White Paper / Case Study

Based on Kinaxis Webinar

Coordinating Outsourced Manufacturing:

A Win-Win Proposition for OEMs and CMs
Technology Forecasters Inc.: Embracing
Change as a Competitive Differentiator
Managing the demands of constant change is one of the biggest
challenges facing the EMS industry today. Although their
perspectives differ, original equipment manufacturers (OEMs)
and contract manufacturers (CMs) share the opportunity to
competitively differentiate themselves by actually embracing this
issue and leveraging it to their mutual benefit.
To achieve this goal, OEMs and CMs must adopt a common
philosophy, share responsibility, and communicate in a way that
enables them to meet customer needs. Without an integrated
approach, only pieces of the problem can be addressed.
Collaboration is key to a truly successful partnership that
empowers all levels of the supply chain to respond in real time.
As the relationship between OEMs and CMs evolves, the need for
flexible tools and methodologies to help them effectively manage
change becomes more critical as well. During a recent webinar
sponsored by Kinaxis, senior consultant Charlie Barnhart of
Technology Forecasters Inc. (TFI) offered valuable insights into
what comprises a successful solution strategy.
THE SHIFTING ROLES OF OEMs AND CMs
The evolution of the EMS industry in response to an increasingly
dynamic marketplace reveals a clear change in the roles played
by OEMs and CMs. “In the beginning, OEMs designed and
manufactured essentially all the components of their products;
then as technology became more prepackaged and ubiquitous,
product differentiation shifted from a matter of functionality
to price-versus-performance,” Barnhart says. “This resulted in
a high degree of product churn as life cycles began to shrink
and sales forecasts became increasingly unreliable due to rapid
changes in user preferences.” As it became harder to predict
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factory utilization rates, OEMs sought ways to shift their fixed
costs to a variable basis, which led to a broader acceptance of
outsourcing. This encouraged EMS companies to expand their
value propositions and OEMs to shrink their investment in
internal capabilities.
Combined with the impact of globalization and a post-Y2K
economic downturn, these trends created a supply-demand
imbalance that favored OEMs, and prices dropped precipitously.
OEMs gladly leveraged the windfall to offset margin pressures,
and EMS companies continued to reduce prices to fill some of
that capacity. As prices started to hit bottom, OEMs were forced
to look beyond local suppliers to cut costs, transferring their
outsourcing requirements to more remote locations such as China.
GROWING CHALLENGES: COMPLEXITY, PRICES,
AND COMPETITION
Cost reductions from outsourcing have come at the price of
increased complexity in the supply chain. As a result, today’s
brand owners often find themselves hampered in their ability to
respond to the volatile, expensive-to-fulfill customer demands
created by constantly changing consumer preferences. Not only
is the EMS side of the supply chain threatened by increased
pricing pressures—despite industry expectations that these
pressures would ease with the recovery of the high-tech sector—
but the survival of OEMs is also at risk if their key suppliers
cannot stay in business.
Price pressure is not the only challenge. A recent TFI survey
asked EMS providers about competition they experienced from
original design manufacturers (ODMs). Approximately 20
percent reported being in moderate or strong competition with
ODM companies. Like EMS organizations, ODMs started with
some level of design value proposition and rapidly evolved to the
point where most of their revenue comes from manufacturing.
Reciprocally, EMS companies have added design capabilities RESPONSE MANAGEMENT—
to their internal manufacturing. Research shows a convergence THE KEY TO MANAGING CHANGE
between the growth of these two supply solutions as well as their Though reintegrating manufacturing back into the core of the
percentages of revenue. OEM enterprise might seem like a possible answer, the resulting
Another challenge occurs when markets sometimes increase in costs would likely prove prohibitive. Instead, Barnhart
spontaneously revise their supply solutions. Barnhart cites says, companies should shift the way they manage change—
Wal-Mart’s decision to stop using OEMs to fulfill its low-end focusing on the opportunity that change brings to the enterprise
notebook requirements—and instead to start buying directly and turning it to their advantage.
from Taiwanese ODMs. Such wrenching events are painful at “Of all the approaches I’ve looked at—in my research, interviews,
best to the company losing the order. and work at TFI—the one that works best is Response
Barnhart expects the evolutionary cost/complexity trend to Management,” Barnhart says. The ‘what-if’ modeling technique
continue as relationships extend around the globe. “Besides of Response Management enables OEMs and their EMS suppliers
China, there’s also a major increase in the interest and activity to quickly assess resources and map the best action alternatives
level associated with India—an even more remote geographic to handle changes in product demand or supply availability—
solution,” he says. “As you go farther and farther away, whether facilitating real and meaningful collaboration between the parties.
