July 25,
2007
Collaboration
in the Components Supply Chain
Remember
the mountain of excess inventory that exploded on the components market during
2001? The boom-boom 1990s led to confidence in year-after-year growth. The big
fear was shortages, so OEMs and their contract manufacturers kept bumping up
their forecasts to make sure they had sufficient parts to supply the
ever-increasing demand. But when the demand collapsed on mid-to-late 2000, the
forecasts kept growing. Nobody matched supply with demand. The result was a
mountain of unneeded inventory and millions of dollars in write-offs.
Part
of the problem was the lack of technology that could give parts suppliers some
visibility into real demand. Part of the problem was simply the failure to
insist on matching supply with demand. And part of it was the optimism that
growth couldn’t possible end abruptly.
Analysts
and distributors now believe that painful phenomenon from 2001 is a thing of
the past. They claim that improvements in supply chain technology will help prevent
inventory build-ups when the next downturn comes. They also believe the simple
willingness to share information among supply chain members will allow
companies to match supply and demand.
Collaboration
between supply chain members – from the component supplier to the distributors,
OEMs and contract manufacturers is relatively new. Most of it goes back only a
few years. The collaboration shows up in a number of ways, from collaborative
forecasts (where distributors share customer demand information with component
suppliers) to advanced ship notices that let OEMs and contract manufacturers
know what’s been shipped and when it will arrive. The point of it all is to
reduce inventory while lowering the risk of shortages.
“Suppliers
and their customers are certainly collaborating with advanced ship notices,”
says John Fontanella, VP of research at Boston-based AMR Research Inc. “This is
the most important document a supplier can give to its customer. It tells
what’s coming and when it’s coming.”
Fontanella
also points to efforts to push inventory to the furthest point in the supply
chain as a strategy to keep inventory supplies low. “There’s a relentless
effort to move inventory as far up the supply chain as possible,” says
Fontanella. Vendor managed inventory is a version of this, though he notes the
popularity of vendor management inventory programs has died down recently. “The
best example of pushing inventory upstream is the Dell model,” says Fontanella.
“They have inventory pour into their distribution center and it’s all on
consignment. They pay their suppliers when they actually use it.”
Avnet
Inc. in Phoenix keeps inventory under control by taking information about
demand from their customers and sharing it with suppliers. “When customers
share information with us, it helps us plan better,” says Greg Frazier, Avnet’s
EVP of supply chain worldwide. “We have more than 1,000 customers in North
America, where we exchange forecast information, mostly on a weekly basis.”
Frazier
notes that forecasts aren’t perfect, but it still helps to get at least some
information about what’s selling. “It’s still a forecast, so it’s subject to
things that are wrong with a forecast, but it does allow us to trigger
material.” To improve the accuracy of the forecast, Avnet takes the additional
step of checking demand. “We take the forecast information and look at the
consumption to see how it matches the forecast. You see a forecast of 1,000
pieces and you see that they have consumed 1,000 pieces and that makes us
wonder if they forecast too little.”
Frazier
says that scrutiny has improved visibility in the supply chain. “What it has
done is caused all constituents in the supply chain to take a closer look at
demand from the OEMs,” says Frazier. “Now you question the validity of the
forecast. The OEMs, the contract manufacturers and the suppliers are all
looking closer at the forecasts.”
He
notes that much of the work to improve the accuracy of forecasts is not
necessarily based on new technology. “The important part is the checks and
balances, and that’s not done with technology,” says Frazier. “If consumption
doesn’t match the forecast, then you have a problem. And any time things look
really out of whack, you pick up the telephone.”
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