Few industries have embraced outsourcing and extended supply chains more vigorously than electronics. Such electronics manufacturing service (EMS) firms as Solectron and Flextronics now do most of the global production of finished products for original equipment manufacturers (OEMs) on a contract basis. Distributors such as Arrow and Avnet dominate supply of components to the EMS firms and the OEMs. Global third-party logistics providers move finished goods of all types, from consumer electronics to high-end servers, directly to store shelves and business users without ever being touched by the OEM. Even suppliers of high-end semiconductors are now "fabless"-meaning that they outsource actual manufacturing by a third-party.
So with this industry-wide commitment to outsourcing, it is not surprising that the electronic components industry is leading the latest trend in vertical market outsourcing: supply chain management between component suppliers and their top manufacturing customers.
Electronic component manufacturers segment their markets for sales channel purposes. For commodity items marketed to the thousands of small to medium-sized customers worldwide, they will sell through a variety of distributors. The cost, complexity and inventory risk is just too great to deal with the thousands of buyers that make up the $300bn electronic components industry. But for the top 10 or 20 OEMs or EMS firms, the component manufacturers are compelled to deal direct. These buyers not only represent very large unit volumes, but the component suppliers' entire business rests on relationships that they can build with them. Pricing, customer service, quality assurance and their business relationship are just too important to leave to a middleman.
Of course, by choosing to deal direct, the component manufactures take on the inventory, collection and fulfillment risk. They must also be completely responsive to the manufacturers' just-in-time inventory needs, which requires a significant investment in supply chain technology, infrastructure and logistics capabilities. And there is the rub. The component suppliers highly prize their top customers, but their core business is not logistics or supply chain technology. And to remain competitive in this fast changing electronics market, they need to focus their attention and investment on product design and development.
New Electronics 3PLs
The answer to this dilemma is a new type of third-party logistics provider that specializes in providing inventory, transportation, technology support, business-to-business networks and other supply chain services to electronics component manufacturers. The emerging players are not the major global 3PLs but the distributors who have long had a business relationship with all of the major players in the electronics industry. According to Bob Parker, vice president of research with IDC Manufacturing Insights, who closely watches trends in the electronics components industry, the first 3PL to successfully adopt this business model is Avnet Logistics, a new division of $13bn distributor Avnet Inc.
"Avnet Logistics is offering a variety of supply chain and logistics services to help the component suppliers better serve their upper echelon of customers," says Parker. "The logistics services are completely different from what Avnet provides as a distributor, but they are able to leverage their physical assets and their industry expertise."
For example, one of Avnet Logistics' customers is SMSC, a semiconductor provider for network applications in a wide variety of consumer and industrial applications. To supply its growing Asian market directly, SMSC wanted to centralize its fulfillment operations that were scattered among a number of small regional distributors. Avnet Logistics took over SMSC's entire fulfillment operation for Asia at its Hong Kong distribution center.
"Avnet Logistics enables a direct channel to the Asia market for SMSC that provides us with flexibility and improves our customer service model while maintaining a high level of quality," says Bill Wagner, senior director of supply chain, SMSC.
That relationship has expanded rapidly. What started out as a basic warehousing engagement now includes inbound freight management from assembly test sites, reverse logistics and transportation to customers within China around the Shenzhen area.
"SMSC gains the advantage of our volume freight rates all over the world, as well as whatever infrastructure support they need," says Andrew Bryant, president of Avnet Logistics, which was created by its parent in 2004. The Phoenix, Ariz.-based 3PL operates 15 specialized distribution centers and 16 value-add facilities throughout North America, Asia and Europe comprising nearly 1.4 million square feet of warehousing. Collectively they ship 15,000 orders per day from more than 30,000 line items.
According Parker, Avnet Logistics presents a value proposition that incorporates both an economy of scale and economy of scope. The scale in this case comes from Avnet's massive investment in warehouse locations, associated operational assets, transportation buying volume, as well as a highly sophisticated technology infrastructure. The economy of scope comes from Avnet's knowledge of the electronics industry. If a component supplier needs to support vendor-managed inventory, demand forecasting or pre-ship value-added activities, Avnet has the requisite experience.
"It makes sense for Avnet to grow into the 3PL space," he says. "They are already shipping a good portion of these customers' components," says Parker. "As a 3PL, they are just not taking on inventory and receivables risk. They have the infrastructure and the logistics capabilities to move the goods faster and cheaper than the component manufacturer and still make money, while lowering the cost for the component manufacturer."
