Boom and Bust
Presentation: TOWARDS A MORE RESPONSIVE SUPPLY CHAIN: A
u Mandate & Scope
u Supply Chain in High Tech
u Problem Statement and Causes
u Recommendations and Action Plan
•This is our agenda base on a Mandate, Introduction, etc.
•We want to address with this agenda all the challenges, trends, current
situation in the Supply Chain in the high tech and take a look at it from a Case
Mandate & Scope
n To study the strategic aspect of SCM
n To establish recommendations for SCM
n To provide final comments
•Our mandate is to come up with general and realistic recommendations for
potential best practices in dealing with supply chain partners in the High Tech
sector, given the current challenges and trends that industry confronts.
•We all know that effective supply chain management within an organization
has proven it can drive cost reductions while increasing customer
responsiveness, but organizations face a new challenge: How will companies
achieve competitive advantage in a world where supply chains compete with
other supply chains.
u Great importance in general
n Evolution of the Chain
n Supply Chain Management overall objectives are
enterprise wide decisions
n Supply Chain as competitive advantage
•Before we get to the good stuff of supply chain, we need to know what is it?
•Since its inception about 10 years ago, the field of supply chain management
has become tremendously important to companies in an increasingly
competitive global marketplace. The term supply chain refers to the entire
network of companies that work together to design, produce, deliver, and
service products. In the past, companies focused primarily on manufacturing
and quality improvements within their four walls; now their efforts extend
beyond those walls to encompass the entire supply chain.
•For this purpose we would like to make an introduction of supply chain by
looking at the definition, evolution and the strategic part of it to gain
WHAT IS SCM?
“The means by which firms engaged in creating, distributing, and
selling products can join forces to establish a supply network with
unbeatable competitive advantage.”
•It’s important to have a clear definition supply chain when a company is
trying to set its strategic objectives. For this purpose we have come out with
the most accurate defination “the means by which firms engaged in creating,
distributing, and selling products can join forces to establish a supply network
with unbeatable competitive advange”
•In the picture you can see the bigger picture of the supply chain.
•So Supply chain have to do with the following:
•Material flow from suppliers and their “upstream” suppliers at all
•Transformation of materials into semi-finished and finished products
•Distribution of products to customers and their “downstream”
customers at all levels
• Depending on the situation, the supply chain may include major product
elements, various suppliers, geographically dispersed activities, and both
upstream and downstream activities. It is critical to go beyond your
immediate suppliers and customers to encompass the entire chain, since hidden
value often emerges once the entire chain is visualized.
EVOLUTION OF SCM
LEVELS OF SUPPLY CHAIN OPTIMIZATION
Sourcing and Internal Network Industry
Logistics Excellence Construction Leadership
Phase I Phase II Phase III Phase IV
VP Sourcing CIO/Supply Business Unit Management
(under Pressure) Chain Leader Leader Team
Leveraged Prioritized Best Partner Networks
Savings Improvements Performance revenue
Inventory, Process Forecasting, Consumer
Freight, Order improvement services Network
Teaming Benchmarks, Metrics Intranet,
Database Internet, Virtual
Excellence best practices e-commerce Systems
Midlevel Expanded Total Full Enterprise
Organization levels Organization
Cost Data, Process Advanced Cost Demand-Supply
success funding Mapping process Linkage
None Supply Chain Interenterprise Global Market
Supplier Best Partner Formal Joint Ventures
Training Team Leadership Partnering
Source: Poirier, Charles “Advanced Supply Chain Management”
•Why do this? Most of the gains achievable from an internal focus have been
realized, while the opportunities that exist through cooperation and
collaboration are the new frontier.
•The evolution of supply chain includes Internal integration which occurs
within the organization and represents the position of most business
organizations seeking improvements in their supply chains. And External
integration which occurs when the business joins forces with external firms to
seek network savings. Both levels together describe the evolution of supply
management and become the foundation to reach operational efficiencies
along with a strong strategy. The internal level have to do with gaining
sourcing and logistics efficiencies to reach internal excellence (see table).
External optimization has also two phases which includes network
construction and industry leadership.
•We believe that High Tech companies are on phase IV of this classification,
however some of the problems we identify have to do with internal aspects of
the optimization of supply chain.
