Top Ten List of Issues/Opportunities Facing High-Tech Companies
The “Top Ten List of Issues/Opportunities Facing High-Tech Companies” was developed recently by members of Tompkins Associates’ high-tech industry vertical. This list was compiled based upon direct conversations with industry executives, and insights developed in the course of daily activities by Tompkins Associates’ team members.
For 18 months, Tompkins Associates has been saying:
- The correct strategy for the Great Recession is to maintain talent, maintain strategy and cut all other costs.
- The correct strategy during the Great Recession is to develop a detailed plan for your Great Comeback.
- The recession will bottom in the 2nd quarter of 2009, employment will stop falling in the 1st quarter of 2010, and companies need to have a comeback plan in place by the 1st quarter of 2010.
- The companies that have a Great Comeback plan in place and who execute their plan will flourish, starting with the 2nd quarter.
High-tech companies are presented with a real challenge today. It is clear by the current part shortages that many companies have not done a great job of planning their Great Comeback.
Right now is the greatest opportunity for major growth in the last 30 years. View the Executive Briefing on the Great Comeback.
Why should high-tech companies address their inventory/working capital priorities?
The financial panic that conquered the business world after 2008 had a similar impact, as do wild fires and their destruction to forests. It came with losses, it put a halt to the normal way of life, and it left major scars. In other words, the world’s largest financial crisis has realigned the way we do business in a permanent way.
In other words, the world’s largest financial crisis has realigned the way we do business in a permanent way.
The high-tech companies were probably the most affected, and the level of impact is directly related with how high their inventory levels were when the crisis first hit. Historically, high-tech companies were always the pioneers in business, and their role during the upcoming recovery is even more so. They are the ones that invented or redesigned business models, and their successful performance has had a major contribution in setting benchmarks and best practices.
Nowadays, during this global recovery, the business world is looking up to them once again.
The winning companies will be the ones that master the capital the best in this new “format” of doing business, with added variables: the global outreach, the margin erosion, the scarcity of capital, the rapid fluctuation of currency, etc.
Most of the challenges relate to the working capital, hence the criticality of managing it right.
What were, up until very recently, top avenues to tune up inventories – namely promoting forecasting or designing collaborative framework internally (SIOP) and/or within the vertical (CPFR) - are no longer sufficient. Getting ahead of the game during this current recovery is a quest for changing business patterns and for adopting newer strategies.
At Tompkins Associates, we believe that high-tech companies are presented with a unique opportunity to excel through running with the right-sized inventory levels. The top three critical ingredients to better manage inventory and working capital are:
- Flexibility: One sure way to avoid the remake effort and the transfer and the destruction costs is to identify the opportunities for postponement of the finished goods. This strategy allows the last leg production/customization/transport to beat the lead time for ordering, and hence to benefit from the advantages of running slim in a pull strategy. On the upstream side of the supply chain, a similar strategy can be done with promoting multi-sourcing strategies and with SRM policies, especially the ones that reduce lead time variability and length.
- Continuous optimization of the inventory on-hand: At any given moment in any certain location, an analysis of the inventory can surface quite a disturbing picture, i.e., only one third of the total inventory can be at the right level -- to backup the desired service levels. Up to another third can be in current overages, or potential overages, that would likely occur due to blanket/automated replenishment. The other third would be inventory affected with shortages and/or expediting/transfer costs, with or without an associated risk of lost sales.
- Repositioning the inventory: The most advanced analysis of a distribution network is based on the trade-off between the cost of the holding the inventory vs. the cost of transferring within the multi-tier network. In other words, through the repositioning exercise, an optimum is found as to what SKU should be stored in which location. This is a dynamic process and the benefit of running a multi-echelon analysis cannot be attained statically or through one-tier-at-a-time type approach.
For all three of these directions, Tompkins Associates is prepared to help clients to go through the transformation process.
Our edge is the expert approach and our own methodologies, which can include leveraging existent software solutions or adopting new ones to augment the business performance of our clients.
Interactions with executives across many industries indicate not only a pent-up demand for acquiring or otherwise combining with other businesses, but also an increasing interest in doing so.
The high-tech industry is no different. With undervalued assets continuing somewhat into 2010 – and many companies holding onto capital – this is the perfect time for increased M&A activity.
The overriding challenge for supply chain managers is how to prepare for this heightened likelihood, as well as respond to it. During the late 1990s and early 2000s, when M&A activity was at its peak, supply chains were too often treated as afterthoughts.
Supply chain managers were among the last to be engaged, and they were commonly told to integrate the respective supply chains quickly and cheaply and to focus only on cost reduction synergies and the required controls.
Today, we can likely expect different types of executive directions and quite possibly a different perspective on M&A evaluations. First, we should expect more companies to focus greater attention on the fundamental drivers of value. During the last decade, business executives have learned more about global sourcing, international sales and distribution, supply chain agility, and even overall supply chain value.
This awareness should encourage M&A executives to consider not just cost reductions, but also the supply chain value creation potential for executive agendas targeting profitable growth.
One of the chief challenges in M&A supply chain integration is to ask the right questions upfront. The strategic questions today, then, with regard to M&A and supply chains, are:
- Is the potential combination accretive from the perspective of supply chain contributions to operating margins?
