It is obvious that the players in today's electronic-component industry chipmakers, distributors, original equipment manufacturers (OEMs) and electronic manufacturing service (EMS) providers are facing tremendous pressure due to the breadth and complexity of products, shortened product lifecycles, mergers and acquisitions, price erosion, increased time-to-market pressure, and more. But what might not be so obvious is the fact that one of the fundamental contributors to this pressure is simply a lack of effective means of communication.
For example, with more than 1,000 chipmakers collectively offering several million electronic components to hundreds of thousands of OEMs and EMS providers, either directly or through component distributors, each segment of this industry is tasked with quickly and regularly disseminating vast amounts of information to customers, partners and suppliers as well as obtaining equally vast amounts of information just as quickly in return.
With thousands of electronic components introduced and discontinued every month and chipmaker mergers and acquisitions announced almost daily, OEMs and EMS companies face ever-increasing difficulty in the task of staying informed of the latest component information. This issue is even more critical given the fact that, with shortening profitability windows, OEMs and EMS providers are under heightened pressure to conceive, design and produce tomorrow's products with a competitive edge, which requires the very latest in component technology. And, surprisingly, most chipmakers even the world's largest do not have intuitive, easy-to-search online catalogs of their components on their own sites.
Here's a brief breakdown of some of the problems facing each of these key players.
Chipmakers are focusing more and more on components targeted at specific industry segments such as telecom, the promotion of which requires the creation of reference designs. Chipmakers are looking for a more effective mechanism by which they can distribute reference designs and use such designs to create demand for their components. Additionally, because design wins happen at the new product development's discovery process and not at the implementation phase, it is crucial that design engineers are given reference designs and related component information in a timely manner. According to a marketing manager at a major chipmaker, manufacturers are currently spending several million dollars per year to create reference designs to influence design engineers, but lack a cost-effective means to deliver such designs online to Internet-savvy engineers in the discovery phase. This represents an estimated $2 billion of inefficient marketing expenses. Furthermore, most chipmakers lack a comprehensive, dynamic XML component database, which inhibits them from implementing RosettaNet (an e-commerce standard) for conducting e-business with customers and distributors.
OEMs face shortened product lifecycles and an increasing need to differentiate products. Design and component engineers and purchasing managers still find it difficult to evaluate and compare parts by functionalities, assess risks and obtain timely technical support from experts with the right domain knowledge. Design engineers spend an average of two hours per day on time-consuming discovery work that consists of conceptualizing, searching, selecting, checking and documenting. They pore over catalogs, talk with sales reps and visit multiple Web sites (55 minutes per day, according to the 2001 International Internet Usage Study conducted by publishing company CMP). This amounts to approximately $15 billion of ineffective discovery-related engineering expenses per year. In the course of doing discovery work, engineers also need access to the performance characteristics of components, a means to collaborate with others on the same project, ways to document their thought processes, and a place to store and retrieve the work they have done.
EMS providers are becoming the manufacturing vehicles of choice by OEMs. This industry has mushroomed during the past decade and, consequently, has turned into a cutthroat business. Winning manufacturing contracts from OEMs means more than being just high quality and low cost. EMS providers must provide quick response time to request for quotes from OEMs. The act of turning around a quote requires that the bill of materials (BOMs) submitted by the OEM is scrubbed to ensure all line items have correct OPN (Orderable Part Number). In addition, the providers must find alternates for obsolete parts or parts on allocation; sort line items by preferred distributors; request pricing from such distributors; analyze submitted pricing; and make buy decisions, determine inventory overage absorption factors, cost out the BOM, calculate the labor and capital content, and cost out the assembly. Given the razor-thin gross margin involved because of competition, mistakes made could have a significant impact to the EMS provider's bottom line.
Component distributors are in a highly consolidated industry with a handful of companies controlling over 80 percent of the market. With lackluster return on working capital, ambiguous channel support and high operating costs, these distributors are using expensive field application engineers to provide design support to OEMs and EMS providers in the hopes of securing design wins for their chipmakers. This costs the distribution industry over $1 billion per year. Distributors also spend considerable time and expense "cleansing" their customers' BOMs for quoting, dealing with missing or inaccurate part numbers or trying to find matches for parts no longer available. Due to the lack of a comprehensive database covering the world of electronic components and the availability of an automated tool that can intelligently scrub BOMs, distributors are forced to process their incoming BOMs manually. In addition, in hope of winning the business, distributors typically bundle the cost of BOM scrubbing in their pricing and therefore put the associated expense at risk. According to a senior manager at a major distributor, the scrub rate is no better than 30 line items per person per hour, or approximately $1 per line. This means that a BOM of 1,000 line items could take away $1,000 from the distributor's bottom line.
The issues that have been described, which each of the constituencies in the electronic component industry must face, boil down to companies' lack of a cost-effective means to receive and distribute information that is crucial to the success of their business. So, what's the answer? A solution that answers all of these issues needs to speed conceptual design, facilitate IP reuse and collaboration, minimize approved vendor list (AVL) and preferred parts list (PPL) exceptions, perform BOM scrubbing and risk reduction, automate request for quote (RFQ) and quote analysis, and optimize purchase decisions. In particular:
" A comprehensive and unbiased component database that contains detailed design related attributes and values, as well as life cycle information, that is extendable to include proprietary information and supported by the chipmakers.
" A conceptual design tool that provides reference designs from chipmakers, access to the comprehensive and unbiased database, a rule-based search mechanism to find parts using design specifications, a flexible investigation engine to perform side-by-side comparisons, and means to support design collaboration.
" A comprehensive component cross-referenced information containing pin-for-pin replacements and functional equivalents.
" A BOM scrubbing tool that can capture the orderable part numbers' form description, cleanse corrupted orderable part numbers, identify obsolete parts and access cross-referenced information to find alternates.
" A quotation tool that automates the merging of multiple BOMs, sorts line items by preferred suppliers, collects pricing, performs bid analysis, and costs out BOMs and assemblies.
" A financial analysis tool that captures internal transaction costs, applies these costs suppliers' quotes based on the value services they provide, derives total cost of ownership, and optimizes inventory turns.
In an industry inundated with thousands of pieces of new information each day that determine competitive advantage, companies should search for this type of solution. Think of the billions it could save.
Martin Shum and Cynthia Bova are the CEO and vice president of marketing services, respectively, of Aprisa Inc.