Executive Briefings

In Difficult Economy, Leading Companies Are Transforming Their Supply Chains

Core high-tech consists of semiconductors, contract & design manufacturing, original equipment manufacturing, consumer electronics, and telecommunications. Most companies in this segment are highly impacted by the economic downturn, trying to reduce working capital, and segmenting product decisions based on profitability.

Globalization is requiring high-tech supply chains overall to re-examine their organizational structures, performance management models and collaborative methods. Over the past 10 years, the high-tech network evolved to a global model, and visibility, for the most part, has been achieved. However, the challenge going forward is to build global productivity, creating efficient global organizations, aligned metrics and incentives, and real-time global collaboration solutions.

Semiconductors: Pricing and utilization remain the top key indicators. The top supply chains are attacking these metrics through different methods: asset reduction (asset-lite), outsourcing or re-design of their in-house fabs. While chip sales reached an all-time high in 2007 of about $250bn worldwide, capital equipment spending appears to have plateaued around $50bn to $60bn. Going forward, analog and logic chips, required by the mobile growth, will force supply chains, which have historically focused on microprocessors and memory, to redesign their networks.

Contract Manufacturing: With an extremely tight margin on assembly services, contract manufacturers are looking to expand their supply chain coverage into deeper channel integration, returns processing, and service-based networks. Since many OEMs use CMs for manufacturing, a closer alignment with the channels will help to lower end-to-end inventories. With control of the returns and service materials, CMs can also offer high-margin design services to perform incremental designs and extend product margins.

Original Equipment Manufacturing, Consumer Electronics: AMR Research shows two significant concerns of the OEM/CE supply chains: demand signal repository and multi-channel transparency. When asked about their main use of DSR (true customer demand), the three top results were improved demand planning (30 percent), optimized channel inventory (18 percent), and better price/promotion management (16 percent).  And research shows the results are significant. Better downstream visibility leads to 20 percent more perfect orders, holds a third less inventory, and has lower supply chain costs equal to 5 percent of revenue.

Consumers are also using all available channels to purchase electronics, making product and price transparency a critical requirement for OEMs/CEs. Pricing already is pressured by slowed consumer spending, forcing some supply chains to pursue cost reduction initiatives. Aside from the common working capital reductions, OEMs/CEs are shifting from sales to customer management, to help reduce churn in the costly maturing markets.

Telecommunications: The mobile handset market remains the one optimistic segment of high-tech. Convergence of the handsets with content will require supply chain leaders to focus on a new supply chain model, one where digital content is the differentiator for consumer purchase. Along with improved product designs, supply chains from CEs will need to improve collaboration with the telecom operators, content providers and retailers to enable a unique content based consumer experience.

Telecom operators have a significant value to the mobile handset manufacturers. They have an enormous amount of end customer data. Mobile companies can use this data for new product designs, inventory positioning and price/margin management. However, today's partnerships do not effectively collaborate to enable sharing of this data. Telecom's value driver is air-time improvements. AMR Research is researching quantitative data to best align the KPIs of the telecoms and the mobile businesses.

The Outlook

The high-tech supply chain segment will be greatly affected by the timing of the economic recovery. Data from the Bureau of Economic Analysis, National Association of Realtors, shows that consumer electronics PCE growth maps directly with existing home sales (1982-2007). High-tech companies can use this period to align their product portfolio with the most efficient and cost competitive supply network.

Globalization is requiring high-tech supply chains overall to re-examine their organizational structures, performance management models and collaborative methods. Over the past 10 years, the high-tech network evolved to a global model, and visibility, for the most part, has been achieved. However, the challenge going forward is to build global productivity, creating efficient global organizations, aligned metrics and incentives, and real-time global collaboration solutions.

Semiconductors: Pricing and utilization remain the top key indicators. The top supply chains are attacking these metrics through different methods: asset reduction (asset-lite), outsourcing or re-design of their in-house fabs. While chip sales reached an all-time high in 2007 of about $250bn worldwide, capital equipment spending appears to have plateaued around $50bn to $60bn. Going forward, analog and logic chips, required by the mobile growth, will force supply chains, which have historically focused on microprocessors and memory, to redesign their networks.

Contract Manufacturing: With an extremely tight margin on assembly services, contract manufacturers are looking to expand their supply chain coverage into deeper channel integration, returns processing, and service-based networks. Since many OEMs use CMs for manufacturing, a closer alignment with the channels will help to lower end-to-end inventories. With control of the returns and service materials, CMs can also offer high-margin design services to perform incremental designs and extend product margins.

Original Equipment Manufacturing, Consumer Electronics: AMR Research shows two significant concerns of the OEM/CE supply chains: demand signal repository and multi-channel transparency. When asked about their main use of DSR (true customer demand), the three top results were improved demand planning (30 percent), optimized channel inventory (18 percent), and better price/promotion management (16 percent).  And research shows the results are significant. Better downstream visibility leads to 20 percent more perfect orders, holds a third less inventory, and has lower supply chain costs equal to 5 percent of revenue.

Consumers are also using all available channels to purchase electronics, making product and price transparency a critical requirement for OEMs/CEs. Pricing already is pressured by slowed consumer spending, forcing some supply chains to pursue cost reduction initiatives. Aside from the common working capital reductions, OEMs/CEs are shifting from sales to customer management, to help reduce churn in the costly maturing markets.

Telecommunications: The mobile handset market remains the one optimistic segment of high-tech. Convergence of the handsets with content will require supply chain leaders to focus on a new supply chain model, one where digital content is the differentiator for consumer purchase. Along with improved product designs, supply chains from CEs will need to improve collaboration with the telecom operators, content providers and retailers to enable a unique content based consumer experience.

Telecom operators have a significant value to the mobile handset manufacturers. They have an enormous amount of end customer data. Mobile companies can use this data for new product designs, inventory positioning and price/margin management. However, today's partnerships do not effectively collaborate to enable sharing of this data. Telecom's value driver is air-time improvements. AMR Research is researching quantitative data to best align the KPIs of the telecoms and the mobile businesses.

The Outlook

The high-tech supply chain segment will be greatly affected by the timing of the economic recovery. Data from the Bureau of Economic Analysis, National Association of Realtors, shows that consumer electronics PCE growth maps directly with existing home sales (1982-2007). High-tech companies can use this period to align their product portfolio with the most efficient and cost competitive supply network.