Cutting cost is key in consumer electronics

Buyers at electronics manufacturing service providers are handling more sourcing responsibility in consumer electronics

James Carbone -- Purchasing, 11/17/2005

Reducing cost from suppliers, short product lifecycles, and seasonal demand are three of the challenges that purchasers in the consumer electronics industry face.

Many of those challenges fall into the laps of buyers at electronics manufacturing services (EMS) providers, who are building an increasing amount of consumer electronics equipment, from digital televisions to MP3 players to white goods.

One such EMS provider is Jabil Circuit in St. Petersburg, Fla. Jabil's consumer electronics business has increased seven-fold since 2000.

"We have seen a dramatic increase in the amount of consumer business we do," says Courtney Ryan, vice president of supply chain management for Jabil. "Five years ago, our consumer revenue represented about 4% of our overall business. At the end of our fiscal 2005, it was 29%." The EMS provider has also increased its business with medical equipment and industrial controls OEMs and military and aerospace contractors.

Jabil began focusing more on consumer electronics when the telecom industry collapsed in 2001. At that time, about 50% of its business was building telecommunications and networking equipment.

Jabil soon learned that the consumer electronics industry was different than telecom. The differences forced Jabil to change how it purchased and managed its supply chain.

"One thing we learned was consumer electronics products tend to have shorter lifecycles," says Ryan. "This has implications as it relates to excess and obsolete materials."

If Jabil buyers purchase too much of a certain component used in a consumer electronics device, Jabil could easily get stuck with excess inventory or obsolete parts if the design changes in six months and different parts are needed.

Ryan also says that consumer electronics tend to be more focused on cost than technology and the business is very seasonal, which impacts how Jabil must buy and how it uses its factory assets.

"The consumer segment is much more cost sensitive than other segments," says Ryan. "When is the last time you went into a consumer electronics store and expected to pay more for a television than last year?"

The need to reduce the cost of the end product means Jabil has to press its suppliers for annual price reductions.

"We aren't just pressing them. We are working with them to migrate production to low-cost regions," says Ryan. "We are working with them to identify ways to remove cost from the supply chain."

Jabil also looks for leverage opportunities.

"We have the benefit of using one common enterprise resource planning (ERP) system worldwide. The system can help us identify and leverage opportunities. It is an easy and efficient way to leverage our materials spend worldwide," says Ryan.

Another challenge is that, unlike telecom, a lot of consumer electronics companies ship 75% of their volume in the last four months of the year. "That has interesting implications on managing supplier capacity," he says.

To manage the supply chain challenges of consumer electronics customers and OEM customers in other business segments, Jabil's supply organization recently reorganized.

"With a diversified customer base, a one-size-fits-all supply chain doesn't work," says Ryan. "We had to recognize the significant differences in each industry segment that we serve and organize our supply base accordingly."

Jabil's supply chain organization is divided into two segments. One segment includes commodity management, supplier quality engineering, logistics management, quoting and design-related activity, which services 80% of Jabil's customers, says Ryan. Jabil has commodity teams for products, including logic, linears, passives, interconnects, cables, DRAMs, plastics, metals and tooling among others.

Then there is a group that focuses on customization of that supply chain infrastructure and that's accomplished via a global business unit materials management team. The team works with the customers to make sure the customers' unique supply chain needs are met.

Since Jabil has moved into the consumer segment, it has had to add suppliers.

"We saw a significant proliferation of suppliers because it became clear that to support the unique attributes of consumer and other segments, we needed to have a different type of supply base," he says.

For instance with printed circuit boards, Jabil needed to buy more single and double-sided, four-layer boards. "These are used more extensively in consumer electronics than in other segments," he says.

Jabil had to add plastic injection molding and sheet metal suppliers and semiconductor suppliers, such as MediaTek, which are focused on consumer applications. MediaTek supplies chipsets for DVD players.

Jabil also began doing more business with chip suppliers such as Texas Instruments and Philips, which supply a broad range of products for all customer segments.

In total, Jabil buys about $6 billion of production materials from about 5,000 suppliers.

"Five thousand sounds unmanageable, but 80% of our spend is with 180 suppliers," says Ryan.

It has so many suppliers because Jabil, like other EMS providers, has to take on the suppliers of its OEM customers. Often EMS companies try to get the OEM to use the EMS provider's suppliers.

"We measure the concentration of spend into our strategic suppliers. Commodity managers are encouraged to load up spend with the suppliers listed in their strategy."