In a business environment where the best supply chain will provide a competitive advantage, top-level OEM executives and analysts are emphasizing the critical role purchasing and supplier integration will play in improving profitability and time-to-market.
Central to any strategy aimed at tackling the new-age dilemma of boosting earnings while streamlining operations and trimming headcount is coordinating the inbound supply chain, industry observers said this week at the Aspect Development Summit, Palm Springs, Calif., which drew about 500 procurement and supply-chain managers.
Concentrating on that side of the supply chain-the link where engineers and buyers interface with component vendors-improves flexibility with suppliers, optimizes make/buy/outsource decisions, gives OEMs a global view of their commodity purchases, and enables pricing negotiations, according to James R. Warner, leader of the Global Supply Chain Practice at PricewaterhouseCoopers, London.
"Companies have to make procurement a core business process and facilitate the value-add of that process," Warner said. Since purchased goods-both MRO and critical-production goods-represent 50% to 80% of the expense base for most corporations, lowering those related costs could produce substantial results, he added.
A 5% reduction in purchasing costs, for example, could result in a 50% profit gain, Warner noted. Traditionally, companies could achieve those gains by boosting sales 50% or cutting their workforce 20%, he said.
An even greater impact can be realized by employing supply-chain practices during the product-development phase and using software solutions to make it easier for engineers to choose parts on the approved-vendor lists.
Companies such as Celestica, Emerson Electronics, Hewlett-Packard, IBM, and 3Com know all about these benefits. They have been focusing on this portion of the supply chain for quite some time, and with the help of various software solutions have been able to trim millions from their overall costs, executives at the conference said.
3Com Corp., which spends about $2 billion in annual component purchases, recently implemented a complex set of supply-chain management software tools.
An immediate result was a $10 million savings on purchase price variance (PPV), or the difference between what is actually paid for a part and the price standard the company periodically establishes, according to Craig Martin, 3Com's vice president of worldwide materials. The Santa Clara, Calif., company also cut $6 million in connector spending and improved its inventory-management activities, he said.
Similar results were seen at HP, according to Garry Gray, director of supply-chain information systems at the Palo Alto, Calif.-based OEM. Primarily by using proprietary information systems and some third-party software suites, the company has reduced its parts-selection process 100-fold while sharpening its competitive edge, in part due to a 10% to 15% price advantage with suppliers, Gray said.
"We need to create an environment where people can be encouraged to select parts from preferred suppliers," he said. "By doing that, we're able to build relationships with our key supply base and collaborate on day-to-day projects."
Although executives touted the financial and tactical benefits technology and software solutions provide in part-number coding, parts selection, and strategic-sourcing initiatives, they also recognize that such tools are just a facet of the overall solution.
A major challenge in establishing effective supply-chain practices still rests in the human aspect of its implementation-and in convincing purchasers, engineers, and supply-chain veterans to change the way they have traditionally done their jobs.
"Technology is one of the enabling tools that companies are investing in to bring about supply-chain efficiencies," said Mark G. Simmons, global leader of Ernst & Young LLP's Supply Chain Solutions Team, Cleveland. "It needs to be complemented by changes in the organization to make it sustainable. Technology needs to be embedded in the company, and has to be part of the process and the way the organization works."
To help ease the transition at the company level and within the electronics industry as a whole, supply-chain mangers may find some answers in the semiconductor business, said David J. Lando, engineering and environmental technologies vice president at Lucent Technologies Inc.'s Bell Laboratories units.
"Within the semiconductor industry, the community has developed a commonality of language. Everyone has the same definition of yield, cycle time, and capacity utilization," Lando said, adding that the trend has extended further in the supply chain, to capital-equipment vendors. "The ability of that community to effectively express their needs to each other and their suppliers in a clear and coherent manner has allowed them to develop solutions to meet those needs. "The same commonality needs to exist in the supply chain."