Have OEMs Relinquished Too Much Control Over Their Supply Chains?

A dozen years ago, some of the biggest OEMs in the electronics industry -- including IBM, Hitachi, Matsushita, LG Electronics, and Nortel Networks -- established E2open as a component trading site. OEMs and their subcontractors frequently found they'd ordered more parts than they needed for production.

Rather than sell those components for pennies on the dollar in the open market, E2open provided a forum for OEMs and EMS companies to trade excess inventory with one another.

A very different E2open released a cloud-based trading platform earlier this week. The E2open Business Network V 8.0 allows supply chain partners to view and manage procurement events in real-time. The product, among other things, enables users to "monetize" the various aspects of a buying transaction: it captures and compares component costs; assesses various logistics scenarios; and calculates risks such as manufacturing line downtime.

"The problem is the electronics industry has the fastest moving supply chain in the world," said Michael Schmitt, E2open senior vice president of marketing and product management, in a phone interview.

"Additionally, the industry has become global, and the stress levels of managing the supply chain are huge. As companies have moved their inventory and process management outside their four walls, the technology available to support that move hasn't kept up. There's a lack of visibility, and if you can't see something, you can't measure it. If you can't measure it, you can't manage it."

Research conducted by the Aberdeen Group, IDC, and the Harvard Business Review has concluded that OEMs have outsourced too much control over their supply chains. In the early days of outsourcing, OEMs contracted out manufacturing but maintained control over their supply chains. Now, EMS companies purchase and manage inventory as well as provide manufacturing services.

The problem, researchers say, is that OEMs have lost the ability to capitalize on many measures that can save costs. EMS companies usually pool their component purchases and divvy the parts up among various OEM customers. OEMs, however, may have direct relationships with suppliers that give them a price advantage. If an OEM can't see how the EMS is allocating its purchases, the OEM can't take advantage of its own discount.

Collaborative cloud platforms, among other things, allow OEMs to see such transactions in real-time. With information provided by component suppliers, EMS providers, and logistics companies, OEMs can direct their subcontractors to source to the OEM's advantage. "It's not just providing the data; it's the ability to interpret and react to the data," says Schmitt. E2open likens the process to an air traffic control system with the OEM in the control tower.

"Some OEMs hand their bill of material over to an EMS and say 'here you go; you take care of it.' Others prefer the 'trust but verify' approach," says Schmitt. Through cloud collaboration platforms, OEMs can decide what information they want to see and who they share it with.

E2open's system also analyzes the costs attached to changes in a purchasing transaction by running "what if" scenarios incorporating component prices, shipping costs, vendor reliability, and other factors known as key performance indicators (KPIs). The OEM sets the standard for the KPIs and shares that data with partners on a need-to-know basis.

The system works on a scaled subscription basis so that small companies can participate in the network without a lot of upfront investment in IT. This is crucial to successful collaboration, according to a December 2011 Harvard Business Review article:

Big original-equipment manufacturers have gone too far in delegating management of lower-tier vendors to top-tier suppliers. By doing so, OEMs have weakened their control over costs, reduced their ability to stay on top of technology developments and shifts in demand, and made it more difficult to ensure that suppliers are operating in a sustainable fashion.
The remedy: OEMs should selectively reestablish direct relationships with lower-tier suppliers. These include suppliers that have the most significant impact on the total cost of goods sold, are leaders in developing innovative solutions, pose the biggest sustainability risks, and can provide early information on impending shifts in the economy. A move to managing select lower-tier vendors constitutes a major change for OEMs that have been focusing predominantly on top-tier suppliers.

In other words, OEMs have to take back control. Do you agree? Let us know in the comments.