Supply chain management gets outsourced
By James Carbone -- Purchasing, 2/11/1999 7:00:00 AM
Manufacturing is not the only thing that's being outsourced these days. While contract manufacturers are handling more of the printed circuit board and systems assembly for OEMs, electronics distributors are handling much of the supply chain management for contract manufacturers as well as OEMs. In fact, many distributors say contract manufacturing is their fastest growing customer segment due in part to the supply chain management programs that distributors offer.
Many CMs want to concentrate on their core competency--manufacturing--and rely on distributors to manage supply lines. They also want to reduce their total cost of ownership and procurement cycle time, which many supply chain management programs are designed to do.
"At least 50% of our business is going through some form of supply chain management program, whether it be electronic data interchange (EDI), consigned inventory, or in-plant stores," says Peter Dennis, director strategic marketing of Kent Electronics. That figure has doubled from just two years ago, and it will continue to increase. Much of the growth is from contract manufacturers.
"A contract manufacturer may have six or seven manufacturing sites, supporting twenty to thirty customers," says Dennis. "They have a fluctuating bill of materials, fluctuating usages. The hills and valleys and changes of a contract manufacturer far exceed a typical OEM customer." Kent and other distributors support CMs with programs such as consigned inventory, auto replenishment, and in-plant stores.
Inventory is the thing
One contract manufacturer that has decided to use distributors for supply chain management is eftc, based in Longmont, Colo. eftc builds boards and assemblies for avionics, industrial control, medical, and telecommunications OEMs. eftc recently decided to use three distributors--Avnet, Atlas (Veba) and TTI--for in-plant stores and to do business with the distributors via EDI.
"We wanted to consolidate purchases to a few strategic partners and put together a program that helps us improve the service we get and increase inventory turns," says Brian Tracy, eftc's vice president of strategic supply chain management. eftc had used about 10 distributors and chose the three based on total cost of ownership issues. eftc determined that the three distributors could best service its high-mix low-to-medium volume niche.
"Our niche is very transaction heavy," says Tracy. eftc buys a lot of different parts. It wants to reduce the cost of acquisition. "One thing about moving to a relationship like this is a lot of total cost reduction is in reducing complexity of the business we put together." eftc is simplifying its purchasing process by using EDI with distributors and transmitting updated planning forecasts every two weeks as well as sending releases electronically.
"It's computer-to-computer EDI, and no human interface is needed," says Bob Child, eftc director of corporate purchasing. "No one has to read the information and talk about it on the phone." He says the stores and EDI will cut eftc's procurement costs 12%.
Fewer distributors needed
As OEMs and contract manufacturers rely on distributors for supply chain management, it will result in fewer distributors being used by CMs. For instance, the three distributors that eftc chose will get the bulk of the business and will be in a good position to obtain additional business as eftc grows.
"When you enter into a supply chain management contract with a customer on a large scale, you have entered into a partnership," says Mel Smith, Kent's general manager of strategic accounts. "What you have done is taken over the inventory responsibility for the customer. The customer has asked us to do a lot of work and the customer benefits by realizing a total cost reduction. But the partnership also eliminates competition, for the most part. It is rare that a distributor will get displaced," he says.
While CMs are demanding more supply chain management programs, so are OEMs, but their needs are different, according to Greg Frazier, executive vice president of Avnet's Integrated Materials Services division. "OEMs have more space, so they are more open to us putting a warehouse in their building," says Frazier. "They may have 25,000 square feet of manufacturing space that was fully used five years ago, but now everything is miniaturized and they have 10,000 feet open. We need a 4,000 foot cage and our parts," he says.
But CMs value space differently. "They don't have nearly the room," says Frazier. "They often want to reclaim that space for another line."
Avnet is moving toward "territorial warehouses" says Frazier. They are facilities dedicated to certain customers. "We put one in Denver to support eight customers and we are going to have more of them. These give us greater flexibility. We can keep inventory in a bigger pie for longer."
Supply chain management will evolve
While programs such as in-plant stores, just-in-time deliveries, and parts kitting for assembly have been important programs, they don't go far enough to satisfy the changing needs of customers, according to Rob Rodin, CEO of Marshall Industries. OEMs and CMs have an insatiable need to reduce cost and time; such programs can only go so far.
Rodin says purchasers need to look at the entire supply chain, from engineering, to new product introduction, to forecasting, to production, and look for solutions to reduce and eliminate costs during the entire process. For instance, in-plant stores will move an expense from a customer, but that expense is then borne by the distributor and ultimately reflected in prices. The cost needs to be eliminated from the supply chain, not shifted from one link in the chain to another.
Rodin says Marshall's Macro program looks to reduce and eliminate cost in the supply chain by managing the information flow among all parties in the supply chain: OEMs, distributors, contract manufacturers, sales reps, and component manufacturers.
Macro, using hardware, software, and the Internet, effectively eliminates "work including fax phones, letters, and voice mails," says Rodin. Macro manages the flow of information and adds value by eliminating rework, increasing productivity, speeding time to market, and improving productivity because information flows to the appropriate parties in a timely fashion.
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