last year's revenue on [hiring] development people. Let's figure out another way.' "
Stephen Gold, chief executive, Azerity: "We were doing some work with a company, and the CEO was saying, 'Go to China. Find an ODM in China. Find an ODM in Taiwan.' He was not really thinking about what [that decision] would do to his overall product portfolio; he was just thinking about his cost structure."
Pamela Gordon, president, Technology Forecasters Inc.: "It's financial pressure that the CEO is experiencing, so he or she is giving the directive that 'we're going to China'"sometimes on an analyst call"and then they throw it over to the operational people, who don't always feel comfortable communicating the risks up the chain.
"We recently completed a study on risks where supply chain executives indicated the likelihood of various risks and the damage to their business if those things occurred. And the numbers were high, in the 50 percent range of [certain] risks happening and being very damaging to the company. Yet, they didn't feel comfortable communicating that to the management."
On the shift in supply chain power
Lidow: "This may be heretical, but we believe the data shows the best place for supply chain control and visibility is back with the supplier. Inventories have shifted over the last four years back to the suppliers' shelves. Many suppliers have become more aggressive about only letting inventory off their shelves if it's going to go into a product almost immediately. [It's a] step in the right direction for the industry.
"Suppliers do a better job of managing inventories than any other entity in the supply chain. They certainly have more at risk, and they have the best visibility in terms of what's happening. From our vantage point relative to the data, we can only encourage suppliers to become even more assertive in managing their inventories from wherever they are in the world."
Robertazzi: "I can see why you would say that from a data standpoint, but at the end of the day, the real consumption is closer to the OEM. The semiconductor that gets sold to an EMS provider [and eventually] to the person that's buying the cell phone or the piece of industrial equipment [is a long way from the actual demand]. The OEM is the one that's best-positioned to see the end consumption."
Lidow: "Some suppliers have been aggressive in capturing data"not necessarily in an automated fashion, but capturing data in terms of consumption by their customer's customer. That data has been enormously productive in improving the management of [supplier] inventories."
Gold: "I think you're actually saying the same thing: The supplier needs to take control of the inventory, but that doesn't necessarily mean they retain [or hold] the inventories. It means they have to have improved visibility. So [Robertazzi is saying,] 'I need to have visibility all the way through to consumption.' That doesn't mean I have to have a part on my shelf. It's OK to let the part go, but I've got to know where it is in the process, so that way my liability and exposure are still controlled."
Robertazzi: "When the digital radio business got really overheated and we [Agilent] were in allocation, we were thinking of putting on more fab capacity. So we did some calculations of how many digital radio towers could physically get licensed and built"and it just never squared with demand. We just would not accept orders from distributors or customers.
"It's kind of [odd] that we were doing this analysis of how many radio towers could be built, but we did it because fab capacity is so expensive, especially in the RF area. [It was] one of the smartest things we did in the boom period."
Macaluso: "Maybe this is the rub: If the material is best held as far back as possible [in the supply chain] and it's the OEM that has the best visibility to true demand, perhaps the issue isn't so much where the inventory is, it's how quickly [the supply chain] can react to the demand once it's triggered.
"Stop worrying about where that inventory is and hammering each other about it, and start worrying about the collective time to respond to a real piece of data, because that's our enemy."
Lidow: "Contracts in the electronics industry are structurally flawed to the point where that is not possible. And that's not going to get fixed to the point where there are truly efficient [collaborative] operations or [they have] complete visibility."
On sharing the inventory burden
Gold: "There are two issues here. One is a reactive issue, which is the contractual basis by which we do business. That is, by the time we get to the contract and litigation it's too late. It's over, everybody lost.
"The alternative is to be proactive. Independent of the contract and liability, let's try to figure out how to improve the process. Visibility improves, so that when the music stops hopefully there will be enough chairs for everybody to sit down.
"In the last downturn, we had all been on this euphoric ride for such a long time that when the music stopped, there were no chairs."
Cohen: "I think that's right. We get asked all the time to look at the contract: 'What should our flexibility parameters be? What's our upside? What's our downside?'
"When it comes right to it, we say to the company we're working with, 'What does it mean to you to have 25 percent upside in a four-week period?' and they don't know.
"When they go to fight the battles about what the contract said, there are three hundred different interpretations of what the wording means."
Brian Batterman, director of supply chain strategy, Plexus Corp.: "To that point " the discussions about 25 percent in this time window and 25 percent in that time window " there are a plethora of data models and supply chain algorithms that will affect a certain service level. My underlying question would be, 'Twenty five percent of what?'
"Where is the responsibility in the supply chain from a data perspective for the entire stream that drives all of the activities through the supply chain from a demand side?
"There's been a marked change in the industry from providing forecasts, which are poor to begin with, to providing no forecast, which is better. I could argue both of them under different conditions. But where is the attention given to the data that drives the entire system? I don't think we as an industry have focused at all on trying to solve that problem."
Kirschner: "What a [small or mid-sized] OEM needs to understand is their lack of control of all these things. They really don't have much control over anything that goes on downstream [in the supply base]. It's the big 10 OEMs and on the other end it's the big 10 semiconductor companies [that make the rules.]
"The best thing a [small or mid-sized] OEM can do to minimize its risk is to understand the suppliers they select to design into their products. [They must] understand their capabilities, how they design their product, how they build their wafers, whether they postpone to the second or third mask layer to finalize their product so they can turn quickly the exact product that's needed.
