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Kinaxis has gained significant recognition in the marketplace for its focus on delivering a real-time supply chain that drives operations performance management in
manufacturing and demand management."
Source : Kinaxis
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AMR RESEARCH: CHALLENGES AND TRENDS IN
CONTRACT MANUFACTURING
Success for today's manufacturers depends on the ability to
respond quickly to constantly changing customer demands'while
keeping costs low and eficiency high. Yet effectively managing
the "demand-driven supply chain" is highly challenging in today's
increasingly outsourced and complex environment. Both original
equipment manufacturers (OEMs) and contract manufacturers
(CMs) must now deftly orchestrate the activities of a diverse group
of companies in addition to their own internal operations in order
to meet customer requirements.
These issues are the focus of a 2005 study conducted by AMR
Research. Based on an extensive survey of more than 700 brand
owners/OEMs and CMs located primarily in North America, the
study outlines trends and deines challenges that must be overcome
for OEMs and CMs to create win-win relationships. AMR vice
president Bill Swanton presented highlights of the report as part of
a recent EMSNow webcast sponsored by Kinaxis.
DIVERSE AND CHANGING CM LOCATIONS
Contrary to common perception, North American OEMs engage
with CMs from a wide range of geographic locations other than
Asia. Though China CMs are used frequently by about 65 percent
of respondents, other countries capture signiicant portions of
business as well'particularly the United States, western Europe,
and Mexico. "One of the things we're seeing frequently is that
contract manufacturing is looking for a balance between close-tomarket
and low-cost countries," Swanton says. For example, base
level products might be manufactured in Asia, with postponement
operations occurring in western Europe or Mexico for North
American markets, and inal assembly to order, coniguration,
and model mix work occurring in North America. "We believe that
companies will almost constantly change their supply networks
for each product they make to take advantage of the nature of the
market for that product," Swanton says.
MAJOR OEM/CM CHALLENGES
Asked to name their biggest business and technical challenges,
OEMs cited planning and managing inventory throughout the
supply chain as the most important. "Brand owners have found
that they can't just hand that over to the contract manufacturers,"
Swanton says. "They have to have visibility and decision-making
capability over manufacturing across the whole supply network."
Managing product quality was also a top concern. "The brand
owner's name goes on the product that's being sold, so the quality
of that product relects on their company and the value of their
brand," Swanton points out. This ties directly to the third top
concern of brand managers: protecting intellectual property.
Often, intellectual property'such as a new type of a device, the
software that goes in it, or a particular technology converting
materials'is the single most important asset OEMs have. As a
result, protecting intellectual property while managing suppliers
and CMs is key to maintaining value.
CMs had related, yet different concerns, with materials
sourcing ranking irst among the challenges they face. "Contract
manufacturers take on a lot of the responsibility for sourcing
materials, and they in turn have to rely on other CMs or material
suppliers to meet their contractual requirements," Swanton says.
"So managing that lower part of the supply chain is very important
and challenging for them."
THE SOLUTION GAP: IMPORTANCE VS. PERFORMANCE
Study participants were also asked to rank the importance of
various business processes along with how well they managed
them and the performance of software applications used to
support them. Among these, forecasting demand as well as
inventory visibility across the supply chain ranked highest in
terms of the gap between importance and performance. For
forecasting demand, 80 percent of respondents ranked it as very
important, but only 29 percent felt they were doing it well, and 23
percent were satisied with the performance of existing demand
forecasting applications. For inventory visibility, while 71 percent
felt it was very important, just 36 percent thought they did it well,
and 30 percent indicated satisfaction with current applications.
"Clearly, companies should focus on these two areas'both to
improve their performance and gain better tools to help them do
so," Swanton says.
THE NEED FOR CLOSENESS IN THE OEM/CM
RELATIONSHIP
Study results debunked the view that OEMs maintain an arm'slength
relationship with their CMs. "The idea that OEMs just send
a PO, hand over the assets and responsibility to CMs, and expect
them to deliver products on time without hearing any more about
it isn't really accurate," Swanton says. In fact, critical material is
managed jointly by both OEMs and CMs 48 percent of the time,
and is managed solely by the CM only 30 percent of the time'
with the remaining 22 percent managed by brand owners.
