The push to outsource high-tech manufacturing has given rise to a number of electronics manufacturing service (EMS) providers, which make everything from cell phones to video games to key components for networking and critical business systems. Among the major players in that space is Milpitas, Calif.-based Flextronics. Like most of its biggest competitors, the company has long since evolved from a pure manufacturer of components to a provider of such value-added services as product design, fabrication, assembly, testing and contract logistics. Operating on a global scale, Flextronics is constantly challenged by the need to rein in costs while adhering to high standards of product quality and customer service. It has pushed hard to implement quality-control efforts such as Lean and Six Sigma throughout its operation. At the same time, with so much production taking place in low-cost regions such as China, Flextronics has sought to offset the drawbacks that come from being so far from the customer. In this interview, conducted in San Francisco at the "Best Practices" Conference of the Institute of Business Forecasting and Planning, Jay Hollenbeck, Flextronics' director of business solutions, offers his opinion as to what's missing in the relationship between many original equipment manufacturers and their contract manufacturers. He also discusses how the two parties can enable the real-time exchange of data in order to drive day-to-day supply-chain flexibility.
Q: What is the biggest challenge facing supply-chain collaboration today?
A: Hollenbeck: I'd say it's the following of decision-making and information across supply chains. Unfortunately, the outsourcing trend has negatively impacted some of the great efforts that have been made in developing lean supply chains. Companies need to be able to view information outside their four walls; the information that was once part of their infrastructure is now viewed at a distance. The delay in understanding the impact of decisions is caused by that fragmentation of the supply chain.
Q: Outsourcing is not a new phenomenon by any means - it's been going on for decades. But is it getting harder and harder to enact true collaboration among these multi-partner supply chains? And if so, why?
A: Hollenbeck: It's not [necessarily] getting harder. Some of our best customers still do an excellent job of it. They're able to understand what the impact of their decisions are on the supply chain. Rather than view supply-chain collaboration as micro-managing the execution of purchase orders and production schedules, they understand the need to measure what's going on at a macro level. They have to know how their decision-making is influencing the supply chain, and make strategic decisions that impact it - rather than rely on their contract manufacturing partners to make those strategic decisions for them.
Q: Is that the key to how companies differentiate themselves in supply-chain collaboration - getting this macro view of things?
A: Hollenbeck: Yes. Specifically, some of the companies that truly differentiate themselves will take ownership for inventory turns at their manufacturing services provider. They'll also try to measure the volatility in the operational plan that they send out. And they'll aggressively drive down component lead times, rather than just making sourcing decisions based on cost. They truly have a strategic view of the supply chain, and they take ownership for making those decisions.
Q: How do they achieve that level of visibility? I take it that means you have to be collaborating with customers from your end in a very strong, continuous way.
A: Hollenbeck: Right. They build the information that we share from the ground up. And they make sure, when it comes to materials metrics, that it's viewed collaboratively. Again, the emphasis is on strategic information rather than the tactical, micro-managing of inventory. They still need to take ownership for making sure that supply and demand are aligned. At the same time, their focus isn't on the supply chain operating in a vacuum. Their strategic decisions affect what happens [throughout the chain].
Q: How can metrics be used to measure the impact of supply chains in a collaborative environment?
A: Hollenbeck: Metrics are truly key. There are lots of different ones that our customers use. It's not so much the specific definitions of the metrics that are important. It's more the spirit of them - making sure that they capture all of the impacts of decisions that are being made. Sourcing decisions that are typically made by our customers at the OEM level have key impacts on flexibility in the supply chain. It's the same with forecasts and buffering strategies.
Among the specific key metrics that I've seen as best practices are inventory turns at the contract manufacturer, because that tends to be where the inventory pools up. Also, some sort of weighted average lead-time metric, which allows them to aggressively pursue reductions in lead time in addition to cost. Rather than just measure forecast accuracy once a quarter, they'll say, here's our forecast for the quarter. Did we hit those revenue goals? They're looking at the volatility in the forecast that goes out to the supply base as well. On a weekly basis, they're looking at the message that's going out, so they can understand how it fluctuates over time. You want to make sure that you have a steady plan, rather than just looking at a quarterly forecast that's revenue metric-driven.
Q: When you use the term "lean supply chain collaboration," are you talking about classic Lean techniques? And if so, how can those be deployed at both ends - the contract manufacturer and the original equipment manufacturer - in order to create a more efficient supply chain?
A: Hollenbeck: It's all about looking at weights within the supply chain. What inventory is out there that's non-value add? What's driving it, so that inventory and time lags within the supply chain? Collaborating on processes - breaking down those barriers between trading partners - allows you to see how the information can flow through the supply chain on a real-time basis, rather than waiting on quarterly forecast updates. It's about using real-time data throughout the supply chain in order to make decisions, from the component manufacturers all the way up to the manufacturing of product and order fulfillment.
Q: Is there still a problem in terms of the difficulty of a contract manufacturer and OEM agreeing on a forecast? Or have you pretty much got that licked through collaboration?
A: Hollenbeck: No, that's still one of the most fundamental problems. Where we see issues arise is when we don't have good mechanisms for dealing with uncertainty in the forecast. There aren't good strategies for buffering inventory on the finished-goods level. A lot of our customers use the forecast as their only tool to drive flexibility within the supply chain. They're relying on the forecast, which should be used to determine expected ship rate, to drive a holistic material plan. That causes a lot of confusion within the supply chain, as far as what the running and capacity expectations should be. That single forecast mechanism is being used to drive both the expected ship rate as well as all of the flexibility requirements, both from a mix and a volume perspective.
Q: So can information alone make the difference between success and failure in lean supply chains?
A: Hollenbeck: No. Metrics are only a first step towards true collaboration. After the entire supply chain is working toward a common set of metrics that really measures your performance, you need an organizational structure that allows those metrics to be tied back to the decision-makers. The impacts of the downstream supply chain need to be driven back up to decision-makers at the OEM, or contract-manufacturer level, or whoever within the supply chain is making those decisions. People need to be empowered for collaborative change, to make sure that decision-making is enabled down to the lowest level. Again, we can't rely on a monthly or quarterly forecast or cycle process to drive change. We need a process that's collaborative, that allows us to use real-time data to make decisions.
Keywords: High-Tech/Electronics, Logistics, Global Logistics, Inventory Planning & Optimization, Value-Added Services, Technology, Business Intelligence & Analytics, Business Process Management, Collaboration & Integration, Customer Relationship Mgmt., EDI Communication (XML/EDI), Event Management, Order Fulfillment & P.O. Mgmt., Network Design, Order Fulfillment & P.O. Mgmt., Product Lifecycle Management, Sales & Operations Planning, Sourcing & Procurement Solutions, Supplier Relationship Management, SC Finance & Revenue Mgmt., SC Planning & Optimization, Supply Chain Visibility, Global Supply Chain Management, Quality & Metrics, Business Strategy Alignment, Institute of Business Forecasting and Planning, Lean Supply Chain Collaboration, Lean, Six Sigma
Timely, incisive articles delivered directly to your inbox.