The World Is Enough

Avnet Electronics Marketing's Executive Vice President, Supply Chain Services, Worldwide, Greg Frazier, takes on the task of making the global high-tech supply chain more accessible for customers.

[From Supply & Demand Chain Executive, August/September 2004] As a major player in the electronic components distribution business, Avnet Electronics Marketing has been well positioned over the past few years to observe, and participate in, the increasing globalization of the high-tech supply chain. And within Avnet, Greg Frazier now finds himself well positioned to help both his own company and its customers and suppliers to meet the challenges of the global supply chain.

Avnet recently named Frazier, a 27-year veteran of the company, to the position of executive vice president, supply chain services, worldwide. In his new post, Frazier's charge, in part, is to work with Avnet's suppliers and customers to design competitive supply chain strategies. Given the continuing globalization of the high-tech supply chain, a significant component of those strategies is likely to revolve around building "cross-regional" relationships outside a company's traditional area of operations. So when Supply & Demand Chain Executive spoke with Frazier, shortly after Avnet announced his latest appointment, we began the discussion by asking about the risks and challenges inherent in building a more global supply chain.

Frazier: When we talk about the high-tech electronic components supply chain, everyone likes to talk about being "global." But in many cases companies still have very regional supply chains because they are still regional businesses. In other words, they still operate primarily in a single region, whether that's North America, Asia, Europe, Japan (which falls into its own region) or China (which is almost a region unto itself, too).

Now, of course, many of these companies are moving toward designing their products in North America and more specifically, in the United States and Canada but then doing the fulfillment, supply chain and manufacturing elsewhere in the world. That could be for cost reasons, because it's a lower-cost country, or because that's where the product is going to be sold, or due to the local-content requirements that different countries have.

So what Avnet has done to assist our customers in the globalization of their supply chains is to help them move what has typically been a European- or North American-centric supply chain into different regions of the world. Part of the challenge for a company in doing this is that they might not necessarily be familiar, for example, with the import/export tariff laws of different countries, the impact of currency fluctuations on the supply chain and those types of issues. Because Avnet does business in 68 countries today and we've already been dealing with those issues, we can help our customers mitigate some of the risks that they otherwise would have to deal with on their own.

Another challenge, frankly, can be something as simple as the fact that there is a 15-hour time difference between some places in North America and Asia. Also, there can be language barriers, a lack of knowledge about how business is done in other parts of the world and other communications issues involved in establishing new relationships in a different part of the world.

S&DCE: What strategies can companies apply to deal with those relationship issues?

Frazier: Typically when one of our customers in, let's say, North America wants to have their material built in, say, Southeast Asia or China, we already have relationships established in that region. So we work in a process called "global migration" to ensure that the communications lines are set up between our customer, our local North American organization, our Asian organization, and the contract manufacturer or original design manufacturer (ODM) that they will be using in Asia. That removes a lot of the "relationship gap." There's still some learning time, but a good deal of it's overcome by the fact that the customer doesn't have to start from ground zero.

Of course, when all of a company's material procurement is outsourced, sometimes that customer no longer receives the same level of support from the engineering resource. One of the things that Avnet does to bridge that gap is to make sure that the customer in North America still gets the engineering support, even though the actual execution of the purchase orders and revenue may be on a totally different continent. We have to make sure that continuity of supply is not only in parts, but also in technical support.

We also have the capability of sharing forecasts internationally. If a customer is building in two or three different regions, we're capable of getting an overall forecast from the customer, communicating that forecast to the different regions of the world and the taking consumption data back from the suppliers and giving it to the customer. You match the overall forecast with the consumption data, and that helps you to determine how much inventory needs to be held in place and what you do from an overall asset utilization standpoint.

S&DCE: How do you deal with the challenge of working with suppliers that are operating in environments where the technology infrastructure might not support
real-time data exchange, or the supplier itself might not have the technology to support those types of real-time connections?

Frazier: Oftentimes we will assist our customers in picking a partner in another part of the world, and part of the criteria that we use when picking partners is the ability to take forecasts or to do [electronic data interchange] EDI, RosettaNet or EDIFAX, which are three of the standards that they can use, or [extensible markup language] XML. In other words, one way to combat that problem is to never have it.