Brand managers must maintain a certain level of control for
two reasons: to ensure that limited allocations go to highmargin
products before low-margin ones, and to consign critical
components in a way that delivers the greatest value. This may
involve limiting CM access to intellectual property (in order to
safeguard sensitive information) as well as masking the prices
OEMs pay for high-cost components purchased at better rates
from competing CMs. Brand owners also need strategic sourcing
visibility to ensure that CMs are not charging unnecessary
markups on components. These and similar concerns require that
OEMs and CMs work closely in a variety of ways.
MANAGING CM RESPONSE TIMES
OEMs must continually balance the savings gained by using
overseas CMs with the longer response times these companies
need to respond to change. Turnaround times for changes
requested by North American brand owners typically lengthen the
farther away the CM is located'ranging from about two weeks for
CMs in the United States to eight weeks or more for those in the
Asian Paciic. Premium freight charges paid to expedite deliveries
from more remote CMs must also be taken into account, as
these can often erode price advantages gained by going overseas.
Particularly in the high-tech and electronics industries, OEMs
must effectively manage a diverse array of CM capabilities,
capacities, and restraints so they can quickly respond to the
constantly shifting requirements of a highly variable demand and
model mix.
KEY CRITERIA FOR EFFECTIVE CHANGE RESPONSE
SYSTEMS
"More and more, we see companies looking at the brand signals
coming in and planning daily for how they can best respond,"
Swanton says. To do this, leading organizations are building
virtual planning systems designed to help the long lead-time
supply chain react more quickly and eficiently to constant
changes in demand.
Certain considerations are key in making these virtual planning
systems work well. First, brand owners must understand
demand visibility issues. "You have to know what will change
your customer demands, and how to get the earliest possible
notiication of those changes," Swanton says. Next, OEMs should
standardize contracts with a set of common options for design,
inventory, manufacturing visibility, and planning responsibility.
"Rather than just going for the lowest price, you should put some
form of premium on lexibility and agility, and most importantly,
on the ability to take an upside order," Swanton points out. This
means providing incentives for CMs to maintain the components
and capacity to fulill order increases quickly. Incentives must be
balanced, however, with controlled manufacturing visibility and
shared planning responsibility for critical materials and resources.
"The best companies didn't try to tell the CM what to do, but
rather sought to understand what was possible and change the
production targets on a daily basis while ensuring the CM had the
capacity to do it," Swanton says.
Automating information transfer is also crucial. "You can't be
going halfway across the world with faxes and phone calls to try to
ind out critical information, especially when they're sleeping and
you're awake and vice versa," Swanton points out. Accordingly,
companies should participate in industry standardization efforts
to facilitate supplier communication. "RosettaNet and similar
standards that reduce the cost of on boarding suppliers and
streamline interchange information are going to be important,"
Swanton concludes.
OEM/CM SUCCESS STORIES
A growing number of OEMs and CMs are adopting unique new
approaches to help them work more effectively together and
enhance their ability to respond to change. Below are descriptions
of two such initiatives undertaken by Teradyne, an OEM, and
Solectron, a CM. Both companies have achieved a signiicant
degree of success by incorporating many of the ideas advocated
in the AMR study'and by utilizing Response Management
technology to facilitate their efforts.
Teradyne: Increasing Supply Chain Visibility For
Faster Customer Response
COMPANY PROFILE
Teradyne is the world's largest designer and manufacturer of
automatic test equipment that provides competitive advantage
to leading semiconductor, electronics, automotive, and network
systems companies. With annual sales of $1.4 billion, Teradyne
employs about 4,100 people in its four divisions'broadband
test, assembly test, semiconductor test, and vehicle diagnostic
solutions'and maintains high market share positions in all of
these. The company provides global manufacturing, sales, and
engineering support and has a 44-year history of exceeding
customer expectations.
THE CHALLENGE
In 2000, Teradyne made a strategic decision to outsource its
internal, domestically based printed circuit board manufacturing
operation. However, the shift to contract manufacturing created
a problem that Teradyne called "the obstructed view," limiting
Teradyne's visibility into supply chain data.
The complexity of Teradyne's products'combined with the
fact that its contract manufacturers are scattered across the
globe'made this situation extremely challenging. "Our products
have up to 5,000 components each, and are highly conigurable
as well," explains Robert Kenney, ATE operations supply chain
manager for Teradyne. "Customers can choose from up to 235
different options for each product, and each of our sales orders
averages about 45 line items apiece, with very little repetition."
