Electronics Makers Key In On Value Chain

Dec. 21, 2004
Manufacturers of devices from VCRs to computer peripherals are searching for ways to improve the supply network and collaborate with customers.

The global electronics industry is knee-deep in a revolution, a dramatic shift in the way OEMs, suppliers, and contract manufacturers conduct business, and the change can be summed up in two words: value chain. Indeed, the rationalization that is going on in the electronics and electrical equipment value chain is sweeping the industry. It affects almost every company, whether it manufactures VCRs, TVs, set-top boxes for the home, integrated circuits, network switches, personal computers, PC peripherals, or cellular telephones. Electronics manufacturers' goals are simple: first, companies want to reduce costs by removing wasted effort; and second, by improving the supply network, manufacturers are working to speed delivery to the customer -- whether it's another supplier, an OEM, or an end user of the product. Finally, players in the electronics value chain are looking to get closer to their customers in such areas as collaborative design so that they can respond more quickly to their customers as a result of shorter product life-cycles throughout the industry. "Many of our customers have to react in days or hours to new demands," says Chris Bettis, Sunnyvale, Calif.-based vice president of information technology and planning systems for United Microelectronics Corp., a global silicon foundry that expects to produce 2.4 million 8-in. silicon wafers this year for semiconductor firms. "Our customers want us to link with them in a very automated way so that we are viewed as an extension of their own company." Many large electronics firms have recognized the importance of value-chain efficiency to their overall success, as witnessed by their naming of top executives to run their value-chain activities. For instance, Lucent Technologies Inc. created the position of chief of procurement three years ago. In April Jose A. Mejia was named to the position, succeeding Daryl Skaar, who retired. Two years ago, Apple Computer Inc. hired former Compaq Computer Corp. executive Tim Cook to revamp a bloated, inefficient value chain that had dragged down the company's financial performance for years. And contract-electronics manufacturing giant SCI Systems Inc. in April named Bhawnesh C. Mathur, a former IBMer with extensive e-commerce and procurement experience, as senior vice president of value-chain management. Especially in the emerging e-commerce world, electronics firms are looking for ways to ensure that their behind-the-scenes processes, including logistics and distribution, work smoothly rather than hinder the flow of components, assemblies, and finished products. And that means tighter connections with suppliers and customers. One way to streamline the value chain is to have someone else -- preferably a sophisticated contract-electronics manufacturer (CEM) -- take a large chunk of it on. More and more electronics firms are farming out pieces, entire subassemblies, or even entire product lines for CEMs to build. Yet another reason for the value-chain "fever" taking hold in the electronics industry is a very real concern over component shortages that could potentially interrupt production, causing a massive ripple effect throughout the industry. For example, an earthquake in Taiwan not long ago caused large electronics manufacturers to worry over possible disruption and delays, since many are heavily dependent on Taiwanese makers of semiconductors, chip sets, and other electronic parts. While there were no major disruptions, some companies received shipments of key electronic parts later than expected. Some firms, of course, benefit from product shortages. Avnet Inc., Phoenix, a leading distributor of electronic components, recently posted a 95% increase in profits in its fiscal third quarter (before acquisition charges). The higher profits were largely due to fatter margins for a growing list of components that have become hard to get as a result of surging growth in the telecommunications and networking markets. In some cases the leadtime for obtaining certain key parts such as capacitors, microprocessors, and resistors can be as long as 20 weeks. As companies such as Apple and Compaq have sought to follow the Dell Computer Corp. model of make to order rather than make to forecast, inventories at these PC OEMs have plummeted. The effect is to force suppliers to either take on more inventory to handle fluctuations in demand, or reduce their manufacturing times to be more responsive. As a result, major CEMs have sought to link their operations more closely with those of their key customers, from product design to finished product. In semiconductor manufacturing, itself a $150-billion-plus global industry, some companies are looking to simplify their distribution channel, thereby creating greater efficiency and reducing costs to end customers. "We think there is a higher value in a reduced distribution channel, especially if it is more efficient," says Rob Kirk, global sales director responsible for the distribution network at ON Semiconductor Inc., Phoenix, which recently reduced the number of distributors handling its products. "Our strategy is not to duplicate areas of expertise up and down the value chain, but to leverage what each party does very well, so that we have the most efficient supply model for getting products to the customer." Similarly, a host of other semiconductor companies have cut the number of distributors they use to achieve the same efficiencies. These include Analog Devices Inc., Seagate Technology Inc., and Xilinx Inc. Most electronics manufacturers at one time or another have experienced troubles with meeting product demand. Thomson Consumer Electronics is one. "We were losing sales, experiencing stockouts in our distribution network and in our customers' stores," says Michael O'Hara, senior vice president of the Americas division of Thomson, based in Indianapolis. "At the same time we had excess inventories, due to inaccurate sales forecasts and variation in demand." Thomson has since streamlined its value chain, instituting process changes and installing software to help it manage demand more efficiently, thereby reducing, if not eliminating, most of those problems. The company was able to reduce leadtimes, improve the accuracy of sales forecasts, improve order-fill rates by up to 40%, boost inventory turns, reduce out-of-stocks, and reduce order cancellations by 60%. Acer America Corp., San Jose, the third-largest PC manufacturer, is moving toward a more customer-centric point of view. By offering custom-configured products through its reseller-distributor channel, Acer, which recently garnered a major order for notebook computers from Dell Computer, is moving toward the build-to-order scheme. To be successful, this manufacturing model requires companies to dramatically shrink cycle times and inventories. And that's not easy for a multibillion-dollar manufacturer such as Acer, with a total of 36 manufacturing plants and assembly sites worldwide. "Direct vendors like Gateway and Dell are our competitors," says Denese Yao, senior director of operations at Acer America. "Over time, the custom-configured product will become an increasing percentage of the business." And therein lies the rub for electronics manufacturers. As OEMs accelerate efforts to reduce their dependence on inventory to handle fluctuating product demand and more custom-order products, the need for inventory of parts and assemblies such as motherboards, disk drives, and other products goes elsewhere in the value chain. "The killer is the inventory," Yao says. "Each player keeps some inventory." Top Companies in Electronic/Electric Equipment

