Supply Chain All the Way: Strengthening the Weakest Link

The strength of a chain lies in its weakest link

Picture this: a market concentrated with very high buying power, suffering from elusive product differentiation and competitiveness that erodes profit margins. This is the current scenario in the electronics manufacturing service (EMS) industry. Let's face it: it's not easy being an EMS provider.

In an increasingly competitive and globalizing world, it is not sufficient for EMS providers to merely produce high quality products. With companies adopting similar strategies, the question frequently asked is, "Where lays the weakest link and the resulting competitive differentiator?"

EMS providers require novel strategies to aggressively capture rival market share and ward off the competition. Earlier EMS providers could compete on the basis of the products they offered, however, with changing competitive scenario, they are now forced to compete on the basis of the company's supply chain strategies. The good news is that there is light at the end of the tunnel. EMS providers are now waking up to brand new strategies that feature supply chain optimization at the top of the list.

Market Pulse

Supply chain management, especially the formulation of the next-generation supply chains, is the current buzzword in the EMS providers market. The electronics industry is one of the most aggressive and proactive sectors to have implemented supply chain outsourcing. Increasing complexity of supply chain operations has driven original equipment manufacturers (OEMs) to increase outsourcing. The EMS market grew from $126.00 billion in 2004 to reach $ 158.00 billion in 2005. It is anticipated to grow at a compound annual growth rate (CAGR) of 10.6 percent till 2012.

With increasing demand fluctuations, OEMs are now aware of the benefits of outsourcing supply chain operations to EMS providers. The current trend for OEMs is to achieve better optimization and become "demand-supply chain leaders" by outsourcing their supply chain operations. This enhances order fulfillment performance. EMS providers are capable of providing more efficient cost-saving services, lean manufacturing, just-in-time (JIT) manufacturing and vendor-managed inventory (VMI). EMS providers have knowledge banks and are capable of keeping up-to-date with the rapidly changing technology when compared to the OEMs. They are also better equipped to handle short span product life cycles.

However, as the market grows, the degree of competition grows proportionally. As competition continues to escalate, EMS providers scramble to identify new strategies to differentiate themselves. This is where the dependence on supply chain strategies comes to the forefront, ensuring delivery performance in a highly fluctuating market.

Taking the High Road to Success

Supply chain strategy, in the correct perspective, can act as the essential enabler in achieving competitive advantage for EMS providers. Shared strategies, competencies and trust — the sharing of information — can provide smart EMS providers the edge required to ensure success. Though the EMS industry is pretty good at firefighting, they still need to increase their proactive approach to enhance supply chain operations.

The ultimate success of supply chain strategies comes from forming the "best fit" strategies, which means applying strategies that fit with the whole organizational goals and strategies. It is also essential to focus on the weaker links and strengthen them. They include:

  • Increasing visibility
  • Increasing collaboration
  • Reducing costs by optimizing procurement and logistics

The current focus is on making the supply chains more demand oriented. This means enhancing the organization's forecasting skills and hitting the demand figures accurately. This will reduce the discrepancy between perceived and actual demand. The future will be "on-demand supply chains." With an efficient on-demand supply chain in place, any organization will be able to meet the challenges of fluctuating demands and be able to convert them into opportunities. This will enable EMS providers to hit both the upside and downside of the demand levels.

The Best Fit Strategies — Strengthening the Weakest Link

The success of supply chain management depends on the visibility of demand. If EMS providers can master the art of demand forecasting, they can avoid coming under the "bullwhip effect" (the bullwhip effect refers to the phenomenon of major oscillations caused by the orders placed. This effect becomes more pronounced at higher steps in the supply chain). This increased flexibility will yield both short- as well long-term cost savings. The greatest advantage of increasing visibility is ensuring an optimal level of inventory.

EMS providers need to keep in mind that supply chain theory does not merely apply to the procurement of raw materials, production, inventory, warehousing, transportation, and customer service, but also involves the complete information system. Without the proper information flow it becomes extremely difficult to monitor the supply chain activities. The bi-directional flow of information is imperative for the success of supply chain strategies. "There is no advantage in being choosy while exchanging information." The ability to share information by itself is a competitive differentiator.

With regional boundaries becoming blurred, the partners in EMS providers' supply chains require exceptional levels of synchronized communication. A lot of effort needs to be expended in order to achieve total supply chain integration. Once this is accomplished, the chain becomes more transparent, offering better visibility for demand forecasting.

The other major consideration for a successful supply chain strategy is to make the supply chain more collaborative in nature. A collaborative supply chain will benefit from increased coordination and smooth bi-directional information flow. A collaborative supply chain will be more responsive and therefore ensure on-time order and demand fulfillment. Collaborative supply chains can very well be the cornerstone to achieving competitive advantage. In short increasing visibility and collaboration will yield better procurement leverage and logistics advantage. In the end, the success of a supply chain lies in the assurance of continuous supply and competitive pricing.

EMS providers also find themselves under constant pressure to squeeze out the lowest price possible. They try to diffuse this situation by increasing their procurement leverage. The reason for this is, since manufacturing is EMS providers' core competence, the amount of raw materials consumed by them is massive. This gives them the opportunity to obtain the best value possible for the materials. In order to realize this, EMS providers need to identify the best supplier that can provide the raw materials at the prescribed quality level and optimal price.

In order to improve and optimize procurement operations, EMS companies will need to automate the solutions for connecting their suppliers, providing replenishment and inventory information. To realize procurement goals, it is necessary to analyze costs and budgets but more importantly to translate corporate business plan into a procurement roadmap. EMS providers are also adopting lean management principles in order to optimize their processes. This enables them to provide better return for revenue and enhanced customer service, all at extremely low levels of inventory.

These factors will forever be the biggest drivers behind outsourcing supply chain operations or defining the EMS providers' competitive strengths. A more efficient supply chain will contribute to long-term success, irrespective of whether it is a matter of responding to a new flood of customers and products, or trying to reduce costs and maintaining customer loyalty at all times.

The long and short of it is that: "Efficient logistics and supply chain strategies can provide EMS providers the edge over their competitors. All EMS providers need, is the 'know how' to achieve it."

About the Author: Lavanya Ram Mohan is a research analyst at the global growth consulting firm Frost & Sullivan.