Outsourcing certainly has added a new element of complexity to the supply chain of integrated circuit maker Agere Systems. Based in Allentown, Pa., Agere is a $1.8 billion company with 6,600 employees serving markets ranging from mobile telephones and modems to hard disk drives and digital satellite radio. In years past, the electronics and computing equipment manufacturers that use Agere's components employed vertically integrated supply chains. Demand signals and material flows ran directly between Agere and its customers, encouraging close buyer-supplier collaboration through such initiatives as Total Quality Management and just-in-time (JIT) manufacturing, and allowing for a relatively flexible, responsive supply chain. Buffer stocks resided with the customer.
But that changed when, beginning in the late 1990s, many of Agere's customers began moving toward more horizontally integrated business models. As a new tier of subcontractors, each establishing and holding its own buffer stock, appeared between Agere and its customers, the company began to see degradation in the performance of the collective supply chain, according to Chris Armbruster, director of supply chain strategy at Agere. "There was now another trading partner between us and our customer, and that could really slow down information in both directions," Armbruster says. "Information was now being brokered to us by a subcontractor between us and our customer, rather than from the customer itself."
Specifically, Agere saw a degradation in the speed at which it was receiving demand signals and the quality of the demand signal that it was receiving. "Our experience with a subcontractor between us and the customers is that it would often slow down the information flow by two weeks or more," Armbruster says. Those are 14-plus precious days of latency when you consider that most of Agere's customers are working on a one- or two-week lead time with their own customer base. "When it takes us eight weeks to build a product, there's already a mismatch," says Armbruster. "But if there's a party between us and our customer that's slowing down that demand signal by two weeks, you've lost a big opportunity to be more responsive."
The introduction of subcontractors also affected the quality of the demand signal. For example, when a single customer would use multiple subcontractors, the forecast would suffer from a degree of gamesmanship, as Armbruster explains: "Let's say the end customer had a market upside potential of 30 percent, and that was shared with each of its subcontractors. When Agere eventually saw the demand coming through those subcontractors, each of them was stating the entire market potential upside and hoping that they would get [all the additional demand]. So we would end up seeing 160 percent of demand rather than 130 percent."
With outsourcing taking hold as the business model of choice in its various markets, Agere recognized that it needed to move to a new supply methodology to cope with the information disintermediation and distributed inventory inherent in the horizontal supply model. As a first step, the company initiated a project with one of its large customers in the mass storage sector, a customer that had moved to working with four subcontractors rather than directly with Agere. Under this project, Agere, the subcontractors and the end customer agreed to hold monthly forecast collaboration meetings to set a single overall forecast and a single, centrally located buffer held between Agere and the subcontractors. That reduces the latency in the demand signal reaching Agere, and it reduces the total buffer that the supply chain as a whole must hold. Agere builds to its end customer's direct forecast rather than to the subcontractors' demand, with inventory dispatched to the subcontractors on a just-in-time basis. As Armbruster wrote in a white paper on the project: "Actual shipments are made to short interval pull signals. All the subcontractors need to do is 'call off' inventory 24 to 48 hours before they need it."
Operating under this JIT model, the subcontractors are happy because the system minimizes the inventory that they hold and they get the components that they need when they need them. The end customer is happy because the new system simplified the management of the overall supply chain: The customer now knows how much total inventory is in the supply chain and has the flexibility to dispatch that inventory on a just-in-time basis to whichever subcontractor needs it.º The customer has also seen better delivery performance and responsiveness thanks to better control over the buffers; overall, on-time deliveries (including early shipments) increased to 93 percent, up 25 percentage points. And, of course, Agere has benefited from better visibility into total demand within the supply chain, allowing the company to more than double its inventory turns for finished goods under its JIT program.
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