This combined with very volatile and unpredictable customer
demand'and customers delaying orders until the last minute'
created a "bullwhip effect" that ampliied the dificulty of planning
and managing change.
Adding outsourcing to the mix complicated data management
even more, resulting in excess and poorly distributed inventory.
"It was taking us up to four days to aggregate supply chain
information through our contract manufacturer," Kenney says.
"Because of that delay in information, we were making the wrong
inventory decisions. We had inventory out of position within the
pipeline, and we couldn't see it and we could not move it. And that
caused tremendous delays to our customers."
THE SOLUTION
To solve the problem, Teradyne has created what it calls the
"glass pipeline tool," which uses a combination of business
process engineering and Kinaxis RapidResponse™. "Through
RapidResponse, we've been able to consolidate and link the
MRP data for all of our global EMS providers and Teradyne
plants, which allows us to see the entire supply chain," Kenney
says. "We can see demand through our plants down through our
EMS provider as well as the open order streams they're placing
on our end suppliers. That gives us the same capability we had
when we were in sourcing the printed circuit boards. Our planners
have immediate access to crucial worldwide MRP data through
RapidResponse's very user-friendly interface."
THE BENEFITS
Teradyne has realized a number of signiicant beneits from the
new solution. "The irst is what we call key pipeline commodity
management," Kenney says. "Right on their desktops, our
commodity managers have all the demand information through
each site and a view of where the supply is, so if they need to move
inventory from one plant to another, they can do it very quickly.
And that has solved the inventory out of position problem."
Greater visibility into CM lead times has also enabled Teradyne to
streamline and shorten them. "Being able to see the cumulative
effect of the lead-time stack-ups from Teradyne to the EMS
provider all the way out to the supplier enables us to drive lead
time reduction programs," Kenney says.
In addition, Teradyne has signiicantly increased the speed and
accuracy of its response to customer demands. "If a customer
calls, very quickly we're able to position demand, run a plan
through RapidResponse, and provide a quote back to them,"
Kenney says. "Previously that was taking us up to fourteen days,
and we've shortened it to one day'a dramatic reduction in our
response time to our customers."
Another beneit is the company's enhanced ability to analyze and
respond to potential demand or market shifts. "If business is going
to go up or down 50 or 100 percent in one quarter'which in our
industry happens all the time'we're able to run a simulation
through the extended supply chain and assess the risks and
impacts of various scenarios through the EMS provider down to
the supplier," Kenney explains.
The initiative has also helped Teradyne cut component costs.
"We're able to aggregate the demand that both we and our CMs
place on our end suppliers, then use that as a tool to negotiate cost
reductions with the end supplier," Kenney says.
CONSIDERATIONS AND SUGGESTIONS
OEMs seeking to increase visibility and create their own glass
pipelines should irst consider various system integration
and partnership trust issues, Kenney suggests. For example,
companies need to determine system compatibility with their
partners. "You have to understand how to do detailed data
mapping across multiple MRP systems and bring that into the
system," Kenney says. "Data integrity is key here'it's the old
garbage-in, garbage-out scenario, so you have to deal with keeping
both your own and your partners' data clean across multiple
sites." Companies should also learn the underlying business rules
of their partners' systems.
Assessing how to deine suficient trust with CM partners'and
how to maintain that trust over the course of the relationship'is
also important. "You also have to think about how to signal a
change in trust over a particular item," Kenney says. "Because if
they're not willing to share information that's critical for you to
respond rapidly in terms of a quote, lead-time, or cost reduction,
the relationship is not going to be effective."
Solectron: Enhancing Service and Cutting Costs
through a Pull-Driven, Lean Supply Chain
COMPANY PROFILE
Solectron Corporation is a leading global provider of electronics
manufacturing services (EMS) and offers a full range of integrated
supply chain solutions. Solectron's 57,000 employees serve the
world's most innovative companies in industries that rely on
high-tech electronics. The company's integrated collaborative
design, lean manufacturing, and post-manufacturing services offer
customers such as Teradyne competitive outsourcing advantages,
including access to advanced manufacturing technologies, shorter
product time-to-market, lower total cost of ownership, and more
effective asset utilization.
