Key Trends Will Drive Supply Chain Best Practices

Regionalization of manufacturing, the ability to predict and manage risk, and scarcity of raw materials are some of the trends that will affect supply chain strategies and best practices in the electronics industry, says Tom Linton, chief procurement and supply chain officer for electronics manufacturing (EMS) services provider Flextronics.

Linton adds that other trends, including social responsibility issues, cloud computing and the specialization of supply chain management and procurement skills will also affect the supply chain and purchasing strategies of successful OEMs and EMS providers.

Rising labor costs in China is a key trend that is resulting in growing regionalization of electronics manufacturing. Many electronics companies moved manufacturing to China 10 to 15 years ago to take advantage of very low labor rates.

Speaking at the recent “Crossroads 2013” conference at MIT in Cambridge, Mass., Linton noted that labor costs in China have risen dramatically, increasing by about 19% per year. That trend will continue, so there will be much less of an advantage to manufacturing in China from a direct labor cost point of view, he said. When shipping and logistics costs are factored into the total cost of manufacturing equipment in China for export to other regions, many companies are deciding it makes greater sense to build closer to the market where their products will be sold.

Such a strategy reduces time, waste and cost in the supply chain and gives companies a “competitive advantage," according to Linton.

“If you can optimize the supply chain for North America, Europe, and Asia, you're going to have a competitive advantage over companies that don't because of the last mile in fulfillment," says Linton. Costs and waste are reduced when product is built closer to the end customer.

"You’re taking time and waste out of the supply chain, so your supply chain becomes much more efficient," he adds.

For example, in the North American market, leveraging Mexican labor will become more of an advantage for companies selling into North America.

As manufacturing becomes more regional, it means the supply chain must also get more regional and local.

Linton notes that when manufacturing moved to China in the 1990s, parts suppliers also moved. Now, as manufacturing becomes regional, the supply chain must follow.

Linton says tax breaks and other incentives are often offered to manufacturers to open facilities in certain states.

“But the problem is, even if we have great infrastructure and incentives to put factories in the U.S. to do assembly, you run into the problem that your component guys are in China, southeast Asia, Japan or Korea,” says Linton. “We have to create ways to bring those guys back here. Otherwise, the total landed cost of something made in the U.S. is not going to work even if the labor costs are less.”

Managing risk

Managing supply chain risk is another key trend. Companies that develop best practices for managing their supply chains will be successful because when a supply chain is “de-risked,” cost is reduced, velocity increases, and the supply chain becomes more efficient.

“The management of risk has become a competitive advantage,” Linton explains. “The failure to mitigate risk and accelerate the supply chain leads to a more expensive supply chain.”

One example of the importance of sound supply chain risk management was the 2011 flooding in Thailand, which halted production at many electronics facilities. Drive maker Western Digital’s manufacturing facilities were shut down, resulting in a worldwide shortage of hard drives. About 60% of the company’s drive production was located in Thailand and the supplier could make up for the loss production at Thailand facilities at its other factories.

Another trend that will affect supply chain strategies is raw material scarcity. Linton points to a 2012 survey by professional services and consulting firm KPMG, which found that 96% of CEOs said raw material scarcity concerns them because the population of the world is growing and the amount of raw materials is finite. As global population increases, there will be greater demand for goods, and prices for raw materials that are needed for those products will increase.

“The management of risk has become a competitive advantage,” says Tom Linton, chief procurement and supply chain officer for Flextronics.
Although recycling will be helpful, Linton says more companies will try to use less expensive, more readily available raw materials in their products.

One recent example is air conditioners. Manufacturers are using more aluminum and less copper in air conditioners because aluminum is cheaper and weighs less so shipping costs are reduced. Another example is LCD televisions. Before 2006, many used steel in the back part of the television. Today, most use resin because it is cheaper and lighter than steel.

In semiconductor fabrication, there is a push to transition from gold to copper because copper is less expensive.

“A lot of gold is used in the circuitry inside processors. If you can get copper in there, it will reduce the cost of the semiconductor,” says Linton.

Unfortunately, gold has other issues. It tends to be more corrosive, but "engineers are working on those problems and solving them," Linton adds.

Wanted: Specialized supply chain skills

Procurement and supply chain professionals need more specialized skills, as well. Managing the supply chain "requires a lot of expertise, including sourcing, technical and negotiation skills, and knowledge of materials cost drivers of commodities,” says Linton. Logistics skills are important, too.

“Logistics in and of itself is a science, but it is also an art—understanding how best to optimize UPS versus DHL versus other solutions. How do you use freight forwarders most efficiently? A lot of expertise is required. Specialization is really essential to our success," says Linton.

Cloud computing will become more important in the management of the supply chain, too.

“It helps reduce the cost of our supply chain because it is a rent versus buy model,” says Linton. Companies don’t have to invest in the hardware and software needed to manage and process all the transactions and data concerning their supply chain, but pay a monthly subscription fee to a provider for IT infrastructure, platforms and software application.

He says cloud computing will be a cheaper way to manage the supply chain.