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Industry Focus

Adding Service to the Supply Chain
Anita Devasahayam, 1-Jul-2000

Independent industry analyst Technology Forecasters predicted that the electronic management services (EMS) industry will grow at 25% annually, resulting in a US$178 billion market by the year 2001. And the world’s biggest player in the EMS sector, Solectron Corporation, initiated a major organisational change last year to position itself as a premier supply chain facilitator and as a strategy to retain a thinning market share.

Solectron has performed remarkably well in the last three years with net sales at US$3.69 billion in 1997, US$5.28 billion a year later and US$8.4 billion last year - recording an annual growth of over US$2 billion. In 1999, net sales grew 58.7%.

The supply chain is a key contributor to its escalating growth. Last year, the company embarked on a mammoth task to realign its technology solutions, manufacturing operations and global services into three integrated business units. By beefing up its assembly capabilities and automating its processes, it is set on transforming its supply chain management (SCM) into a service-oriented model.

Founded in 1977, Solectron’s was originally set up to capitalise on the overflow from electronic components manufacturing operations. It grew from strength to strength as more companies began to outsource their manufacturing functions. Through outsourcing, customers have the edge with the advanced manufacturing technologies, shortened product time-to-market, reduced total cost of ownership and effective asset utilisation.

“A major part of what Solectron is trying to do is to facilitate supply chain management beyond its traditional scope of materials management,” said its
corporate vice-president of strategic transformation, Ken Ouchi.

He said that SCM is instrumental as a leverage to provide a service to customers and suppliers. “It involves bringing together concepts and ideas that customers have and shaping it to deliver the products.”

Ouchi pointed out that while the framework was already in place, some customers still continue to furnish design sheets to Solectron and its pool of subcontractors to produce a prototype. Others, however, prefer to hand over the entire process from product design right up to delivery directly to the contract manufacturer.

While the company is comfortable serving both market segments, it is still a challenge to get the end product out the front door as soon as possible. Part of the challenge, said Ouchi, lies in the growing sophistication of products that require software or system packaging and other features beyond the assembly of a typical printed circuit board.

“We provide a significant advantage to customers when we are involved in the products from the conceptual stage,” he said, adding that these products could be derivatives of existing products or completely new designs.

The design phase would naturally take a few weeks to a few months but a prototype of a printed circuit board can be completed within three days compared to the industry average of five to 15 days.

“Because of our SCM infrastructure, we are able to do that consistently for a set of customers. Our premium clients are able to have a machine assembled and tested prototype within eight hours. Many take advantage of the capability we offer and are willing to pay for it.”

A typical production cycle at Solectron is one turn every two to three days instead of one turn every three weeks that is the current standard elsewhere.
“We squeeze a lot out of the 1% of our revenues that is budgeted for IT in which SCM accounts for less than that,” Ouchi said, adding that Solectron services about 200 customers and suppliers worldwide.

Collaborative B2B

The Internet is a key communication component between suppliers and customers. According to Ouchi, the collaborative nature of the ‘Net enhanced Solectron’s position as information such as bills of materials and design sheets could be transmitted easily reducing paperwork, driving down costs, improving efficiency and reducing errors and cycle time in the supply chain.

“We rely on a virtual private network (VPN) using the ‘Net between the Solectron sites and secure encryption on the ‘Net with our suppliers and customers. Some customers and suppliers are also included in the Solectron VPN. We get tremendous economy of saving from the VPN compared to the cost of a dedicated wide area network,” he said, adding that with VPN, security is not an issue.

To push the e-commerce envelope further, Solectron is actively involved in RosettaNet, an independent, self-funded and non-profit consortium dedicated to the development and deployment of a standard e-commerce framework to align processes in the IT supply chain.

As a member, Ouchi said that Solectron is pushing for a set of classifications and the standardisation of transactions between companies.

Last July, RosettaNet launched Econcert, a Partner Interface Process (PIP) for members within the supply chain to configure their system requirements in a common supplier language and make an online inquiry or order.

The transaction will seamlessly permeate the supply chain to get an immediate answer to availability, location, price and delivery schedule of products. The automated transaction will initiate a trail of tasks to be performed by each involved member of the supply chain all the way from product introduction to delivery.

Ouchi said that Solectron took part in the pilot last year alongside Ingram Micro, Intel and Microsoft to prove that it would work. “This year we are rolling it out and should complete it by next year.”

Statistics from RosettaNet indicate that one implementation of PIP can yield annual savings as high as US$1 million for each. The IT supply chain could save as much as US$25 billion annually when all PIPs are implemented.

Ouchi said that there are nearly 100 PIPs that are being developed including transaction set up for trading such as partner data for account payables and receivables, shipping addresses, and others, so that partners can begin using RosettaNet transactions immediately.

He added that e-procurement processes also improved inventory levels. “Now we are getting the inventory integrated within the SCM, we expect to see more dramatic results over the next few years. We have always had the cost pressure to consider but by piecing together the right set of technology will allow us to enjoy greater benefits.”

“Essentially we are taking advantage of the ‘Net to coordinate the services within and outside the company to produce the capability for Solectron. By doing so, we have grown substantially more now than ever before.”

Solectron’s value had quadrupled over the last 10 years, to which Ouchi attributed to an efficient SCM. “Greater savings is possible through more automation and closer customer and supplier involvement,” he added.

Managing Relationships

Ouchi pointed out that although the EMS sector is worth over US$100 billion, it is also a very fragmented market with the top five EMS companies sharing 30% of the total market.

Gross margins are under 10%, forcing razor thin business opportunities. Companies like Solectron have to transform themselves into a true service entity to be competitive, argued Ouchi.

He said that in recent years, the growth for manufacturing sector had accelerated as many organisations discovered that manufacturing can be done as a service. Instead of investing to set up a facility to manufacture products, it made sense to farm projects to reliable contractors.

The realisation is beginning to spread from the US into Europe and Asia. Soon companies outside the US will undergo the same transformation as their counterparts and begin to outsource projects. “The potential for growth is tremendous,” Ouchi commented.

And understanding customer behaviour is essential to capture a slice of that market, said Ouchi. He added that often, customers want to be kept in the loop although a job or project has been sub-contracted out. “It is our goal to show our customers that we understand their needs and can provide customised solutions.”

Customer service is essentially about managing and maintaining good relationships with all parties but the new variable in demand today is to provide a service that pushes the value bit up.

“We need to create each service in a way that is consistent and yet tailored to customers’ needs at the same time. In the past, we used to ask the customer what they wanted. Now the customer asks us to tell them what should be done because with our experience, we can help them meet their business goals.”

The greater challenge is changing mindsets to be more receptive to the advantages provided by deploying technology. “The psychology of people in a
successful company is the toughest- they are thinking, why fix it when it isn’t broken?”

Instead of waiting for the economic doldrums to arrive as an excuse to introduce radical changes to work flow or business processes, Ouchi believes that change should be evolutionary and its adoption, progressive.

“Doing this without going through the danger of upsetting people is the hardest problem. It is certainly easier to program computers than change people but the point is, people must realise they must continue to change and evolve to make full use of their creativity within a successful organisation instead of waiting for the market to force changes.”

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