Of course, the major global 3PLs have been providing services to the electronics components industry for many years. In fact, Avnet works with some of them for clients on a partnership basis to provide additional logistics services. But as customer needs become so that industry expertise is required, Bryant says that specialized 3PLs such as Avnet Logistics are the only solution.
"There are many nuances to managing electronics supply chains, which can include over half a million part numbers," says Bryant. "We are rapidly increasing our IT investment to provide more of the systems capabilities the industry needs to collaborate, share real-time data and have supply chain visibility."
In addition to having one of the industry's best B2B exchanges to handle direct orders, Avnet is constantly developing electronic data interchange (EDI) gateways and partner interface processes (PIPs) to support whatever supply chain activities the supplier, OEM, EMS or other trading partner needs.
"We are always working on the plumbing that allows the electronics industry to collaborate more efficiently," says Bryant.
A very specialized service where Avnet is playing a pivotal role is dealing with emerging environmental regulations facing the electronics industry, especially in Europe. Two such initiatives, return of hazardous substances (RoHS) and waste in electronics and electrical equipment (WEEE), require component manufacturers to track components containing lead or cadmium. These elements are gradually being removed from the manufacturing process, so component suppliers want to use lot numbers to indicate which products are lead- and cadmium-free. They do not want to change part numbers, which would greatly complicate their supply management processes. But the OEMs buying the components claim that this approach requires expensive changes to their IT systems to properly track the parts. They want a new part number for the lead-free components.
"Avnet is creating a translation capability-sort of an Esperanto-for the industry, so both the component supplier and OEM can have the information they want, how they want it," says Parker. "By inserting themselves into this industry challenge with a unique value-added information service, they are providing a service that sets them apart from other providers."
Avnet's distributor experience and supply chain visibility has also made it adept at allocating components that are in short supply while keeping all parties as happy as possible. Rather than just ship an allotment of parts based on each customer's forecast, which may be inflated, Avnet will centralize the inventory and postpone final delivery to manufacturers until the parts are really needed. For example, if Cisco and Lucent are both buying an integrated circuit in short supply from a component supplier using Avnet Logistics, the 3PL can monitor actual production by the OEMs or their contract manufacturers and ship the allocation to each plant based on real parts usage.
According to Parker, the industry's complex and elongated electronics supply chains, as well as the increasing demands for higher levels of service, call for more use of vertically-specialized logistics providers like Avnet.
"Electronics suppliers are able to make vital forecast decisions faster, simplify their supply chain management, and leverage services that are strategically and geographically aligned with their markets," he says.
For example, electronic components suppliers increasingly have to provide special services for their customers such as laser marking of parts, programming of memory chips and microcontrollers, and special packaging. Avnet Logistics is finding a growing list of customers that want to outsource these services. For example, the 3PL works with a semiconductor company that is a supplier to an automotive plant in Mexico. The supplier's chips must be programmed with the most current data just before they are installed in the cars, so Avnet performs this task at a nearby facility.
"These are industry-specific operations that require considerable industry knowledge," says Bryant. "The big 3PLs are not likely to invest in such industry-specific operations. Even electronics companies are reluctant to make capital outlays in very specialized testing, assembly and programming equipment, but we have a broad customer base that allows us to make these infrastructure investments and provide these services."
Another trend in the electronics industry that is steering more business to vertical 3PLs is inventory risk avoidance by the manufacturers, whether they are OEMs or EMS firms.
"Manufacturers want more inventory faster and cheaper, but with no ownership risk," says Bryant.
To help meet this requirement, vendor-managed inventory and demand forecasting management have become key offerings from Avnet Logistics.
"We are helping suppliers move from push to pull inventory strategies," says Bryant. "We look at ways we can drive their days of inventory down."
For example, one of Avnet Logistics' customers is Xilinx, a major supplier of high-end components such as complex programmable logic devices and field-programmable gate arrays, a type of logic chip that can be programmed. Its top customers include the leading OEMs and EMS firms that market or make routers, computers and other cutting-edge electronic products.
David Yakich, national distribution manager for Xilinx, has worked with Avnet as a distributor for 10 years and continues to use it for the majority of Xilinx customers. About a year and a half ago, after Xilinx set up a direct fulfillment program for its key customers in Asia, Xilinx saw the need for very specialized outsourced services. Xilinx's direct channel included a 3PL warehouse in Singapore. While the physical fulfillment operations worked well, the increasing service demands of its customers and growing concerns over inventory levels caused Xilinx to turn to Avnet Logistics to manage the direct fulfillment portion of the supply chain.
