Web: Key to electronicscontract manufacturing
"We proactively review our customers bill of materials and approved vendor lists and make proactive recommendations about parts we know will become obsolete or think will become obsolete soon," says Brian Tracy, vice president of business development for EFTC.; "I would like to have 100% system-to-system e-commerce. It would mean there is no human intervention, no fax, no PC. Suppliers ship orders to system requirements," says Karlheinz Totz, vice president of corporate commodity management for Celestica.
By James Carbone -- Purchasing, 1/13/2000
In the not-too-distant past when an electronics original equipment manufacturer (OEM) outsourced the manufacture of a product such as a printed circuit board, the OEM would maintain control of the bill of materials. The OEM would purchase all the required parts, then have them shipped to the contract manufacturer (CM), who would then build the board.However, as the second millennium begins, OEMs are entrusting their CMs with managing all aspects of the purchasing process--sourcing and supplier selection, purchasing of the entire bill of materials, and ongoing supplier management. This change obviously places much more responsibility on the CM, and many have become quite sophisticated in supply management in a relatively brief period of time. And the use of e-commerce and other Internet applications is becoming more and more critical to successful supply strategies.
Some CMs have dedicated purchasing teams that work with OEMs on new product development issues, develop supply strategies, and then execute those strategies. OEMs are turning over purchasing to CMs for the same reason they have turned over manufacturing: to reduce their cost. CMs often can buy components and other production materials for less than the OEM because the CM can combine the volumes of multiple customers and leverage the buy.
Key challenges for CM purchasers in coming years are to develop strategies that speed up procurement cycle time while reducing cost, including cost of components as well as procurement, inventory and overhead costs. Often those strategies must be used in concert with the build-to-order (BTO) business model that many electronics OEMs are implementing.
Cost is the thing
To lower procurement costs for the OEM, several strategies are being deployed by CMs. While CMs typically pick up the suppliers on their customer's approved vendor list (AVL), they in fact are concentrating more business with fewer suppliers. Result: lower component prices.
"I am not trying to reduce my number of suppliers," says Karlheinz Totz, vice president of corporate commodity management for contract manufacturer Celestica in Toronto. "As I grow my business and bring in more new customers, I also bring in their suppliers. However, I have a natural evolutionary process so that if I can use three capacitor manufacturers rather than 30, I will offer that to my customer," he says. "The idea is by consolidating volumes, it means better relationships and more support from suppliers. It makes sense for all of us, including all of our customers, to use three rather than 30," says Totz.
As more business is placed with fewer suppliers, a "new generation of relationships" is developing between CMs and suppliers, according to Totz.
"In a year or two suppliers will have people residing in my facility," he says. "Those people will be doing engineering work, failure analysis, and they will work on problems with system integration."
He says Celestica currently has some suppliers on site, but most of the people involved are in supply chain management, order management or expediting. He says resistor and capacitor and other passive component suppliers will be the first to reside in Celestica facilities. Those are suppliers of parts that already have been turned over to Celestica to manage. Next will be commodity semiconductor suppliers and the last will be application-specific integrated circuit (ASIC) suppliers because the technology is often proprietary to the customer.
E-commerce is crucial
For purchasing organizations at most CMs, electronic commerce will be key to their supplier management strategies. Most CMs are developing supplier strategies that employ either electronic data interchange (EDI) or Web-based electronic commerce. The idea is to automate the transactional part of purchasing, to speed up procurement cycle time, and to lower overhead costs.
Many major CMs like SCI Systems have been using EDI with suppliers for years. However, for many CMs, e-commerce is a work in progress. While many CMs use EDI, they are checking out Web-based e-commerce tools. Some buyers at CMs say, in the next several years, they will use Internet EDI to transmit purchase orders, forecasts, acknowledgments and other purchasing information. Others say e-commerce tools such as auction sites will be helpful.
One CM that is developing an e-commerce strategy is Solectron, based in San Jose, Calif. Eddie Maxie, supplier management director, says Solectron wants to use the Internet to reduce waste and cost in the supply chain.
"Cost manifests itself in waste and inefficiency in the supply chain," says Maxie. "To date, cost has been moved around, but nobody has taken cost out of the chain." He says the Internet has the potential to eliminate waste and cost because information can be transmitted in real time among trading partners.
"It's a given that we are going to go paperless," he says. "We are going to do EDI." He says Solectron is considering some other electronic commerce tools, but he is wary.
"We are getting ready to do a lot, but the trick is to figure out what is smoke and mirrors and what is for real," Maxie adds. "Auction sites may have their place, but in a constrained market, where are the relationships? There are price and availability issues. You can have the world's greatest price, but if nobody ships, you're in trouble. You have to make sure the tool that you are getting has some application in real life."
He says Solectron wants to manage the supply chain via e-commerce technology, but the trick is to guarantee flexibility in the supply chain because "nobody can forecast accurately."
Not a choice
For Celestica, e-commerce won't be an option for suppliers, it will be a requirement, says Totz, the VP of commodity management. "We have to have e-commerce from suppliers," says Totz. "It could be EDI, Web-based, or next generation of the Internet. It has to be direct to the line-order fulfillment, life-cycle management, seamless ramp-up from prototype to production," he says. "This is the next generation of partnerships."
