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The supply chains of high-tech companies are globe-spanning marvels. Over the past 20 years, looking for ready sources of components, lower-priced labor, and talented designers and engineers, these companies have ranged throughout the world. In a highly competitive and fast-moving marketplace, they have sought to maximize their strengths and flexibility as products change rapidly and prices continue to fall. But the sprawl and complexity of such networks have made it harder to manage end-to-end operations smoothly. Many technology companies are grappling with volatility and disruptions across their supply networks, and eliminating waste from duplicative efforts is an ongoing challenge. As product life cycles shrink, we see inventory buildups in the supply chains of some companies, while others cope with rising distribution costs, on-time delivery problems, or delays in getting new products to market. In fact, high-tech companies have let complexity undermine collaboration in their supply chains: they arent working as closely as they could with their supply chain partnerssharing information or streamlining processesto smooth out volatility and eliminate waste. This failure is surprising. The high-tech industry creates products that promote collaboration, openness, and efficiency. We all know stories about companies in other industries such as retail and consumerpackaged goods that have improved their operations significantly by using technology to collaborate more closely with suppliersyet high-tech companies have been slow to follow. For a host of reasons rooted in the way they are organized and compete, their executives have been less than enthusiastic about pursuing the benefits of collaboration with their supply chain partners. This lack of enthusiasm is fast becoming more costly for OEMs. Even as product life cycles shrink, consumers are demanding products with new features (such as mobility, greater storage, and more memory) that make products ever more complex. As this complexity increases, it will become harder to manage supply networks, opportunities will be missed, and supply chain costs will rise. The path to improvement, we suggest, lies in better collaboration with suppliers. To achieve it, companies should address their internal challenges and then deal with key stress points
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executives often believe that they must guard information on their business plans and processes closely. This perceived need for confidentialityOEMs reason that since their suppliers provide parts to competing OEMs, shared data isnt securedirectly affects suppliers. The mistrust extends to ODMs (original design manufacturers) as well, which are also considered risky, since they work with the OEMs competitors, and even to retailers that distribute those competitors products. If OEMs do provide data, its often inaccurate. This lack of transparency makes the OEMs projections less than believable to suppliers, which then compensate by scaling production downward. That causes additional problems if demand is unusually strong.
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an open exchange. In one instance, the supply chain partners of a global networking OEM perennially doubted the reliability of its forecasts doubts that led to production and delivery delays. Seeking improvements, senior executives from the OEM and suppliers established a framework for collaboration. They determined which types of information could be shared and which (for instance, pricing) were too sensitive and thus had to be left outside the agreement. The OEM then created a central data repository using basic spreadsheet technology that gave both suppliers and the OEMs functions the same access to data. After four months, the suppliers confidence in the OEMs numbers improved, encouraging forward planning and ending bursts of last-minute production. Inventories dropped by 45 percent, and the cycle time from order to shipment by 70 percent. Sharing assets OEMs and their partners often operate separate distribution networks with overlapping inventory hubs and logistics systems. Simplifying and consolidating these networks can reduce complexity, shave costs, and strengthen partner relationships. A consumer electronics OEM and a large retailer, for instance, each maintained separate product warehouses and distribution systems, in part because neither had sufficient visibility into the workings of its partners operations. Leaders at the two companies agreed to overhaul this setup by giving the OEM full responsibility for managing store inventories. The OEM, which in the past had relied on incomplete and less-than-current information from the retailer, gained direct access to store sales data. In effect, the OEMs supply chain extended directly to the stores, and the retailer could eliminate its redundant distribution facilities. With better information, the supply chain could adjust more swiftly to variations in consumer demand. The availability of products at retail stores improved by 70 percent, and overall supply chain inventories declined by 20 percent. This type of asset sharing is easier to implement for OEMs and retailers but can also be pushed further up the chain to include OEM suppliers. Joint product development and risk sharing Short product cycles make a certain amount of supplier turnover inevitable, but high-tech companies can solidify their relationships by jointly developing products with their partners and by sharing risks. Such product collaboration needs to go beyond what is now standard: outsourcing of designs to ODMs. Instead, when an OEMs engineers design key components, they should work with key suppliers from the outset. Suppliers and OEMs may even jointly own pieces of intellectual property. This type of arrangement gives OEMs access to skills they may not have in-house and allows them to leverage scarce engineering talent. It can also reduce time to market for new products. Suppliers benefit from assured demand and the chance to develop specialized expertise. In the tech industry, new-product introductions are frequent and inherently risky. The risks are often borne disproportionately, with certain supply chain partners providing most or all of a heavy investment. Some partners with a lower risk tolerance may be hesitant to spend. Apple, for instance, faced such a situation when it worked on its iPod supply chain in 2005. Apples major worry was uncertainty over
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supplies, since industry demand at the time was strong. Few suppliers were willing to make sizable investments just to meet Apples needs. Apple reduced the risks by providing up-front payments to partners such as Micron, Samsung, and Hynix. While fostering collaboration is in the interest of all supply chain participants, creating the internal and then external conditions for change will take time. Most OEMs will first need to launch discussions on the scope and speed of new collaborative efforts and think carefully about which companies will be their closest partners. At the outset, the most suitable ones are major suppliers, for the economics create natural bonds.
Early successes that set the stage for further progress help senior executives think about the longer term. The partners should understand that even if they begin with an appropriate model, they will need to change it, both to build on success and to counter the moves of competitors.
About the Authors
Gautam Groveris a consultant in McKinseys Chicago office, Eileen Lau is a consultant in the Silicon Valley office, and Vivek Sharma is an associate principal in the Chicago office. The authors would like to acknowledge the significant contributions of Bob Dvorak and Vats Srivatsan to this article.
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