"These OEMs need to know who the second source is, and maybe the third source so they can get through periods [of tight supply] without driving themselves nuts or driving their supply chain nuts or double ordering or triple ordering. So a lot of it is sourcing and understanding who your supply base really is, who you want it to be, and who you need it to be."
Lidow: "Virtually every product out there has sole source profit on it. As a matter of fact, the overwhelming dollar value of semiconductors sold are sole source or proprietary. Ultimately it's all about designing to your weakest link, and there are going to be weak links in everybody's supply chain, even the biggest, certainly the smallest, and those are the weak points in the whole electronic supply chain."
Kirschner: "So maybe the due diligence that's not being done is to identify the weakest links. Because you're right, today there's plenty of capacity, tons of capacity for ceramic capacitors, even tantalums, but that was a concern before."
Lidow: "Indeed, those contractual structural flaws are most damaging at those weakest links. Right now probably ceramic capacitors is not where there's that much leverage, but in other areas there's enormous weakness, and that's where the supply chain will break down when it does."
On creating the right supply chain incentives
Bruce Rayner, Editor-in-Chief, Electronics Supply & Manufacturing
"How do you create incentives not only within your own company for your own employees but across the supply chain so that you are optimizing performance of the entire supply chain?"
Robertazzi: "The problem with incentives is that they work: If you incentivize the wrong behavior, you get it."
Lidow: "You can generalize about incentives; it's not just about the cash reward. Management creates incentives just by asking a different set of questions. This may have nothing to do with money changing hands. It's about behavior. It's about what questions management should be asking."
Gold: "I think they're separate issues. I think one deals with job security and longevity and one deals with compensation. So when management asks a question, if you frequently don't have the answer, you don't get the right to retain your position.
"On the other hand, I think Frank [Robertazzi] is absolutely right in that how you compensate is going to influence behavior. Unquestionably, no matter what you do, it's going to have an effect [across the supply chain]. It might not have the effect you want. A supplier might have a compensation plan that's inconsistent with the EMS provider's, which is inconsistent with the ODM's, so you have this compounding effect of compensation that doesn't necessarily yield what everybody's trying to do."
Gordon: "We've noticed over the years that the number of times that an OEM disengages or switches EMS suppliers is a larger number than the number of times that the team responsible for choosing and managing the EMS companies changes.
"We see so many instances where the wrong EMS provider is chosen. There may be nothing [wrong with] the EMS company; it's just an ill-fitting match, owing to political reasons or a lack
of due diligence in the selection process."
Kirschner: "Isn't this part of the CEO making the decision and then operations having to implement it? If the decision is bad, operations just accepts it. Shouldn't they be pushing back?
Kirschner: "And do they push back?"
Gordon: "They don't push back often enough."
Rayner: "There seems to be more obsolescence now than ever before in components. Why?"
Robertazzi: "We could probably use more obsolescence, quite frankly. [Agilent's Semiconductor Division] at one point had so many different flavors of the same [components]. We had 40,000 part numbers; we've whittled that down to 8,000. It was the best thing we ever did. Our distributors can aggregate demand better, and our customers don't have this myriad of product to select from.
"I don't know if our industry needs 3 million semiconductor part numbers; probably 80 percent of the volume is in only a few hundred thousand. [So] we could probably use more obsolescence, but it's painful when you go through it."
Batterman: "It depends on the product [containing] the part that's being made obsolete. [We manufacture medical equipment.] If you obsolete a component out of a medical device, you have to go through requalification. It's painful.
"[But] there's tremendous opportunity for value engineering along the lines of respinning of a board or a design because of obsolescence, so on the engineering front it's good for demand creation.
["Meanwhile,] it remains to be seen what's going to happen as a result of [new] environmental [regulations] and what that's going to drive in terms of componentry."
Gordon: "That's right"that's an opportunity. When we help the OEMs figure out how to efficiently comply with requirements for recycling, power reduction and substance elimination, we [recommend that] one of the first things to figure out is which products you'll be discontinuing before the deadline.
"We always fear the OEM is going to groan upon hearing how difficult that is, but more often than not, they say, 'We really need an excuse to get rid of products.' That will filter down to everyone else [in the supply chain]. It is a huge opportunity to eliminate redundancy."
Lidow: "What our data shows is that with a shift in supply chain power to the supply base, the supply base is in a better position than they've been in for quite some time to force obsolescence in an aggressive fashion to improve margins."
Rayner: "So semiconductor companies are accelerating obsolescence because they're looking to keep products that have higher margins?"
Lidow: "Higher margins as well as higher volumes, because they can't support a product that they're going to make one or two lots of a year. Those few companies that specialize in picking up the obsolete parts actually pick up only a small fraction of them."
Kirschner: "It's a challenge, certainly, for the midtier because the top tier drives what gets built. There's really not a lot the little guys can do about it except to design expecting that parts are going to go obsolete. You've got to do some due diligence.
"Semiconductor companies are certainly being a lot more aggressive, and compliance with [environmental] directives is going to give them even more [of an] excuse [to obsolete parts]. So try to predict that sort of thing. Design for the next generation of DRAM, design for the next generation of FPGA, so that you don't have to design a new board from the ground up."