An oft quoted study published by the National Institute for Standards and Technology (NIST) reported that there was approximately $3.9 billion of waste in the electronics supply chain due to poor coordination. Given the limited product and geographic scope of that study, I believe their numbers are modest. Our research indicates that, globally, there is more than $250 billion of waste in the electronics value chain and over $900 billion across all global manufacturing value chains. Waste, in this context, doesn't refer to environmental refuse, but to unnecessary delays and costs in the classic lean manufacturing context. Given the tight profit margins in the electronics industry, recapturing these costs and shortening cycle times should be central to a supply chain excellence strategy.
Participants in the electronics supply chain have a tremendous opportunity to improve the performance of the overall value chain and recapture the profits sacrificed to waste. A new operating model, based on openness and supported by a new category of software, will be required. The electronics industry will be the laboratory in which we refine this new operating model, but expect other manufacturing segments, as they emulate the fragmentation and global nature found in electronics, to follow suit as well. The aforementioned NIST study, for example, identified $5 billion of coordination waste in the U.S. automotive industry.
Electronics companies have the lowest average net profit margins (2.5%) of any discrete manufacturing industry, which means they must constantly strive to lower costs and improve efficiencies. Many companies have captured the low hanging fruit within their companies through lean or six sigma programs, but must extend those efforts up and down their value chain to continue to realize gains. The complex structure of industry value chains dictates that companies must do a better job of linking corporate strategy to operational execution in a feedback loop fashion. To be effective in achieving this imperative, companies must invest in a collaborative decision environment that can create visibility into activity, provide real-time analysis, and enable an appropriate response.
The overall intent of creating these collaborative decision environments is to deliver a domain wide feedback loop for executives, middle management, and individual contributors. Two kinds of feedback loops get created. Control Loops catch exceptions and initiate corrective actions. Reinforcement Loops identify superior performance and initiate action to magnify the benefits.
Intelligent Operations Management
Delivering these key capabilities requires a new category of software application. Transaction based systems like ERP are fine for delivering consistent generally accepted business workflows, but must be augmented by collaborative decision environments to harvest value from that information. In the domain of managing the activity for an entire value chain, companies need a decision environment that we have labeled Intelligent Operations Management.
Intelligent Operations Management (IOM) is an application category that assimilates and provides context to heterogeneous data sources to provide visibility to all of the participants in the value chain to enable faster decisions that eliminate waste and raise customer service levels. An IOM application has three key architectural components:
- Semantic Information Repository (SIR) -- essential to improving decision making will be the ability to organize all types of information. At the heart of the repository for large organizations will be an operational data store that can organize large volumes of transactional data into hierarchical, analytic friendly forms. The data store should be augmented by effective master data management that can provide a harmonized view of key subject matters like suppliers, products, assets, customers, and employees in the context of the value chain being monitored. The ability to bring some structure to unstructured content like documents completes the repository.
- Advanced Analytic Engine (AAE) -- the second key ingredient for an IOM application is the ability to construct and run analytic models. This capability will include the ability to do retrospective (what happened), perspective (what is happening), and predictive (what will happen) analytics. The AAE will be dependent on a well built SIR to feed it the necessary information in the context of the analysis being performed.
- Goal-driven Ecosystem Collaboration (GEC) -- analysis is only effective if people can take action on the results. The social networking tools found in consumer-based Web 2.0 technologies begin to form the model, but don't go far enough. While social networking tools make coincidental connections, shared business goals will provide the context in an IOM. Some collaborative processes may be very structured (e.g. sales and operations planning) while others completely ad hoc. Business process management tools should accommodate the full range of collaborative processes and be part of the IOM architecture.
Bringing these architecture components together provides visibility into the state of a value chain's operating performance and provides control through feedback loops that enable better results .The ongoing monitoring of performance, however, must be in the context of business goals and should be able to offer alternative scenarios for further action.
If you are dealing with a fragmented, dispersed supply chain, an implementation of an Intelligent Operations Management platform may be in order. Manufacturing Insights recommends the following actions:
- Look for obvious signs of waste in your value chain. A good starting point can be expedited freight charges which are indicative of poor coordination with partners. Frequently, eliminating this expense alone can justify an implementation.
- Conduct an inventory of the spreadsheets being used by your operations, logistics, procurement, and planning personnel and then sort by size. It is very likely that these spreadsheets, particularly the very large ones, are being used to conduct analysis in an isolated, uncoordinated way. It is also likely that the data being put into these spreadsheets is late, inaccurate, and costly to collect. The IOM will be able to replace these cumbersome analytic methods.
- Interview these same personnel to get a sense of how much internal and external collaboration takes place via e-mail. This asynchronous approach carries wasteful latency and may present problems when auditing processes for compliance. Again, an IOM's collaborative environment can overcome these deficiencies.
- Ask your key trading partners about these same issues. It is likely that they have similar inefficiencies. Start with your 3-5 most strategic partners. Understanding and articulating the value of your IOM to the partner community will help to drive participation.
- Leave sufficient time in the implementation plan for working through data and content management issues as success will hinge on getting this right. Consider starting with a single product line or business unit to establish a learning curve and then replicate aggressively.
- Look for a technology vendor that understands the architectural components well. Experience in the electronics value chain is paramount as this is the proving ground. If you decide to wait for your ERP vendor to deliver an IOM you will yield the opportunity to your competitors.
Manufacturing organizations, particularly in the electronics value chain, are seeking to harvest value from the information they have and to harmonize processes, utilize the expertise of their trading partners, and eliminate waste. The information technology required to support these efforts demands a new kind of application with a modern architecture. For value chain management this will be the Intelligent Operations Management platform.
Bob Parker is vice president, research, Manufacturing Insights, an IDC Company. Manufacturing Insights, provides fact based research, benchmarks, best practices, and business cases for using information technology to improve manufacturing processes including Lean/Six Sigma, RFID, Warranty and establishing operations in China. www.manufacturing-insights.com