from Western Europe or North America, this evolutionary Both sides benefit.
problem becomes more complex.” “As traditional solutions fall hopelessly short of accomplishing
Constantly changing needs in an increasingly complex the goal of meeting these highly variable, complex supply
environment require ever-evolving solutions; what worked last requirements based on customer demand fluidity, what is
year may not be so effective today. To stay competitive, Barnhart needed is a methodology centered on the critical inflection point
says, OEMs and CMs would do well to consider whether of manufacturing execution,” Barnhart says. The inflection
yesterday’s solutions are conflicting with today’s challenges. point is not on the demand side where the OEM is evaluating
requirements, or on the fulfillment side where the CM or ODM is
INVENTORY: A SOLUTION BECOMES A LIABILITY shipping product. Rather, it’s the point inside the manufacturing
Many companies maintain higher levels of inventory in an attempt plant when raw materials are transformed into finished products.
to help them meet these challenges and respond to change. Yet “This inflection point is where we can work to the competitive
this is ineffective, says Barnhart, because inventory doesn’t work advantage of an organization rather than against it,” Barnhart
in any of the three potential directions the market can move. says. Focusing on that point and using a tool such as Response
Two of those three directions involve up-ticks or down-ticks in Management—which offers multiple options on a fluid, dynamic
customer demand. “If demand suddenly increases, extra inventory basis to all parties in the supply chain—enables companies to
isn’t a complete solution because it can’t increase manufacturing convert change from a problem to an opportunity.
capacity, which tends to be fixed,” Barnhart explains. “If demand
decreases, inventory becomes a major liability because it uses up
a company’s liquidity.” This hampers the organization’s ability
to respond to a downturn through different methodologies or
discovering alternative paths in its business model.
The third market direction is none at all—a flat market, which
companies typically respond to by updating their product line:
developing new products, releasing those they’ve had in the
development pipeline, and eliminating old products that no longer
sell. “None of this bodes well for inventory sitting on the shelf,”
Barnhart says. “Inventory is perishable and decreases in value the
longer it sits.” Regardless of market direction or adjustments in
the supply chain, inventory slows a company’s reaction to market
changes and makes it significantly less nimble.
Though some EMS companies are now being asked by OEMs to
hold more buffer inventory to provide them with shorter lead
times, Barnhart advises caution in going down that path. “It seems
to me that EMS companies are constantly being asked to provide
additional services, but being compensated for them doesn’t seem
to be very common,” he says. Even if EMS companies comply,
this won’t necessarily ensure that they’ll have everything their
customers need.
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THE NEED FOR AN OPEN,
COLLABORATIVE RELATIONSHIP
Barnhart also suggests that OEMs respond to issues raised by
their EMS or ODM suppliers in a positive, constructive manner.
“You want your suppliers to bring issues to you early and often,
if you’re going to achieve real collaboration,” he says. “If you
respond negatively, you’re not going to hear about it. Yet the truth
is the sooner you hear about problems, the better off you are.”
And with changes happening at both the front and back end of the
supply chain, overall responsiveness is determined by how well all
participants work together.
MANAGING THE VIRTUAL ENTERPRISE
With so much focus on specialized outsourcing in order to gain
cost advantage, today’s OEMs are evolving into highly complex
businesses—becoming virtual enterprises. This trend has created
many benefits, but much of the gain can actually be wiped out if
an organization is inefficient or slow to respond.
While OEMs or brand owners may not be directly responsible
for the execution of every piece of the virtual enterprise, they are
ultimately accountable for the end result in terms of their brand,
product quality, compliance, and similar criteria. Broad visibility
is crucial to help companies effectively orchestrate and control key
business processes and activities across the entire supply chain.
But it doesn’t stop there. A good toolset also empowers all
individuals throughout the virtual enterprise so they can leverage
that visibility to make and keep customer commitments. Dianne
Sforza, former Webplan (now Kinaxis) program manager at
Lucent Technologies, provides a closer look at how that’s done.
Lucent Technologies: Driving Competitive
Advantage Through Response Management
Company Profile
Lucent Technologies designs and delivers the systems, services,
and software that drive next-generation communications
networks. Backed by Bell Labs research and development, Lucent
uses its strengths in mobility, optical, software, data, and voice
networking technologies as well as services to create new revenue-
generating opportunities for its customers, while enabling them
to quickly deploy and better manage their networks. Lucent’s
customer base includes communications service providers,
governments, and enterprises worldwide. Lucent Technologies is
headquartered in Murray Hill, New Jersey.
