Coordinated Outsourced Manufacturing

White Paper / Case Study Based on Kinaxis Webinar

Coordinating Outsourced Manufacturing: A Win-Win Proposition for OEMs and CMs

Technology Forecasters Inc.: Embracing Change as a Competitive Differentiator Managing the demands of constant change is one of the biggest challenges facing the EMS industry today. Although their perspectives differ, original equipment manufacturers (OEMs) and contract manufacturers (CMs) share the opportunity to competitively differentiate themselves by actually embracing this issue and leveraging it to their mutual benefit. To achieve this goal, OEMs and CMs must adopt a common philosophy, share responsibility, and communicate in a way that enables them to meet customer needs. Without an integrated approach, only pieces of the problem can be addressed. Collaboration is key to a truly successful partnership that empowers all levels of the supply chain to respond in real time. As the relationship between OEMs and CMs evolves, the need for flexible tools and methodologies to help them effectively manage change becomes more critical as well. During a recent webinar sponsored by Kinaxis, senior consultant Charlie Barnhart of Technology Forecasters Inc. (TFI) offered valuable insights into what comprises a successful solution strategy. THE SHIFTING ROLES OF OEMs AND CMs

The evolution of the EMS industry in response to an increasingly dynamic marketplace reveals a clear change in the roles played by OEMs and CMs. “In the beginning, OEMs designed and manufactured essentially all the components of their products; then as technology became more prepackaged and ubiquitous, product differentiation shifted from a matter of functionality to price-versus-performance,” Barnhart says. “This resulted in a high degree of product churn as life cycles began to shrink and sales forecasts became increasingly unreliable due to rapid changes in user preferences.” As it became harder to predict

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factory utilization rates, OEMs sought ways to shift their fixed costs to a variable basis, which led to a broader acceptance of outsourcing. This encouraged EMS companies to expand their value propositions and OEMs to shrink their investment in internal capabilities. Combined with the impact of globalization and a post-Y2K economic downturn, these trends created a supply-demand imbalance that favored OEMs, and prices dropped precipitously. OEMs gladly leveraged the windfall to offset margin pressures, and EMS companies continued to reduce prices to fill some of that capacity. As prices started to hit bottom, OEMs were forced to look beyond local suppliers to cut costs, transferring their outsourcing requirements to more remote locations such as China. GROWING CHALLENGES: COMPLEXITY, PRICES, AND COMPETITION

Cost reductions from outsourcing have come at the price of increased complexity in the supply chain. As a result, today’s brand owners often find themselves hampered in their ability to respond to the volatile, expensive-to-fulfill customer demands created by constantly changing consumer preferences. Not only is the EMS side of the supply chain threatened by increased pricing pressures—despite industry expectations that these pressures would ease with the recovery of the high-tech sector— but the survival of OEMs is also at risk if their key suppliers cannot stay in business. Price pressure is not the only challenge. A recent TFI survey asked EMS providers about competition they experienced from original design manufacturers (ODMs). Approximately 20 percent reported being in moderate or strong competition with ODM companies. Like EMS organizations, ODMs started with some level of design value proposition and rapidly evolved to the point where most of their revenue comes from manufacturing.

Reciprocally, EMS companies have added design capabilities to their internal manufacturing. Research shows a convergence between the growth of these two supply solutions as well as their percentages of revenue. Another challenge occurs when markets sometimes spontaneously revise their supply solutions. Barnhart cites Wal-Mart’s decision to stop using OEMs to fulfill its low-end notebook requirements—and instead to start buying directly from Taiwanese ODMs. Such wrenching events are painful at best to the company losing the order. Barnhart expects the evolutionary cost/complexity trend to continue as relationships extend around the globe. “Besides China, there’s also a major increase in the interest and activity level associated with India—an even more remote geographic solution,” he says. “As you go farther and farther away, whether from Western Europe or North America, this evolutionary problem becomes more complex.” Constantly changing needs in an increasingly complex environment require ever-evolving solutions; what worked last year may not be so effective today. To stay competitive, Barnhart says, OEMs and CMs would do well to consider whether yesterday’s solutions are conflicting with today’s challenges. INVENTORY: A SOLUTION BECOMES A LIABILITY

Many companies maintain higher levels of inventory in an attempt to help them meet these challenges and respond to change. Yet this is ineffective, says Barnhart, because inventory doesn’t work in any of the three potential directions the market can move. Two of those three directions involve up-ticks or down-ticks in customer demand. “If demand suddenly increases, extra inventory isn’t a complete solution because it can’t increase manufacturing capacity, which tends to be fixed,” Barnhart explains. “If demand decreases, inventory becomes a major liability because it uses up a company’s liquidity.” This hampers the organization’s ability to respond to a downturn through different methodologies or discovering alternative paths in its business model.

