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Supply Chain reliability – focus on components managed by many partners

How do you ensure supply chain reliability when there is more than one party responsible for prices, terms and conditions for your product? Are your flexibility requirements under control or are they split between different partners with different interests?

Sourcing strategy

Operational excellence is one of the top factors linked to profitability and growth in an organization. According to the 2015 McKinsey study, this is measured by “delivery reliability and share of customer complaints.”

In the search for competitiveness and as part of their sourcing strategy, many OEMs who subcontract electronics manufacturing services (EMS) have their own base of approved manufacturers with prearranged price agreements. These agreed upon basic prices, terms and conditions are brought with them to their EMS partners in an attempt to control the component’s manufacturing price and for strategic reasons that range from ensuring exclusivity of component design for certain commodities such as PCBs and electrical-mechanics, being able to secure the availability of critical material, existing exclusivity agreements, to taking advantage of purchasing volumes.

Cooperation and process

If the relationship between the EMS partner and the OEM’s supplier is not managed effectively or with the right process, operational excellence can be jeopardized, putting end-product delivery performance at risk by creating unnecessary and numerous escalations.

In Industrial Electronics, it is estimated that at least 30% of the material price is typically controlled by the end customer. If this trend increases, over 60% of components in some product lines could be affected. Hence, it is essential that OEMs consider potential supply chain risks when they select manufacturers from emerging markets based mainly on manufacturing/production cost. Don’t overlook the total cost of ownership (TCO) and risks related to landed cost challenges from long lead-time logistic chains, potential market volatility, communication barriers, and cultural differences–just to mention a few.

Challenge

In a business environment where being ahead of demand is crucial, focusing mainly on the manufacturer’s price and quality, while overlooking supply chain flexibility, might lead to major profit loss.

Additional supply chain complexity can result when the OEM’s appointed manufacturers/suppliers view the EMS as merely a delivery point rather than as an extension of the customer, and therefore are not eager to agree to flexible terms with the EMS.

Securing prices does not always secure flexibility of component sourcing and this becomes a challenge for the EMS provider. Some EMS providers may try to mitigate the risk of material shortages via customer-consigned material or by increasing inventories at their own risk and cost; however, this solution is not sustainable in the long term.

Under these conditions, the customer is in the best position to make agreements that will cover all business done with the component manufacturer as well as in ensuring that the manufacturers are following sustainable business ethics.

Sub-optimization

Professional EMS sourcing teams striving for cost control and supply chain flexibility may miss the opportunity to be competitive when prices are locked by the end customer with only basic terms and conditions considered. When one partner controls the price and the other partner controls the terms, the party who is responsible for dealing with the challenges of quality issues, on-time delivery, DPPM levels, long lead-times, short payment terms, lack of signed agreements, flexibility/logistical models, and rescheduling clauses, high inventory levels, and other issues becomes unclear.

Operational efficiency also may be hindered by manual procurement processes that lack automated procurement tools, such as EDI, which are usually developed by the EMS in conjunction with all the preferred partners. This has a direct impact on the speed and ability of rescheduling and delivery response times to the customer. Sourcing strategies and supply chain terms should never be developed in isolation from each other.

Solution

Since the OEM may have built strong relationships with its approved manufacturers, they are familiar with the manufacturers’ overall performance and support for supply chain initiatives that improve the procurement process and reduce complexity. When OEMs wish to use manufacturers they sourced themselves, it is essential to clarify the responsibilities of each partner. When the model for cooperation is clear and benefits all the parties involved, success and reliability will follow.

From an EMS sourcing perspective, it is essential to follow market price competitiveness and monitor the prices of both the EMS’ own sourced material as well as the Customer/OEM’s material.

It is imperative to have a procurement process that systematically follows the suppliers’ delivery performance and puts corrective actions, like purchasing logistics and models that support flexibility, in place. An EMS partner’s proactivity in areas such as studying material lead-times, cash flow, and ensuring there are no material shortages is a key part of the process of supplier management. In terms of quality control, the EMS can support the customer by reporting supplier performance to him (OTD and PPDM).

In order to maintain high levels of delivery reliability, the EMS provider needs to monitor price performance while working with suppliers to develop and integrate sustainable processes and be able to offer sourcing alternatives. Involving these suppliers earlier in the quotation process is useful in developing joint cooperation agreements and achieving operational excellence.

In Enics, we take responsibility for our supply chain, independent of end price obligations. We aim to align our processes to incorporate the management of these suppliers, to control the number of escalations, and aim to work together to institute a supplier integration program that supports flexibility and aims to mitigate Supply Chain risks and reduce complexity to the OEM.

For more information on managing components, please contact our Supply Chain (For OEMs only) atmarketing@enics.com.