There was a time, not very long ago, when Motorola ruled the world of mobile phones. The company pioneered the first commercial portable cellular phone in 1983. Over the years it parlayed that expertise into a series of successful models, culminating with release of the ultra-thin RAZR phone in 2004.
The company's fortunes took a dip shortly thereafter. In the period from 2006 to 2008, revenues from the Mobile Devices business unit slipped from $28bn to $12bn, while the number of units sold plunged from 217 million to 100 million. Other brands, including Apple's iPhone, came to dominate an increasingly competitive marketplace.
Motorola plotted its comeback with the release of a series of new phones built on Google's Android operating system. The company's determination to focus on smartphones and tablet devices eventually led to the splitting of Motorola Inc. into two publicly traded companies, one of which was Motorola Mobility Inc., in January 2011. Before that, though, it needed to take a close look at its supply chain.
The strategy consisted of more than just a slate of new products and a corporation reorganization. Motorola's Mobile Devices unit was facing serious shortages of key electronics components.
The recession of 2008 had made many suppliers gun-shy about taking on large quantities of parts. At the same time, the manufacturer was being forced to take big write-offs on excess and obsolete (E&O) inventory.
"We had too many parts we didn't need," says director of business operations Grant Hoffman, "and not enough of what we did." There was a pressing requirement to improve the link between supply and demand.
The key lay in applying the precepts of sales and operations planning to Motorola's supplier relationships. By its very nature, S&OP is about integrating disparate links of the supply chain in order to create a consensus around sales forecasts. Motorola decided to embrace supplier S&OP as part of a three-pronged strategy to ensure a successful launch of the Android smartphones, in combination with supply-chain simplification and a significant reduction in manufacturing and order lead times.
Applying Range Forecasting
There were two major elements of the plan. One was "range forecasting," an internal effort to ensure the steady supply of parts and products. The other was "component postponement," a practice whereby generic devices are customized for particular markets at the last possible moment.
Motorola Mobile Devices was accustomed to providing its suppliers with forecasts that consisted of just one number. Not surprisingly, suppliers wouldn't always trust the figure and would alter it in line with their own expectations. They were worried about the impact of ever-shifting demand, seasonality, carrier issues and the extremely short lifecycle of electronic devices. The result was a serious lack of harmony between partners.
For about 50 of its most critical suppliers, Motorola replaced the single number with a variable forecast consisting of high, medium and low ranges. The actual quantity could then be adjusted in line with any number of late developments, such as a promotion that was likely to boost sales. Motorola's supply-chain team kept in regular contact with suppliers to set the right milestones. At some point, late in the process, the number would be locked in. The chief target was expensive items with long lead times, which tended to account for the greatest portion of excess and obsolete inventory. They were also frequently found on shortage lists.
According to Hoffman, the practice of range forecasting gave rise to several challenges, including the question of how and when to disseminate information, the difficulties of building solid relationships with suppliers, and the need to stay away from short-term supply issues that could skew the forecast. Nevertheless, the changes led quickly to an improvement in suppliers' inventory levels.
The other piece of the puzzle, external component postponement, wasn't a new idea in the world of high-tech. It had been practiced for years by companies such as Hewlett-Packard, which had implemented a plan for customizing its line of printers to meet the needs of various geographic markets. Again, the idea was to minimize overages and shortages of critical parts, while adjusting to unanticipated changes in demand.
Mapping the Process
Motorola needed to dive deeply into the procurement and manufacturing processes, especially for those products involving long lead times. It drew on Six Sigma methodologies to devise a series of "value stream maps." They uncovered the various points in the process at which key decisions are made about committing to a specific customer or product type. One supplier "moment of truth" occurred when it had to decide whether to process a generic component to meet the unique needs of Motorola Mobile Devices, or release it to another original equipment manufacturer. On Motorola's end of the chain, it had to determine when a basic product would become one model or another.
Up until that crucial decision point, the materials involved were characterized by low cost and a high degree of commonality. Afterwards, the opposite - high cost and low commonality - became true. By identifying the precise inflection points at which the dynamics of a given product shifted, Motorola and its suppliers could devise a successful postponement strategy. The Mobile Devices team could provide suppliers with a forecast well in advance of the inflection points, then supply updates as the deadlines drew near.
With the new program proving a success, Motorola began adding suppliers. It targeted those who frequently showed up on shortage lists, received multiple signals, required long lead times and suffered from capacity constraints. Cross-functional teams met weekly with suppliers to explain the new strategy and help make decisions on the fate of the most expensive components.
Two years after implementation of supplier S&OP, Motorola has realized dramatic results. It saw a 74-percent improvement in inventory turns between the second quarter of 2008 and fourth quarter of 2010, a 75-percent reduction in E&O costs between 2009 and 2010, an additional $34m of gross margin in the first quarter of 2010, and the avoidance of $27m in E&O expense in the third quarter of 2010.
Long-term, the biggest benefit for Motorola might be in the area of improved relationships up the supply chain. "Build supplier trust slowly," says Hoffman, "and business results will follow."
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