Managing Mixed Signals

During the late 1990s dotcom boom, e-commerce was poised to simplify the supply chain. The Internet would give buyers more control over orders, bypass middlemen in the supply chain, and provide pricing options so far not seen in the channel. Instead, the Internet simplified some things but made others more complicated.

The Internet enables sourcing 24/7 on a global basis. For customers buying certain items, this ability provides the best service and price. In electronics, this holds true part of the time. But what about the rest of the time? Component makers, distributors, and even e-commerce sites have had to figure out how to manage both instances.

Customers' expectations of fast service, best prices, and infinite variety forced electronics manufacturers to shift their strategies. For producers of high-volume, low-mix electronics products, offshoring provided cost savings. For companies that wanted to configure products close to the customer, build-to-order (BTO) models such as Dell's emerged. But both of these strategies made an already-complicated supply chain even more complex. Component suppliers were faced with their own cost pressures, shorter leadtimes between orders, and overseas fulfillment challenges. Forecasting also became more difficult for suppliers because of the disparity between BTO and the more traditional, long leadtime, high-volume production orders.

As "The Chief Supply Chain Officer Report 2012" from SCM World puts it:

The problem is that supply chains built to take standard orders or simply replenish a shelf are unlikely to be able to take and execute a complex order that may include extra packaging, assembly, shipping or professional service. The added complexity of fulfilling not only item/location/quantity combinations but also several other variations could pose serious problems for supply chain systems. More complexity in demand must be met with more capability in supply.

Offshoring and BTO actually increased, rather than decreased, suppliers' reliance on distributors. Most high-volume component manufactures warehouse their finished goods at their factories but don't own proximity warehouses around the world. Most global distributors have three to four mega-warehouse hubs around the world with smaller service centers in regions where their customers are most concentrated. Suppliers' products are often shipped to, and managed at, both types of sites. These sites can service the BTO model, since warehousing is often closer to the customers' point of consumption, enabling high-volume but shorter leadtime orders.

OEMs are also mixing their supply chain models to accommodate demand for commodity products at the front-end and customized products at the back end. For example, BTO trailblazer Dell still requires huge volumes of chips for its boards and subassemblies, but those boards may go into a PC or a laptop at the last minute. This requires a lot of flexibility within Dell's supply chain. The SCM report says:

Certain inputs may well be so commoditised (memory chips, for instance) that consumers, no matter how informed or discerning, simply don't care. These will likely gravitate to ever more massive, basic production operations. Other inputs (exterior shells, for instance) could benefit from unique designs, demanding smaller batch runs on more flexible production lines. At an aggregate level our respondents are split on this issue.

While only a quarter overall see little or no effect on manufacturing strategies, the remainder break almost evenly between those who agree that the emergence of eCommerce and digital/mobile consumers will “drive brands to develop mass-customisation manufacturing strategies” and those who expect “lowest possible cost mass manufacturing strategies” to dominate.

The survey notes that much of this input is derived electronically from customers. And, while customers may order a finished PC online directly from Dell, Dell has to convey its demand expectations for the components that go into that PC back to its suppliers. Dell -- or any PC maker for that matter -- usually has a pretty good picture of overall demand as it pertains to PC and laptop volume. But for components required at last-minute configuration sites demand is less certain: PCs and laptops require different display drivers, display housings, connectors, enclosures and other components. In many cases, distributors will have those components on hand.

Distributors also help in interpreting demand signals for suppliers. Many suppliers have direct relationships with OEMs and transmit demand data directly. However, most suppliers count those customers in the low double digits. In order to reach beyond direct line-of-sight customers, suppliers use distribution to identify and service these opportunities. Information about these customers -- how many components they bought, what they used them in, where production takes place -- is channeled back to the supplier. Better forecasting at the front end of the supply chain enables better customer service at the end.