Sforza’s team leads key projects aimed at maintaining, enhancing,
or upgrading the global environment within Lucent. The
company has been a pioneer in bringing external EMS data into
its own environment and was also an early adopter of Kinaxis
RapidResponse™.
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New Demands Lead to Centralized Solution
In 1997, one of Lucent’s manufacturing locations in Massachusetts
needed a new system for what-if analysis and inventory
management, and RapidResponse was the application selected.
At the same time, Sforza says, Lucent also implemented some
tailored solutions to do forecast acceptance and priority allocation
and distribution.
Four years later, a Lucent plant in Brazil chose RapidResponse
for the same purpose—what-if analysis and inventory
management. “At that time we made a very good strategic
decision,” Sforza says. “Instead of installing different instances of
this application around the globe, we decided to take advantage
of the new multi-site functionality Kinaxis was offering to expand
our environment from one full MRP site to six.” This gave Lucent
greater standardization and control while providing cost savings,
because the application itself, as well as support and maintenance,
were centralized.
By 2002-2003, Lucent had seriously adopted the outsourcing
model, and one of the key business issues the company faced was
loss of supply chain data visibility.
“Since we already had RapidResponse up and running with our
Lucent node MRP information, it made sense to bring our EMS
partner and supplier data into the same application,” Sforza
says. Once again, Lucent expanded its multi-site environment
and brought in three full MRP sites—including bills of material
(BOMs), supplies, demands, and inventories—along with a
couple of partial sites with just inventory, demand, and supply
data. The company also implemented its Global Supply Planning
(GSP) application, which aligns the latest demand priorities with
sourcing guidelines to provide strategic decision support.
The outsourcing adding complexity to Lucent’s supply chain also
necessitated new procedures, such as the excess and obsolete
(E&O) inventory claim process the company uses with key EMS
providers. To support this, Lucent added its Global Inventory
and Liability Reporting (GILR) tool and a Sell What We Have
(SWWH) solution. “Our GILR tool takes something that is very,
very data intensive—analyzing the claims coming back from EMS
providers—which formerly took many man-hours and often weeks
to do, and uses the intensive analytics of RapidResponse to
complete it in hours,” Sforza says. The SWWH solution identifies
saleable items which might be built and sold to consume existing
inventories. Both are used across Lucent’s entire supply chain.
In 2004-2005, Lucent migrated from a 32-bit to a 64-bit server
environment to better accommodate its massive datasets, and
added customer order data from its SAP system as well. Since
then, the company has focused on modeling its EMS partner sites
within RapidResponse, shifting multiple locations in one EMS
site into separate locations and expanding some of the partial sites
into full MRP sites. “Kinaxis has been very key in helping us here,
because we don’t want to lose any of the functionality we have in
our current model,” Sforza says. Lucent is also planning to migrate
into the RapidResponse web environment, which will enhance its
ability to collaborate with partners and enable users to access the
application from multiple sites worldwide.
Currently, Lucent has three production environments with
the following data sources: the global supply planning server,
which imports Lucent system integration center node data; the
daily server (where most users reside), for doing general what-
if analysis and SWWH analysis, which imports Lucent, EMS,
and supplier data; and the GILR server for global inventory and
liability reporting, which imports Lucent node data and EMS
partner data.
With all the different roles and experts involved in figuring out
the right course of action for any given change across the supply
chain, Lucent has a broad user base. “We have about 500 different
users—on the customer facing side, on the product side, and
definitely in materials management—working very closely with
our suppliers,” Sforza says.
Depending on their individual roles, people are very focused on
their specific areas and want customized views of the information.
“RapidResponse allows you to set up user groups very easily,”
Sforza says. “We create user groups specifically tailored to
whatever users want to see.”
Improved Regulatory Compliance
Recent regulations in the United States and Europe, such as
Sarbanes-Oxley and the Restriction of Hazardous Substances/
Waste Electrical and Electronic Equipment (RoHS/WEEE)
Directive, impose new compliance requirements on the virtual
enterprise. Having adequate visibility and understanding into
such change drivers is crucial for today’s manufacturers.
The RoHS/WEEE Directive restricts the use of six hazardous
substances in electrical and electronic equipment sold in the
European Union. This environmental legislation will impact every
electronics manufacturer, regardless of geographical location or
the equipment they produce. China, Japan, and California have
based their own initiatives on the European RoHS directive, thus
broadening its scope worldwide.
“We’re actually working within our Lucent nodes and with our
EMS partners on this,” Sforza says. “RapidResponse allows
you to run what-if scenarios on those kinds of issues. How we’re
looking at this with one of our nodes is, if they’re capable of
providing the inventories, supplies, and demands that are RoHS
compliant, then we can identify those by different inventory,
demand, and supply types, so when you’re running a query or
doing a calculation, you can choose to include them or not.”
