OEMs are ready to embrace Lean Manufacturing after the 2001 recession, but traditional approaches were designed for vertically integrated enterprises. The answer to their problem? Extended Lean and Statistical Kanban.
The electronics manufacturing industry has changed dramatically during the past 20 years. Two decades ago, most computer and telecommunications original equipment manufacturers (OEMs) were vertically integrated companies with design, manufacturing, assembly, sales, marketing, service and repair under the same roof. A small community of outsourcers found work making and assembling printed circuit boards and other commodities for these industrial giants, often in small lots for prototype production runs.
Gradually, these tiny contract manufacturers (CMs) expanded their offerings to include more sophisticated multi-layer boards, flexible circuits, surface-mount packaging, and tape-automated bonding, while the OEMs concentrated on building complete systems.
By 1995, contract manufacturers like Solectron, Flextronics, Celestica (then an IBM subsidiary), Sanmina-SCI, and Jabil Circuits whose combined annual revenues were less than $2 billion began spreading their wings, taking on ever more sophisticated systems-level manufacturing, assembly and component sourcing. Meanwhile, the OEMs increasingly focused on their core competencies design, sales and marketing.
By 2000, CMs had given themselves a new name to reflect their elevated status Electronic Manufacturing Services and the transformation of the global electronics manufacturing industry was complete. In fewer than five years, the industry had evolved from an environment dominated by vertically integrated enterprises to an ecosystem of outsourced supply chains with EMS, OEM and tier-one component suppliers making up the three most important links.
Today, the Big Five EMS firms alone employ 270,000 people and have combined annual revenue exceeding $65 billion. And global revenue from all forms of electronics outsourcing will approach $500 billion this year, according to the Outsourcing Institute. But while the EMS and OEM industries have grown to enormous size (Cisco, Dell, Intel, HP and IBM had combined product revenue of about $200 billion last year), most observers forget that supply chain manufacturing is immature and largely untested.
Indeed, since outsourcing became the dominant manufacturing model in the late 1990s it has faced only one economic downturn, and it failed that test miserably. In 2001, electronics manufacturers ran into a perfect storm: a national recession, the dot-com implosion and the 9/11 terrorist attacks. In two years, the semiconductor, computer and telecom OEMs wrote down nearly $13 billion in excess inventory. Since nobody has repeated the business cycle, one wonders how the industry will fare the next time the economy goes boom, then bust.
Anatomy of a Supply Chain Disaster
What caused the industry's $12 billion inventory overhang? Bad forecasting played a part. As did a build-to-forecast manufacturing model based on materials requirements planning (MRP II) principles. While MRP may have worked for vertically integrated manufacturers in slow-moving industries where demand was relatively constant, it never stood a chance in today's fast-paced, outsourced economy where demand fluctuates rapidly and product life-cycles are measured in months instead of years.
The trouble with building to forecast is that the forecast is never accurate for long, states Gary Cortes, co-founder of FlowVision, a Lean Manufacturing consultancy based in Dillon, Colo. The $13 billion write-off happened because there was a complete disconnect between the OEMs, their contract manufacturers (CMs) and the component suppliers, he says. The OEMs gave overly optimistic forecasts to their CMs who then placed orders for components. The distortion rippled through the supply chain, growing larger as each tier added capacity and ordered more and more material. When the downturn came, there was a huge inventory pileup in place.