Xilinx was not looking for logistics services such as warehousing, transportation or product handling. Xilinx wanted better supply chain management. Avnet Logistics now provides the supply chain system framework that includes Xilinx, its OEM customers, the EMS firms and a third-party warehouse that actually holds the inventory.
"Avnet ties this all together with their B2B and EDI capabilities," says Yakich.
The goal for Xilinx was to minimize inventory for itself, its top 18 OEMs and the EMS firms these customers use. Inventory is a high-risk asset in the electronics components industry, so the plan was to create a program that would reduce inventory held by the customers well below the levels the traditional forecasting system had created.
Operationally, Avnet Logistics is essentially an electronic intermediary. Orders come from the OEM or EMS to Xilinx and are fulfilled from the warehouse 3PL in Singapore. Avnet is also the point of contact for Xilinx OEM and EMS customers.
"All day-to-day dialogue about shortages, forecast and commits goes through us," says Bryant. Xilinx does not have to get involved unless the business rules raise the escalation above a critical level.
But the real value comes from Avnet's ability to manage these forecasts to minimize inventory while assuring the customers of supply.
"Avnet acts as our supply chain analyst, so we can understand the behavior of our customers and the forecasts that we receive," says Yakich. "We are able to predict demand better because we have a closer understanding of the forecast and usage for each customer and each manufacturing site. The customers get the supply they need with less inventory risk."
Because the Xilinx supply chain includes both OEMs and EMS firms, both parties have their own forecasts. It is up to Avnet to take these forecasts, which rarely agree, and transform them into one reliable plan.
"Most component suppliers treat forecasts like an order, so they are pushing inventory onto their customers," says Bryant. "There is no validation that the forecast is needed for actual production. In almost every engagement we find that 55 percent of the forecasts are inaccurate. In fact, the inventory in the pipeline is sometimes double what it needs to be."
Avnet moved Xilinx's forecasting from a push model to more of a pull model by cross-checking the forecast against actual consumption pull and its own planning systems.
"We probably reduced inventory 20 to 40 percent of the inventory out of the pipelines," says Bryant. "Some of what we do is just cross-checking the multiple forecasts and actual consumption. Some of what we do is industry experience. If an EMS is increasing its forecast, it may be to cover upside commitments they are making to their customers, but that can result in over-forecasting. We know when to adjust this. We do a lot of communication among the trading partners as well as the suppliers on how to process forecasts."
Avnet's final forecasts set the min-max inventory levels in the warehouse for all the customers served. In turn, Xilinx uses these forecasts to drive orders back to its wafer fabricators. Inventory is reduced throughout the supply chain.
While the big impact has been in finished goods inventory, Yakich says that Avnet has also minimized the complexity of working with OEMs, EMS firm and other parties.
"The whole supply chain is more transparent," he says. "The OEM can see all the way through to the Xilinx warehouses. We can see all the way through to their end demand."
This role as supply chain demand and forecasting expert is becoming an important capability for Avnet customers, according to Bryant.
"We can look at our customers' demand plans and forecasts to come up with a statement of work for them to work from," says Bryant. "The customer avoids having to invest millions of dollars in supply chain IT, and they can be fully operational within 90 days instead of a year or more. Just this greatly decreased time to market is a big advantage for these customers."
Growing Market Segment
According to Parker at IDC, there is a definite synergy for both Avnet's distributor and logistics operations. The component manufacturer can establish a dual relationship with a key distributor: Avnet as customer in the traditional distributor role and as supplier when taking advantage of Avnet Logistics.
"This arrangement can only establish deeper ties and higher levels of trust, which in turn should produce greater levels of supply chain collaboration," he says.
In the case of Avnet, the parent company's distributor business (with $13bn in revenue) dwarfs the logistics business, but Bryant sees 3PL opportunity growing.
"There is a huge market for managing supply chain services for the direct business that will always be beyond the distributor's abilities," he says. Right now, the logistics division has eight customers, but given the fact that the direct supplier-to-OEM market exceeds $200bn annually, Bryant sees the potential share of that market segment for all 3PLs to be at least $9bn in annual revenue.
"As the first mover, we think we have a considerable advantage in capturing a large share of that revenue," says Bryant. "We are in the early stages of this market. We are confident that we will grow rapidly as the industry sees the value we can bring to their supply chains and to their direct customer relationships. We fill a gap in the logistics services industry that few other companies come close to filling."
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