Strategic View of
Source: Booz-Allen’s SCM approach, July 2000
•So for example, on this exhibit of the supply chain management hierarchy, as
you can see we are concentrating on the “what” (from the strategy point of
view of the chain) objectives, policies and operating footprint have to be
establish to achieve effectiveness in the supply chain and prevent major
problems during downturn.
• Strategy concentrates on the long term decisions of SCM; tactical is
concentrating on the medium term decisions and operational on the day to day
operations of supply chain with execution been how to implement all these.
We are concentrating on the to part of the SCM hierarchy.
u Customer Satisfaction
u Time to Market
u Product Quality
u Growth Rate
u Sales Volume
u Market Share
•The overall objectives of an efficient SCM are three:
•Enhanced SCM to drive corporate strategy and shareholder value
•Collaboration among partners to synchronize operations
•Technology play a key role innovative supply chain strategies
•The Internet is already having a major effect on supply chains
and there is more come. One way to capture its effect is in the
•The Framework for Internet Impact
•Within an Enterprise – Better Cost, Speed, Accuracy,
•Across the Chain: Information Exchange – Visibility,
Collaboration on Inventories and Design
•Across the Chain: Restructuring – Compressing the Chain,
Changing Roles; “Virtual Resources”
•Across Multiple Chains or Nets – Auctions, e-Procurement,
•New Business Opportunities – New Channels/Markets, Mass
Customization, Truly New Product
Key Areas of SCM
u Demand Forecasting
u Inventory Management
u Product Development
•Once Companies set up their objectives, they concentrate on the above areas.
Given careful consideration to all of then to reach an optimal and competitive
Supply Chain in the High
u Overall Challenges to SCM
u External current situation in the SC
u Internal current situation in the SC
u Cisco, Compaq and Nortel Case
•So, what had happen in the supply chain in the High Tech Sector? To make
sense of it, we will look at the evolution of it, the overall challenges, External
(environment situation) and the Internal Situation in the Supply chain and not
necessary a particular company. Please remember that in this industry, most
of the supply chain has high level of optimization
•As an example we will take a careful look at Cisco, Compaq and Nortel
u Supply Chain Control
n Prior to the 1990’s OEM’s operated SC
n Control through asset ownership
n Vertical integration (organized by product)
•In the eighties the big electronic equipment suppliers were vertically
integrated. Big OEMs used to own the sheet metal shops, paint shops, printed
circuit board shops, cable and wire plants, assembly plants and depending on
management preferences on what was considered a priority, they used to own
and run specific component manufacturing sites like specialty connectors and
•These were the days where management thought of controlling the supply
chain via asset ownership. The companies were organized by commodity or by
product with some kind of matrix reporting system to the executive team.
•Each component or sub-assembly division had it own financial goals driven
by the internal business unit that was the recipient of the goods.
•The intent was to satisfy internal company demand and in some cases
management allowed the component or sub-assembly division into the external
market but this were not part of what was considered the core business of the
Supply chain trends
In the High Tech
1990 2000 2010
Lower total cost Outcomes:
Reduce redundancy Bludgeoned channel
Better channel communication
Better channel integration
•In the nineties, big OEMs started the process of “divesting” what they thought
was available in the market, the reasons for this divestiture process was to
concentrate in the core competencies and to free up cash to fund the rest of the
activities of the corporation. More and more cases of divesting happened and
then big OEMs started to formulate specific manufacturing strategies.
•The new trend was to pass from a vertically integrated organization to a
virtual set of entities that would contribute with a portion of the whole product.
The concept of supply chain meant all the activities from start to finish in
order to finish a product. This initiative was to increase intregration among
•OEMs would start to consider Supply Chain decisions as strategy decisions.
They would start to outsource what ever was not considered part of the core
•In the late nineties, the concept of outsourcing came as a widespread
phenomenon in the electronic equipment industry transferring assets to the
EMS from the OEMs.
•The OEMs are in the way of becoming brand managers that use the EMS to
put together the product. The degree of outsourcing will depend on the
management ideas about what the future of the company is
•The theory was that manufacturing specialist, companies like Solectron,
Sanmina, Celestica, Flextronics, and Jabil Circuit – could bring greater focus
and expertise to projects, could develop procurement and risk efficiencies
better than OEM (Outsourcing Equipment Manufacturing) and could lead in
innovation if they were encouraged to do so.