Multiple Advantages
Implementing RapidResponse has created four key advantages
for Lucent: timeliness, accuracy, standardization, and data
security.
“Timeliness is key,” Sforza says. “We get our data feeds in from
our Lucent nodes as well as from our EMS partners on a daily
basis, so there’s no need to wait for reports to be generated or to
go to a portal or wait for a spreadsheet. Our users know where
to get the data, and if a change has occurred since the data was
refreshed, RapidResponse enables you to quickly do a what-if
analysis to see the implications of that on your supply chain.” The
intensive analytics of RapidResponse also provide significant
time savings, with tasks that formerly required days or weeks now
completed in just hours.
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“Lead time isn’t only in the Lucent enterprise; it’s also in Lucent has experienced many other tangible benefits from
the extended supply chain,” Sforza points out. “Having our adopting the system. “In the early 2000s when the telecom
EMS partner data within our own environment enables us to industry took a big downturn, the visibility from RapidResponse
collaborate much more efficiently. If there’s a down-tick in enabled us to decrease our inventories by about 70 percent,”
forecast, by working with our EMS providers we can actually avoid Sforza says. More recently, the company has improved inventory
excess inventories ahead of time.” turns from the low single digits to the high single digits. “Using
Accuracy is very important too. “We see what they see; they’re the heavy-duty analytics of the GILR application, we’ve been able
sending us their ERP data. We want to get that customer order, so to avoid approximately $30 million in E&O inventory charges over
we’ll do a very high-level analysis: if we get this order, what might the past couple of years,” Sforza notes. “We’ve also improved our
happen if there are constraints within the supply chain? Being supply and demand planning and forecast accuracy, which has
able to see their data helps us work better and collaborate more contributed approximately 1 percent in gross margin for the last
effectively with our partners,” Sforza says. “For instance, if a BOM fiscal year. So there are definitely some advantages to working
was loaded inaccurately in their ERP system and it wasn’t noticed, together with our partners to bring together an effective supply
and someone on the Lucent side happens to see that, we work with chain, and RapidResponse helps us do that successfully.”
our partners to correct it.”
Another advantage is standardization; RapidResponse has ABOUT Kinaxis
strict requirements for importing data regardless of the source.
“Whether it comes from supplier ERP systems, a global supply Kinaxis delivers an on-demand Response Management service that
chain warehouse, RapidResponse itself, or some other source enables customer-focused companies to achieve breakthroughs
doesn’t really matter; the data needs to be in the same format to in operations performance and customer satisfaction by rapidly
be imported,” Sforza explains. “That allows really rapid analysis and more profitably responding to constant changes in demand,
and workbook creation, because you don’t have to spend time supply and product. Kinaxis RapidResponse combines personal
grabbing data from different places and putting it into the same alerting, multi-enterprise visibility, collaborative “what-if” analysis
format first.” and rapid decision support to empower front-line supply chain staff
with tools for risk tradeoff and response to daily changes inside
Data security has always been a priority at Lucent. “The
the Sales and Operations Planning horizon. Global leaders such as
application itself is a very secure environment, and combined
Casio, Honeywell, Qualcomm, Raytheon and Toshiba use Kinaxis
with the strict requirements Lucent has for any data coming in,
RapidResponse to establish superior responsiveness within
we’ve created an environment that is secure not only for our data,
their fulfillment networks and supply chains and gain competitive
but for our EMS partner data,” Sforza explains. “Any external
advantage. For more information, visit the Kinaxis web site at www.
work with our partners and suppliers is done via a supply chain
kinaxis.com or the company’s blog at blog.kinaxis.com.
portal under tight controls. This is really very key—it addresses
the nervousness that some of our EMS providers expressed in the
beginning about sending proprietary confidential data. We’ve had
no known security issues whatsoever.”
Better Service and Greater Efficiency
RapidResponse also provides critical information needed by
Lucent’s customer support service for accurate customer order
promising. “The ultimate goal of an efficient supply chain is to
take care of your customers—making sure that they’re satisfied,
that you have on-time delivery performance, that you’re capable Comments on this paper?
of addressing changes that are happening in the market, and that Want to learn more?
you have improved forecast accuracy so you can make this all
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it all flow,” Sforza points out. “By having our EMS partner data
within RapidResponse, we have a much bigger view of our supply
chain so we can meet these objectives.”
As globalization continues and competition increases, responding
to customers quickly and efficiently becomes more crucial
than ever. “RapidResponse enables us to meet our customer
obligations and deliver to the customer when they want it despite
constantly changing demands,” Sforza says.