RESPONSE MANAGEMENT— THE KEY TO MANAGING CHANGE

Though reintegrating manufacturing back into the core of the OEM enterprise might seem like a possible answer, the resulting increase in costs would likely prove prohibitive. Instead, Barnhart says, companies should shift the way they manage change— focusing on the opportunity that change brings to the enterprise and turning it to their advantage. “Of all the approaches I’ve looked at—in my research, interviews, and work at TFI—the one that works best is Response Management,” Barnhart says. The ‘what-if’ modeling technique of Response Management enables OEMs and their EMS suppliers to quickly assess resources and map the best action alternatives to handle changes in product demand or supply availability— facilitating real and meaningful collaboration between the parties. Both sides benefit. “As traditional solutions fall hopelessly short of accomplishing the goal of meeting these highly variable, complex supply requirements based on customer demand fluidity, what is needed is a methodology centered on the critical inflection point of manufacturing execution,” Barnhart says. The inflection point is not on the demand side where the OEM is evaluating requirements, or on the fulfillment side where the CM or ODM is shipping product. Rather, it’s the point inside the manufacturing plant when raw materials are transformed into finished products. “This inflection point is where we can work to the competitive advantage of an organization rather than against it,” Barnhart says. Focusing on that point and using a tool such as Response Management—which offers multiple options on a fluid, dynamic basis to all parties in the supply chain—enables companies to convert change from a problem to an opportunity.

The third market direction is none at all—a flat market, which companies typically respond to by updating their product line: developing new products, releasing those they’ve had in the development pipeline, and eliminating old products that no longer sell. “None of this bodes well for inventory sitting on the shelf,” Barnhart says. “Inventory is perishable and decreases in value the longer it sits.” Regardless of market direction or adjustments in the supply chain, inventory slows a company’s reaction to market changes and makes it significantly less nimble. Though some EMS companies are now being asked by OEMs to hold more buffer inventory to provide them with shorter lead times, Barnhart advises caution in going down that path. “It seems to me that EMS companies are constantly being asked to provide additional services, but being compensated for them doesn’t seem to be very common,” he says. Even if EMS companies comply, this won’t necessarily ensure that they’ll have everything their customers need. 3

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THE NEED FOR AN OPEN,

New Demands Lead to Centralized Solution

COLLABORATIVE RELATIONSHIP

In 1997, one of Lucent’s manufacturing locations in Massachusetts needed a new system for what-if analysis and inventory management, and RapidResponse was the application selected. At the same time, Sforza says, Lucent also implemented some tailored solutions to do forecast acceptance and priority allocation and distribution.

Barnhart also suggests that OEMs respond to issues raised by their EMS or ODM suppliers in a positive, constructive manner. “You want your suppliers to bring issues to you early and often, if you’re going to achieve real collaboration,” he says. “If you respond negatively, you’re not going to hear about it. Yet the truth is the sooner you hear about problems, the better off you are.” And with changes happening at both the front and back end of the supply chain, overall responsiveness is determined by how well all participants work together. MANAGING THE VIRTUAL ENTERPRISE

With so much focus on specialized outsourcing in order to gain cost advantage, today’s OEMs are evolving into highly complex businesses—becoming virtual enterprises. This trend has created many benefits, but much of the gain can actually be wiped out if an organization is inefficient or slow to respond. While OEMs or brand owners may not be directly responsible for the execution of every piece of the virtual enterprise, they are ultimately accountable for the end result in terms of their brand, product quality, compliance, and similar criteria. Broad visibility is crucial to help companies effectively orchestrate and control key business processes and activities across the entire supply chain. But it doesn’t stop there. A good toolset also empowers all individuals throughout the virtual enterprise so they can leverage that visibility to make and keep customer commitments. Dianne Sforza, former Webplan (now Kinaxis) program manager at Lucent Technologies, provides a closer look at how that’s done.