Leaders by Revenues
IW 1000 Rank Company Revenue (US$ Millions)
6 General Electric Co. $111,106
10 Hitachi Ltd. $78,118
12 Matsushita Electric Industrial Co. Ltd. $74,815
13 Siemens AG $69,059
14 Sony Corp. $66,536
Leaders by Profit Margin
IW 1000 Rank Company Profit Margin
47 Intel Corp. 24.9%
750 Tellabs Inc. 24.1%
180 Marconi PLC 16.0%
565 Rohm Co. Ltd. 15.9%
400 Applied Materials Inc. 14.9%
Leaders by Return on Equity
IW 1000 Rank Company ROE
433 Maytag Corp. 64.7%
29 Lucent Technologies Inc. 62.5%
79 Nokia Corp. 50.4%
180 Marconi PLC 40.6%
750 Tellabs Inc. 40.6%
Leaders by Revenue Growth (1996 to 1999)
IW 1000 Rank Company 3-Year Growth
477 Qualcomm Inc. 383.8%
830 LG Information & Communications Ltd.* 360.2%
934 Flextronics International Ltd. 216.0%
79 Nokia Corp. 199.0%
233 Solectron Corp. 197.9%
*Growth is for 1995 to 1998
Industry Hightlights
Average revenue growth of companies: 7.5%
Company with highest revenue growth (1998 to 1999): Tyco International Ltd., 82.7%
Company debuting highest on list: ABB Ltd., No. 60
Company with highest profit growth (1998 to 1999): Compagnie Industriali Riunite SpA, 1115.3%

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