THE CHALLENGE
Dificulties in trying to counter the "bullwhip effect" created by
supply chain complexity led Solectron to seek a solution that could
streamline its demand management process and eliminate delays
in responding to customers. Demand signals were frequently
ampliied as they traveled up the supply chain from the end
customer to Solectron. "Often, different layers in the supply chain
add buffers or overlay, so a number that starts at 50 with the end
customer may show up to the supplier as 100, just because of the
different ERP parameters that take place," explains Cesar Gonzales,
director of account operations management for Solectron. "Plus, we
don't all see the same data."
Moreover, end customer signals were taking anywhere from
three to six weeks to make it to Solectron. "The signal typically
goes through several layers within the OEM, such as sales and
marketing, planning, purchasing, or different divisions, and maybe
through three different MRP runs before it makes it out of the
OEM to the contract manufacturer," Gonzales says. This led to low
customer service levels, as Solectron tried to guess what customers
needed and reacted too late to signals.
As a result, Solectron as well as its OEMs and suppliers were losing
revenue. "If you're the end customer, and eight weeks after you
give the OEM your requirements you hear it will take another eight
weeks to get your product, you'll go to another OEM to buy it,"
Gonzales notes. Relationships eroded as supply chain participants
argued over who was at fault when customer needs weren't met.
Buffer stock added in an attempt to meet potential demand resulted
in inventory build-up, and overall eficiency suffered.
THE SOLUTION
To solve the problem, Solectron implemented its "Demand-Chain"
solution, which focuses on three areas: improving service levels,
enhancing supply chain visibility, and reducing supply chain risks
and costs. "Greater supply chain visibility was crucial to help us
respond to constant demand variability," Gonzales says. "OEMs
like Teradyne needed to see how Solectron and its suppliers had
positioned materials, so they could make better decisions about
new marketplace opportunities." A standard process, format, and
timeline were crucial to help all supply chain participants better
respond to changes. Eficiency was also key. "If all you do is throw
inventory at the problem, you're just covering it up rather than
ixing it," Gonzales points out. "We needed to achieve higher
service levels at the lowest possible cost and with the least amount
of excess and obsolete inventory (E&O) risk."
DEMAND-CHAIN COMPONENTS
Demand-Chain comprises various tools and techniques that draw
on Six Sigma lean principles. Its use on Solectron's manufacturing
loor and in the back ofice has streamlined forecasting and
reduced waste. Visibility has increased as well. "We share
information with OEMs like Teradyne so they can load it into
RapidResponse, and now we're able to jointly work on any
upsides or downsides in demand," Gonzales says. "We can also
make decisions faster."
Lead time reduction programs on Solectron's manufacturing loor,
across the supply chain, and throughout the different activities
Solectron performs have resulted in demand collaboration. "This
enables all participants to sit down at the table and talk about
demand changes, organization, the customers, and demand
signals so we can drive to a better supply chain and better results,"
Gonzales says.
Demand-Chain also has a Heijunka component that deals with
level loading and sequencing. "This helps us look at a portfolio
and identify which assemblies are high runners and more stable,"
Gonzales explains. "Then we can put more into a pull system
that's effectively self-managing, and differentiate that from highly
variable assemblies, which require a different manufacturing and
management approach." These systems drive pull from Solectron
into Teradyne as well as from customers and suppliers into
Solectron in order to achieve the lean supply chain strategy.
Flexibility is another characteristic of Demand-Chain. "We look
at how we size supermarkets to identify ways to cover demand
variability and longer lead times for replenishment," Gonzales
says. "For example, if our product is being built in China, it may
take a week even by air to get it to the United States'so we have
to decide how to cover those lead time and demand variables
through appropriate supermarket sizing."
Demand-Chain includes an advance planning system as well.
"We're deploying RapidResponse through all our facilities, which
enables us to connect numerous ERPs and view the data in one
tool," Gonzales says. "It lets us look into centralized planning and
examine data from a central viewpoint for several accounts, so we
can see how the information is lowing at different sites."