Lucent Technologies: Driving Competitive Advantage Through Response Management Company Profile

Lucent Technologies designs and delivers the systems, services, and software that drive next-generation communications networks. Backed by Bell Labs research and development, Lucent uses its strengths in mobility, optical, software, data, and voice networking technologies as well as services to create new revenuegenerating opportunities for its customers, while enabling them to quickly deploy and better manage their networks. Lucent’s customer base includes communications service providers, governments, and enterprises worldwide. Lucent Technologies is headquartered in Murray Hill, New Jersey. Sforza’s team leads key projects aimed at maintaining, enhancing, or upgrading the global environment within Lucent. The company has been a pioneer in bringing external EMS data into its own environment and was also an early adopter of Kinaxis RapidResponse™.

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Four years later, a Lucent plant in Brazil chose RapidResponse for the same purpose—what-if analysis and inventory management. “At that time we made a very good strategic decision,” Sforza says. “Instead of installing different instances of this application around the globe, we decided to take advantage of the new multi-site functionality Kinaxis was offering to expand our environment from one full MRP site to six.” This gave Lucent greater standardization and control while providing cost savings, because the application itself, as well as support and maintenance, were centralized. By 2002-2003, Lucent had seriously adopted the outsourcing model, and one of the key business issues the company faced was loss of supply chain data visibility. “Since we already had RapidResponse up and running with our Lucent node MRP information, it made sense to bring our EMS partner and supplier data into the same application,” Sforza says. Once again, Lucent expanded its multi-site environment and brought in three full MRP sites—including bills of material (BOMs), supplies, demands, and inventories—along with a couple of partial sites with just inventory, demand, and supply data. The company also implemented its Global Supply Planning (GSP) application, which aligns the latest demand priorities with sourcing guidelines to provide strategic decision support. The outsourcing adding complexity to Lucent’s supply chain also necessitated new procedures, such as the excess and obsolete (E&O) inventory claim process the company uses with key EMS providers. To support this, Lucent added its Global Inventory and Liability Reporting (GILR) tool and a Sell What We Have (SWWH) solution. “Our GILR tool takes something that is very, very data intensive—analyzing the claims coming back from EMS providers—which formerly took many man-hours and often weeks to do, and uses the intensive analytics of RapidResponse to complete it in hours,” Sforza says. The SWWH solution identifies saleable items which might be built and sold to consume existing inventories. Both are used across Lucent’s entire supply chain. In 2004-2005, Lucent migrated from a 32-bit to a 64-bit server environment to better accommodate its massive datasets, and added customer order data from its SAP system as well. Since then, the company has focused on modeling its EMS partner sites within RapidResponse, shifting multiple locations in one EMS site into separate locations and expanding some of the partial sites into full MRP sites. “Kinaxis has been very key in helping us here, because we don’t want to lose any of the functionality we have in our current model,” Sforza says. Lucent is also planning to migrate into the RapidResponse web environment, which will enhance its ability to collaborate with partners and enable users to access the application from multiple sites worldwide.

Currently, Lucent has three production environments with the following data sources: the global supply planning server, which imports Lucent system integration center node data; the daily server (where most users reside), for doing general whatif analysis and SWWH analysis, which imports Lucent, EMS, and supplier data; and the GILR server for global inventory and liability reporting, which imports Lucent node data and EMS partner data. With all the different roles and experts involved in figuring out the right course of action for any given change across the supply chain, Lucent has a broad user base. “We have about 500 different users—on the customer facing side, on the product side, and definitely in materials management—working very closely with our suppliers,” Sforza says. Depending on their individual roles, people are very focused on their specific areas and want customized views of the information. “RapidResponse allows you to set up user groups very easily,” Sforza says. “We create user groups specifically tailored to whatever users want to see.” Improved Regulatory Compliance

Recent regulations in the United States and Europe, such as Sarbanes-Oxley and the Restriction of Hazardous Substances/ Waste Electrical and Electronic Equipment (RoHS/WEEE) Directive, impose new compliance requirements on the virtual enterprise. Having adequate visibility and understanding into such change drivers is crucial for today’s manufacturers.