•Finally, the Internet has open a new frontier to reach supply chain excellence,
IT IS ABOUT $$$$$
•So the main purpose of these strategies is PROFITS……..INCREASE
for Effective SCM
u Complex Supply Chain Network
u Complex product structure or building process
u Decentralized control/organizational “silos”
u Increasing pressure for customer service and
u Multiple sources of uncertainties
•So, these are the overall challenges in the High tech sector
•Nonetheless, the payoff from successful supply chain management is high
enough that most companies are finding innovative ways around these
External Sources of
u Demand variability
n Example: Difficulty forecasting sale
u Process variability
n Example: Unexpected downtime and yield losses
u Supply variability
n Example: Supplier deliveries are late
•Variability and uncertainty are the most significant threats to a well-
optimized supply chain network. There are three main external sources of
variability in supply chains:
•DEMAND VARIABLILITY – Bullwhip effect - It describes how
small fluctuations in demand at the customer level are amplified as
orders pass up the supply chain through distributors, manufacturers and
suppliers. As an example – Cisco Suppliers. Nevertheless, order
fluctuations invariably become considerably larger as one moves
upstream in this supply chain. (not been able to scale down)
•Common Causes of Bullwhip
•Demand Signal Processing – each stage does its own forecasting
•Order Batching – trying to achieve economies of scale
•Price Fluctuations – inducements such as “forward buys” through
•Allocation Gaming – when shortages loom, over-orders are placed
through multiple channels.
• Once the causes of the bullwhip for your company’s supply chain are
recognized, you can begin exploring how to lessen the bullwhip. For
example, if a major problem stems from demand signal processing,
then one party in the chain can take responsibility for a single chain-
wide forecast of consumer demand, which is then routinely shared on a
dynamic basis with all members.
•PROCESS VARIABILITY –The push-pull point – it relates to
anticipated demand (forecasts) versus actual demand (firm orders). In
u Old Vertical Thinking
n Lack of Communication
n Lack of Trust and Fear
n Problem Solving Methodology
u Misalignment of Agendas
n Different set of goals
n Different methods of achieving goals
u Flexibility vs Predictibility
u Inventory Differences: Full vs Necessary
•Some internal factors includes the old vertical thinking and the misalignment
of agendas among partners
•Old vertical thinking have to do with not been able to scale down during
economic downturn resulting lack of communication, trust and problem
•The misalignment of agendas where different goals are set by OEM and CEM
(look at the slide)
u Economic Slowdown (scale down)
n Not able to see the macro downturn (V, U, 7)
n $2.2 Billion Inventory write-off
n Steep decline of stock
u Lack of Supply Chain visibility
n Misread the market (demand forecasting)
u Lack of measures with its SC partners
u Lack of alignment with second & third suppliers
•Two of the things that gave Cisco its glow were its development of a virtual
supply chain with limitless capacity and its ability to provide extraordinarily
high reliability to its customers. Another apparent strength was its approach to
manufacturing: It didn’t build most of what it sold.
•By all outside appearances, Cisco was the picture of health and prosperity.
But hidden problems were mounting. Early last year, shortages of memory
and optical components began paralyzing one path of production.
•For the first time, Cisco’s supply chain began to experience the kind of
growing pains that affected its earnings. When the telecommunications
infrastructure experiences a severe downturn, customer orders began to dry up
and Cisco neglected to turn off its supply chain. Orders went out, parts began
to pile up.
•Its raw parts inventory ballooned more than 300% from the third quarter of
2000. Cisco’s problems culminated in a $2.25 billion write-down. In short,
Cisco simply wasn’t able to scale up or down as quickly as it though it could.
•Downturn: oil prices, currency fluctuations, inflation, and Federal reserve
•Over reliance on technology and self-confidance
• Technology vs Human Judgement
•Cheap Financing distorted real demand
•Profits falling vs looking at part profitability
•Outsourced manufacturing model did not encourage frank communication
and trust 17
u Supply Variability (scale up)
u Shortages of equipment
u Unfilled orders of 700,000 devices
u Compaq Mi$$ the boat of opportunities
•The pocket PC, introduced under a direct sales/inventory less strategy,
quickly became the company’s biggest hit. Demand for the device outpaced
supply 25 times, and Compaq executives were enthusiastic about its market
•In late 1999, Compaq decided it needed to revive its lagging commercial PC
sales. The company announced a hot new product line: the Ipaq series of
handheld devices, with full color screens, multimedia capabilities and
•After the 2000 second quarter, however, demand for handheld devices in
general was outpacing supply and most companies, including Compaq, Palm,
IBM and Ericsson, were losing customers and orders
• unfulfilled orders of 600,000 to 700,000 devices
•Because shortages of LCD capacitors, resistor and flash memory
• Suppliers who had their eye only on their own margins concentrat e d o n
p r o d u c i n g o n l y t h o s e c o m p o n e n t s t h a t g a v e t h e m t h e g r e a t e s t r e t ur n o n
their manufacturing investment.