Partner selection is obviously very critical, and when you do your partner selection IT capabilities have to be near the top of the list of criteria. Because when you start talking about a 15-hour time zone difference, how many hours a day do you have to verbally communicate if, in fact, the language barrier can be overcome? So the ability to communicate via one of those standards is really paramount when you start to select your suppliers.

In cases where the supplier has already been selected and those capabilities are not there, sometimes you can build different ways to communicate with suppliers. In the Americas, for example, we have an EDI gateway that allows us to take in forecasts on an Excel spreadsheet and turn that into an EDI 830, which is an automated way that we're used to taking forecasts. Then when we send the information back to the customer, we turn it into an Excel spreadsheet.

But sometimes we have to go back to green bar paper, take the forecast and do it by hand. It's cumbersome, it's expensive and in a lot of ways it takes away from the savings that people think that they're going to get by moving offshore, because the data transactions are slowed and opportunity windows are missed.

S&DCE: You raise a good point: There's a lot of talk about moving offshore to save money by manufacturing in lower-cost countries, but in your experience have you seen folks really achieving the savings that they've been hoping to get?

Frazier: If you look at companies operating in a high-volume, low-mix environment, for example, manufacturing cell phones or PDAs or MP3 players, their move to Asia is probably very, very smart, and for more than one reason. Obviously, they're going to get a lower cost, although the cost savings that they're going to get are really coming in labor and things like sheet metal and plastics. The savings in electronic components in Asia, in the commodity space, is in the single-digits percents, and in the high-technology space there really aren't any savings in components because the pricing is the same worldwide. But if they've got an MP3 player and they're building a million units, they can see the economic benefits because they can have it shipped back to them on a boat and wait the two or three weeks that it takes to get across the ocean. But they also realize the benefit of having the products made where new, potential consumers are.

Take China, for example. How many new potential consumers of cell phones and MP3 players are there in China a billion or so? So they win two ways, right? And that's very smart business for them. You've seen some of this same thing in Eastern Europe, too.

Where we have seen the value not be realized, or less value realized than anticipated, is when, instead of a high-volume, low-mix environment, you have a high-mix, low-volume environment. That's where we've seen many companies bring their production back to North America, whether that means going into Mexico or back into the States or Canada. The reason it's being brought back is because the economies of scale that they thought they would realize just aren't there and, as I said before, component savings are not as much as thought.

S&DCE: What advice might you give to a company that is looking to move toward a more global supply chain?

Frazier: First, examine your motives. Then stratify your business: Look at the segmentation of what you build and where it should be built. Then pick the global companies out of your supply base, and talk to them about what you're planning to do; solicit their help, because the local knowledge that can be shared from one region to another can significantly aid any transition that does occur. Those would be the first three steps that I would take. Of course, if you're mandated to do it that just takes out step No. 1, but you still could look at steps two and three. That's pretty simplistic, but it's amazing how many people have moved production all around the world without having what you would consider a totally set strategy for why they're doing it.

There are a couple of other things that are more specific to Avnet than to the rest of the electronic components distribution industry. One of those is that we have seen companies increasingly wanting vendor-managed inventory (VMI) on the inbound side and their own customers requesting it on the outbound side. Because of this, we have seen an increase in requests from our customers, both inbound and outbound, to aid them with vendor-managed inventory. That has caused us to make some fundamental adjacencies to our strategy of being a component sales and distribution company. We've added logistics partners to help in this, partnering, in our case, with DHL. We don't use an Avnet warehouse, which we would want to do first, but we've partnered with DHL because of their availability of warehousing around the world, to provide VMI services for our suppliers and our customers both on an inbound and outbound strategy. The other thing that this has done is, because you have products moving by boat from Asia back to the States, that we've also found ourselves needing to have an alliance with funding organizations that allow companies to maximize their working capital by not having to own inventory for long periods of time. These two things have really come out of the globalization of our business, and they're adjacent to what has been our normal component distribution strategy.

S&DCE: Is the move to a more global supply chain just one component of the general trend toward increasingly complex supply chains?

Frazier: Put it like this: The globalization or "internationalness" of the supply chain has added significant levels of complexity to the supply chain. But there's no way to back out of it. It's happening now, and it's going to continue to happen.

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