electronics manufacturer, regardless of geographical location or the equipment they produce. China, Japan, and California have based their own initiatives on the European RoHS directive, thus broadening its scope worldwide. “We’re actually working within our Lucent nodes and with our EMS partners on this,” Sforza says. “RapidResponse allows you to run what-if scenarios on those kinds of issues. How we’re looking at this with one of our nodes is, if they’re capable of providing the inventories, supplies, and demands that are RoHS compliant, then we can identify those by different inventory, demand, and supply types, so when you’re running a query or doing a calculation, you can choose to include them or not.” Multiple Advantages

Implementing RapidResponse has created four key advantages for Lucent: timeliness, accuracy, standardization, and data security. “Timeliness is key,” Sforza says. “We get our data feeds in from our Lucent nodes as well as from our EMS partners on a daily basis, so there’s no need to wait for reports to be generated or to go to a portal or wait for a spreadsheet. Our users know where to get the data, and if a change has occurred since the data was refreshed, RapidResponse enables you to quickly do a what-if analysis to see the implications of that on your supply chain.” The intensive analytics of RapidResponse also provide significant time savings, with tasks that formerly required days or weeks now completed in just hours.

The RoHS/WEEE Directive restricts the use of six hazardous substances in electrical and electronic equipment sold in the European Union. This environmental legislation will impact every 5

“Lead time isn’t only in the Lucent enterprise; it’s also in the extended supply chain,” Sforza points out. “Having our EMS partner data within our own environment enables us to collaborate much more efficiently. If there’s a down-tick in forecast, by working with our EMS providers we can actually avoid excess inventories ahead of time.” Accuracy is very important too. “We see what they see; they’re sending us their ERP data. We want to get that customer order, so we’ll do a very high-level analysis: if we get this order, what might happen if there are constraints within the supply chain? Being able to see their data helps us work better and collaborate more effectively with our partners,” Sforza says. “For instance, if a BOM was loaded inaccurately in their ERP system and it wasn’t noticed, and someone on the Lucent side happens to see that, we work with our partners to correct it.” Another advantage is standardization; RapidResponse has strict requirements for importing data regardless of the source. “Whether it comes from supplier ERP systems, a global supply chain warehouse, RapidResponse itself, or some other source doesn’t really matter; the data needs to be in the same format to be imported,” Sforza explains. “That allows really rapid analysis and workbook creation, because you don’t have to spend time grabbing data from different places and putting it into the same format first.” Data security has always been a priority at Lucent. “The application itself is a very secure environment, and combined with the strict requirements Lucent has for any data coming in, we’ve created an environment that is secure not only for our data, but for our EMS partner data,” Sforza explains. “Any external work with our partners and suppliers is done via a supply chain portal under tight controls. This is really very key—it addresses the nervousness that some of our EMS providers expressed in the beginning about sending proprietary confidential data. We’ve had no known security issues whatsoever.”

Lucent has experienced many other tangible benefits from adopting the system. “In the early 2000s when the telecom industry took a big downturn, the visibility from RapidResponse enabled us to decrease our inventories by about 70 percent,” Sforza says. More recently, the company has improved inventory turns from the low single digits to the high single digits. “Using the heavy-duty analytics of the GILR application, we’ve been able to avoid approximately $30 million in E&O inventory charges over the past couple of years,” Sforza notes. “We’ve also improved our supply and demand planning and forecast accuracy, which has contributed approximately 1 percent in gross margin for the last fiscal year. So there are definitely some advantages to working together with our partners to bring together an effective supply chain, and RapidResponse helps us do that successfully.”

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 profitably 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 fulfillment 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.

Better Service and Greater Efficiency

RapidResponse also provides critical information needed by Lucent’s customer support service for accurate customer order promising. “The ultimate goal of an efficient supply chain is to take care of your customers—making sure that they’re satisfied, that you have on-time delivery performance, that you’re capable of addressing changes that are happening in the market, and that you have improved forecast accuracy so you can make this all happen, as well as having appropriate inventory levels to make it all flow,” Sforza points out. “By having our EMS partner data within RapidResponse, we have a much bigger view of our supply chain so we can meet these objectives.” As globalization continues and competition increases, responding to customers quickly and efficiently becomes more crucial than ever. “RapidResponse enables us to meet our customer obligations and deliver to the customer when they want it despite constantly changing demands,” Sforza says.

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