• C a p a c i t o r m a n u f a c t u r e s d i d r e s p o n d t o t h e s h o r t a g e s , r u n n i n g t h ei r
plans three shifts a day, seven days a week. Although production
capacity is starting to expand, the pace is hardly breakneck. At p e n n i e s
a piece and with tiny commodity margins, capacitors and resistors n e e d
to be sold in major quantities to support the kind of growth nec e s s a r y t o
underwrite a fully responsive new factory.
• When the economic downturn hit, Compaq build up its capacity in
inventory. When they tried to sell the product, none was buying, 18
u Like Cisco, victim of Demand Variability
n Econ downturn – unable to scale down
n Lack of visibility, measures & alignment
u to gain market share no matter what
u Steep competition – playing catch up
• Like Cisco, Nortel fell victim of demand variability for the same reasons
• D u e t o f a s t m o v i n g c o m p e t i t o r ’s, exemplified by Cisco, who were
o u t s o u r c i n g h e a v i l y , a n d r a p i d l y a c q u i r i n g c o m p a n i e s a n d c a p a b i lities to
fill out their product portfolios. Nortel decided it had to bec o m e m o r e
like its competitors. This meant swapping vertical integration for virtual
integration and using acquisitions to maintain a technological ed g e o v e r
•Falling behind - no competitive advantage – play catch up with Cisco.
Analysis matrix of
SC in the H-Tech
•Supply chain are unique, but it is possible to classify them generally by their
stability or uncertainty on both the supply side and the demand side. Consider
the following table – where would your company fit in? See Table
•On the supply side, low uncertainty refers to stable processes, while high
uncertainty refers to processes which are rapidly changing or highly volatile.
On the demand side, low uncertainty would relate to functional products in a
mature phase of the product life cycle, while high uncertainty relates to
•Once your chain has been categorized, you can select the most appropriate
tools for improvement.
•For example, if your chain is in box 4, with a dynamic demand and highly
uncertain supply, then creating a “virtual supply chain” like that of Cisco
would make sense. On the other hand, if your chain was in box 1, with stable
demand and stable supply, you would like to avoid the bullwhip and would use
strategies to counter the bullwhip effect.
u The misalignment of objectives among
partners has created impediments in the
supply chain that prevents them from
achieving operational efficiency and from
increasing shareholder value. Given the
current economic slowdown supply chains in
the high tech industry have revealed
weaknesses due to the inability of the partners
to scale down when needed.
Causes of problem
u Design of supply chain
u Lack of practices
u Lack of focus in strategic relationship
u Technology without strategic purpose
u Supply chain design must be cautiously
Fit between demand pattern and supply chain
Define strategy for asset ownership
Benchmark for best in class
u Strategic relationships
Alignment with supply chain partners
Focus on the “right” customers
Consolidation of accountability and
u Technology application
The Benefits of Collaboration
u Crafting the project vision, developing the business
case and ensuring executive commitment.
u Managing organizational change and redesigning
u Choosing the appropriate implementation approach
u Managing technical challenge.
u Start with the right goal.
u Strategy must enable the organization to deliver a
unique value proposition.
u Strategy must define how all elements of what
organizations do fit together.
u Strategy involves continuity of direction.
Growth Cost Minimization
W. Capital Efficiency F. Asset Utilization
Careful attention to the supply chain design and
operation can give an organization the competitive
advantage needed to succeed in the marketplace.
Management should understand the
consequences when making decisions affecting
the supply chain configuration.
It is not about asset ownership but having the
accountability at the right place and the
collaboration among partners.
u Break Organization Barriers
u Build Visibility into the Supply Chain
u Manage SC by metrics
u Reduce the decision Cycle Process
(Demand and Supply alignment)
u Encourage Collaboration
u Reduce problem resolution latency