DEMAND-CHAIN METHODOLOGY
The Demand-Chain methodology breaks down into ive major
steps. The irst is initial assessment and review. Solectron uses a
value stream map to identify problems and performs a root cause
analysis on current supply chain issues, then prioritizes those
using a standard Fishbone diagram and FMEA [failure modes and
effects analysis]. Next, they meet with the customer to determine
an improvement plan. "That plan may vary for each customer
because of different market or supply chain conditions, but the
assessment and review process we start with is the same for
everyone," Gonzales says.
The remaining four Demand-Chain steps'forecast management,
demand management, production planning, and execution and
metrics'focus on action. Forecast management involves long-term
review and discussions of markets the OEM is penetrating, how
demand is expected to come in, major deals the OEM is working on,
and how to plan lexibility. Demand management includes weekly
meetings to review consumption, orders, and inished good buffer
levels, then use the advance planning system to collaborate with
customers and suppliers to ensure prompt response to demand
changes.
Production planning involves implementing a pull system with
the customer and select vendors. "As consumption happens from
the inished or semi-inished goods supermarkets, that triggers
production to replenish them," Gonzales explains. Execution and
metrics ties back to the preceding three steps. "As consumption
takes place and we're replenishing it, we look at how well we're
meeting customer needs, whether we're achieving the service levels
we expected, do we need to review our supermarket strategy, and so
on, so the system keeps reining itself," Gonzales says.
THE BENEFITS
Adopting Demand-Chain has netted highly positive results for
Solectron. Service has markedly improved, helping the company
build a much stronger relationship with suppliers and customers.
"We're no longer looking at just how to serve the OEM, but how
to better serve the OEM's customer, which enhances performance
throughout the whole supply chain," Gonzales says. Comprehensive
collaboration improves communication and response while
enabling Solectron to optimize inventory strategies. As a result, the
company has slashed E&O and cut supply chain costs. "In most
activities we've reduced inventory by 50 percent, and we've seen
dramatic improvement of on-time delivery to requests, to levels of
98 percent and higher," Gonzales says. "In many cases we've been
hitting 100 percent consistently."
All of this virtually eliminates the damaging consequences of the
bullwhip effect. "Typically, each player in the supply chain acts
independently, which is what you mostly see out there in the
electronics industry today," Gonzales says. "So you have dramatic
ampliication of demand because the signal gets passed from
one player to the next, leading to reduced service levels, higher
costs, and more quality problems." By moving to a pull-driven,
lean supply chain, Solectron has enhanced visibility and reduced
variability'reaping major rewards for both the company and its
customers.
THE KINAXIS SOLUTION
Kinaxis delivers an on-demand Response Management service
to drive operations performance in today's manufacturing world.
By rapidly responding to constant changes in demand, supply,
and product'Kinaxis RapidResponse supersedes the need for
traditional supply chain planning systems by rapidly enabling
collaborative response and manufacturing action aligned with
corporate objectives.
Leading manufacturers use Kinaxis RapidResponse to provide
supply chain visibility and a single view of the truth. This allows
them to rapidly and collaboratively assess multiple "what-if"
alternatives. By scoring these alternatives, they can understand
the impact on other organizations and ensure that response
decisions align with corporate objectives.
Leading OEMs and CMs rely on Kinaxis RapidResponse for
operations performance management. It enables them to gain
competitive advantage at hundreds of locations by reducing
costs, shrinking cycle times, and increasing customer service
levels. RapidResponse is the only software that allows global
leaders such as Teradyne and Solectron to respond rapidly
and effectively drive the best action. RapidResponse delivers
the breakthrough manufacturers need to drive operations
performance management.
ABOUT KINAXIS
Kinaxis delivers an on-demand Response Management
service that enables customer-focused companies to achieve
breakthroughs in operations performance and customer
satisfaction by rapidly and more proitably responding to
constant changes in demand, supply and product. Kinaxis
RapidResponse combines personal alerting, multi-enterprise
visibility, collaborative "what-if" analysis and rapid decision
support to empower front-line supply chain staff with tools
for risk tradeoff and response to daily changes inside the
Sales and Operations Planning horizon. Global leaders such
as Casio, Honeywell, Qualcomm, Raytheon and Toshiba use
Kinaxis RapidResponse to establish superior responsiveness
within their fulillment networks and supply chains and gain
competitive advantage. For more information, visit the Kinaxis
web site at www.kinaxis.com or the company's blog at
blog.kinaxis.com.