Contract manufacturers are under intense pressure to cut costs and streamline their supply chain. In a revealing interview, SCI CIO Vincent Melvin talks about whether technology can help.
It wasn't exactly the most shining moment in the history of electronics manufacturing. Contractors such as Flextronics, SCI Systems and Solectron, which quietly churn out the innards of PCs, routers and cell phones for the likes of Cisco, Dell, Nokia and Nortel, were once considered recession-proof. But in March, financial analysts downgraded the contract manufacturers' stocks, citing excess inventory and low demand from their original equipment manufacturer (OEM) customers.
Then came the bomb from the industry's biggest OEM, Cisco: not only would sales for the quarter ending April 30 be down 30 per cent, but the company claimed that $US2.2 billion of its inventories were worth-less because of a decrease in demand. "This may be the fastest deceleration any company of our size has ever experienced," said Cisco CEO John Chambers in a statement.
Across the country in Huntsville, Alabama, Vincent Melvin watched Chambers on TV. The next morning, he got out of bed and went to his job at SCI Systems, just as he does every morning. More pressure? Sure -but it makes things interesting. "The truth of the matter is, if you didn't want that pressure, you wouldn't be in the job you're in," says Melvin, CIO of the Fortune 230 company that did $US8.3 billion worth of sales in 2000.
Yet Chambers' comments were clearly weighing on Melvin's mind. Soon after, SCI laid off 1300 employees, capping off a total of 5100 layoffs between January and April.
SCI sits smack in the middle of the world's most complex, volatile supply chain -a spot so risky that some of the most respected technology companies, such as Cisco, Dell, Hewlett-Packard, IBM, Motorola and Nokia, just to name a few, decided they'd be better off not making their products themselves. Instead, they farm them out to electronics manufacturing services (EMS) companies such as SCI. EMS companies purchase their customers' old factories, where they will assemble as many different products for different customers as possible, to keep the lines rolling all the time and squeeze out the maximum efficiency.
Considering that the factories were pretty good before the OEMs threw up their hands, SCI's is not a high-margin business. To make matters worse, SCI's OEM customers are feeling constant downward price pressure on the perishable electronics they sell -pressure they don't hesitate to pass on to SCI. And despite the fact that OEMs have cast off direct responsibility for manufacturing, they still want to be involved in the process, from forecasts to decisions to inventory. "I'd be hard-pressed to identify a business model that requires more collaboration than that between an OEM and EMS," says Todd Ackerman, a director for the management consultancy Pittiglio, Rabin, Todd & McGrath.
In response, SCI is in the midst of an ambitious effort to streamline its supply chain -to give customers visibility into the manufacturing process, to monitor suppliers, to reduce inventory and to respond better to changes in demand. It's not a plan so much as a process, and Melvin, along with SCI's senior vice president of supply chain, is piecing it together.
SCI is pushing its top 200 suppliers (of the thousands it works with) to communicate via EDI, XML or the Web. In April, about 40 per cent of those suppliers were still sending data either on paper or in nonstandardised electronic formats, such as e-mail attachments. When asked what the incentive is for SCI's suppliers to cooperate, Melvin laughs. "Business," he says. But if that's true for SCI's suppliers, then it's equally true for SCI itself, as the company deals with the unpredictable needs of its own customers in tough times. CIO talked to Melvin about the driving forces behind his company's supply chain initiative.CIO: How are you using software to improve your supply chain processes?
Vincent Melvin: We're using it to respond faster to changes in customer demand. For example, a key customer will say: "A week ago I asked you for 1000 units in four weeks; now I need 2000." The customer wants to know within 24 or 48 hours what we can do. Now, everybody [at SCI] says, OK, we have this new recognised requirement, but nobody knows whether we can build the 2000 in the period that they have requested.
Figuring that out requires us to analyse a huge amount of data about our capabilities to meet the order. Before, we did this by brute force -collecting data manually. You'd have to get in touch with each of your vendors -call them and say: "We need to deliver 1000 more", and see if you could get a firm commitment from all of them.
Until recently, the software for helping with this was hard to use and didn't have the right interface capabilities. Our software from Webplan allows us to do the scenario analysis of customers' demand and our ability to supply that demand. It does a fast simulation -24 to 48 hours versus a week in the past -of an entire material planning cycle.
Based on the simulation we run in the software, we can come back to the customer in a day or two and say: "Look, we're very confident that we can get you 1500 in four weeks, and the other 500 two weeks on."CIO: You are also just starting to use software to measure your suppliers' performance. How does that work?
MELVIN: SeeCommerce is a relational database engine that takes the framework of the Supply Chain Operations Reference (SCOR) model [cross-industry standard for supply chain management] and attempts to put parameters and guidelines around it. For example, let's say I've contracted with a supplier to have 25 days' worth of materials available to me all the time. That manifests itself in my system as an inventory location with X amount of goods in it. I can put in a rule that says when the inventory drops below 25 days' worth, an e-mail automatically goes to the supplier, or the number shows in red to them.
Then the question becomes, what do I do with that information? Do I call the supplier [and complain whenever inventory drops below that level], or do I go back to the supplier during the SCOR card review and say: "During the last 60 days, there were 15 days where the service level in the hub dropped below 95 per cent."? The main challenge is deciding what to measure and then how to monitor and communicate with the supplier [so you get what you want from them].CIO: Many experts say that the only way to have a truly efficient outsourced supply chain is if everyone in the supply chain has real-time visibility into the entire supply chain. Do you agree?
MELVIN: I'm not quite yet on the page that says that you need to have real-time, seamless visibility to everyone. Providing that level of visibility still has some level of overhead to it -the cost of moving data, and then storage and systems that can manage that data. If every event within my system triggers notifications across the supply base, that can create an awful lot of traffic and complexity.CIO: Many companies are having serious problems with their supply chain software implementations. What have you learned from your experiences?
MELVIN: One of the lessons I've had is that you tend to overestimate the amount of time you can get from the key supply chain people who understand the business process change that needs to occur. You can look at the vendor pitch and get excited and think that all the functionality is there. But the reality is that until you actually bring the software into your environment, you're not really going to know whether you have a 90 per cent fit to what you expect or a 60 per cent fit or a 100 per cent fit. [Looking back,] I could have planned better for this happening. Part of the difficulty in predicting the fit is understanding [the level of development of] the technology versus [the supply chain processes you have in place]. And you know, if you don't have a good understanding of your process design or if your process just isn't very good, you can bump into some problems.CIO: Do you have an answer for getting out of that predicament?
MELVIN; You should go into the project with the expectation that you're only going to get 80 per cent of what you want. And maybe what you do is set the realistic expectation that you are going to have release one, release two and release three to get to where you want to be. You want to get your releases tightly dovetailed together so you can keep showing improvement. Plan for the fact that you're not going to finish and be done. You're going to finish with something good, hopefully, and then you're going to work to make it better.
CIO: In your mind, what does collaborative supply chain mean?
MELVIN; [Laughing] As you know, it means we're all partners, right? I think it means everybody is trying to do the right thing -make decisions quickly and effectively so that everyone across the supply chain understands the ramifications. [But every company has its] own incentive systems in place, right? And the truth is, those incentive systems and those priorities and goals need to be in alignment across the supply chain. If they are not, it doesn't matter -you can call it collaborative supply chain until you're blue in the face, [but it isn't].CIO; Yet you seem pretty optimistic.
MELVIN;I am. I love the idea of working with companies like Dell and Cisco and Compaq. Working with them to redesign the supply chain is exciting as hell.
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.