E-commerce is important because it will provide "matrix networking" among Celestica, its customers and its suppliers, according to Totz. Information about new products, build schedules, forecasts and orders can easily be seen by all three parties.
Currently, about 66% of Celestica's business with suppliers is done via EDI; that percentage will increase in the next several years.
"I would like to have it be 100%," says Totz. "One hundred percent system-to-system e-commerce would mean there is no human intervention, no fax, no PC. It goes from my system hardwired into their [suppliers'] planning system. Then they ship orders to system requirements."
He says e-commerce lowers procurement costs and improves accuracy. "It costs about $45 to place a manual purchase order. That's the manual typing of it. Electronic purchase orders are $5," says Totz. But that is only part of the benefit of e-commerce.
"When I place an order electronically with you, I know you have it. Even if there was a problem, a system message would inform me that the order didn't go through and to retransmit it. Errors are being avoided, and you can't put a dollar amount on that accuracy," he says.
Information is key
But cost and accuracy aren't the only reasons why CMs will use the Internet as part of their procurement strategy. The Net can be used to transmit valuable information about components. Example: Contract manufacturer EFTC uses a password-protected Web site to review OEMs' bills of materials for part obsolescence. EFTC, based in Denver, builds boards and assemblies for avionics, industrial control, medical, and telecommunication OEMs.
"Obsolescence is a big issue in electronics," says Brian Tracy, a former buyer and now vice president of business development for EFTC. If an OEM designs in a component that will soon become obsolete, the board may have to be redesigned adding cost and delaying shipment of a new product. Or if a key component in a product already in production becomes obsolete, it could send buyers scrambling to find a suitable substitute that is being manufactured in volume.
"We proactively review our customers bill of materials and approved vendor lists and make proactive recommendations about parts we know will become obsolete or think will become obsolete soon," says Tracy. We have a separate Web page for each customer. The customer logs in and can check our recommendations."
At Flextronics, buyers use the Internet to see customer orders. Some of Flextronics major customers have extranet sites on which new orders are posted. Buyers can log on to the site, see the orders, and buy the needed components for the orders. Michael Marks, CEO of Flextronics, says suppliers soon will be able to see and respond to orders.
Flextronics has a similar tool for customers. OEM customers can log onto the Flextronics Web site and view a variety of real-time information concerning a product being built on a Flextronics line, including quality data, engineering notices, yield rates, and failure rates.
It's clear that the Internet will be a key part of a CM's supplier management strategies. It is becoming the tie that binds CMs to their suppliers. It will result in closer alliances between CMs and their key suppliers, and it will be a useful tool as more CMs handle procurement for OEMs.
E-commerce will be incorporated with other supplier management programs. Case in point: SCI System's supplier-managed inventory program. Under the program, suppliers ship parts not to an SCI facility, but to a nearby hub operated by a third-party logistics provider. When SCI receives customer orders, it notifies the hub via EDI and the parts are shipped. SCI does not own the parts until they are shipped; the only inventory it has is on the production line. The program reduces inventory costs and increases inventory turns, says Bill Quinn, vice president of purchasing for SCI. He says the program is useful because it supports BTO strategies, which many of SCI 's customer use.
E-commerce is being used in conjunction with dedicated buying teams that some CMs offer. Example: ACT Manufacturing in Hudson, Mass. ACT's buying teams do planning and procurement for OEM customers, says Dave Harrington, vice president of material management.
The team looks at the customer's MRP to make sure ACT can support the customer's build plan and is also involved in new product introduction.
The idea is for ACT to know what products are being planned. "We have to understand what components are being designed in so we can do the strategic and tactical procurement of those components to assure that the OEMs get faster time-to-market, time-to-revenue, time-to-profit," Harrington says.
Many CMs are global with commodity teams around the world. Team members have a bird's eye view of the global electronics supply chain and can identify emerging technology and market trends. Example: Manufacturers Services based in Concord, Mass. The CM has commodity teams around the world for semiconductors, interconnects, passives, electromechanical parts and peripherals. Those commodities are broken down into 20 different categories, and a team is formed for each one. For instance, within semiconductors, there are subset teams for various components like logic and memory.
The teams, which include purchasers from the company's manufacturing facilities in North America, Europe and Asia, develop the commodity strategies for Manufacturers Services and OEM customers.
"They look at technology trends," says Steve Dahrendinger, vice president of supply management. "When they see technology transitioning, they keep OEM customers informed and give them advance warning so they can change their product to include the latest technology," he says.
He says the teams work with OEM buyers, giving them updates on where certain technology or market conditions for a commodity are heading. Often the teams will bring an alternative supplier to a customer. They also get involved with design, looking at design for manufacturability issues.
CMs say more OEMs will outsource purchasing to their manufacturing partners in the coming years and CM buyers will help determine the supplier strategies that will be used by the OEM. However, for the most part supplier management strategies will be a joint effort between the OEM and CM, based on supplier capabilities and emerging technologies.
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