- What competitive advantages will the combination yield with customers, suppliers, or other stakeholders?
- What type of supply chain disruptions in our markets and in our sourcing processes might there be as a result of the combination?
- How long, and what is involved, in the appropriate degree of integration of the respective supply chains?
- What are the synergies for cost savings, and also in enabling profitable growth?
These questions were rarely asked before, or if so, not in a timely manner. In fact, during the Tompkins Supply Chain Leadership Forum in 2009, when Jim Tompkins and Gene Tyndall chaired a session on M&A, many industry executives stated that they were still not being brought in early enough on the planning and evaluations of potential combinations. More information on M&A.
Many companies have come to recognize that the successful execution of business and/or supply chain strategy depends largely on the effectiveness of the organization – the people, the culture, and the ways in which people and teams interact.
In fact, recent surveys have discovered that when asked if their organizations quickly translate important strategic and operational decisions into action, almost 2/3 replied "no."
This issue and its impact shows up almost everywhere, across all industries, and can be observed in the long lead times from idea to reality, in the excessive delays between decision and results, and the competitive performance differences between leaders and followers.
Yet it is particularly important in the high-tech world, where product life cycles are relatively short, speed is a critical success factor, and company performance depends so highly on the right products (and services) being provided at the right times, at the right costs, and bundled with excellent services.
It is not just about speed, of course. Organizational performance drives operating results. The efficiency and effectiveness of business processes are responsible for cost, time, and quality - the three primary categories of metrics that matter.
Organizational effectiveness is the link between strategy and results, and weak execution affects a high-tech company in many categories of results.
Several fundamental traits can be attributed to organizational effectiveness. In other words, these traits can be observed at the best high-tech companies:
- Information flows freely across organizational boundaries.
- Everyone understands the decisions and actions for which he/she is responsible, and how these affect business performance.
- Line managers have access to the metrics they need to measure the key drivers of their business, and their teams accordingly.
- The individual performance appraisal process differentiates among high, medium, and low performers, and the reward and recognition system reacts accordingly.
- Important information about the competitive environment gets up the chain to division and headquarters executives quickly.
- Managers and team leaders are involved in operating decisions regularly.
- Teams are rewarded for making process improvements on their own.
- People are motivated not only by compensation, but by pride in their company, their products and services, and their organization.
- The primary role of corporate and other staffs is to support business units, not to audit and command and control.
- Change is reinforced, welcomed, managed, and institutionalized.
These "fundamental organizational and behavioral traits" of successful high-tech companies are manifested in the critical success factors of high-tech businesses – speed , new product introductions, cost containment, high perfect order metrics, and product life cycle management.
The supply chains, for example, of high performing companies such as Apple, HP, and Cisco Systems, are managed and executed by organizations, cultures, and processes that mirror these traits well.
Any high-tech company can benefit from improving its operating processes. Assessing the costs, times, and qualities of a business process will almost always discover improvements that have a value-base.
Moreover, innovations can be derived from adapting better processes or best practices found elsewhere. In fact, most innovation comes from adaptation, not from an initiative for transformation or development.
Organizations can achieve change and effectiveness, and higher performance, regardless of their history, size, and capabilities. This can be done not by command and control, but by common objectives, shared vision and direction, strong and involved leaders, and collaboration (both internal and with customers and suppliers). The results are worth the effort. More on supply chain organization.
Basic forecasting and inventory management policies for stocking, safety stock and cycle stock are inadequate for firms with high rates of SKU evolution. The inadequacies are especially exacerbated when the SKUs have short product life cycles or multiple sequential supercessions, each with a slightly different market. Sales, inventory and operations planning (SIOP) processes are specifically designed to facilitate collaborative inventory acquisition and deployment decision making in such situations.
The need for such processes arises because of demand and supply uncertainty, in general, and specifically because of conflicts in priorities between planning, manufacturing and sales relative to allocation of both inventory and manufacturing resources.
Ineffective internal or supplier communications, fuzzy organizational boundaries and lack of organizational alignment each increase the need significantly.
SIOP processes facilitate demand planning and supply management decision-making at the product family or group level, as opposed to the specific SKU level. While some elements are common to all processes – the forecast, the inventory and the supply plan – the elements and the review process should always be tailored to meet the specific needs of the business.
They often support the communications bridge between product development and supply chain operations and maximize the likelihood that product category inventory turnover targets can be met. In the ideal situation, SIOP processes can identify potential issues before they arise. And, in the best firms, they serve as a non-confrontational forum for lessons learned.
Creating a new SIOP process requires vision, experience, leadership and, often, patience and persistence. Trust is crucial and clear communication of the facts is an absolute necessity. Shared performance measures work to minimize disconnects in objectives.
The issues which can be encountered can be difficult, especially when there has been a history of conflict or past misrepresentations. Progress is inevitable with good leadership and good will. Not collaborating is categorically not a solution. View the executive briefing on SIOP.
High-tech companies thrive on innovation. This innovation creates products that are “first to market,” “feature rich,” “easy to use,” “low cost,” or sometimes simply “trendy.” Success comes from gaining a leading and sustainable position in the served markets.
To achieve this position, a strategic market plan will combine market and competitor intelligence, assessment of the addressable opportunity and a penetration strategy.
It is an execution plan to compete in the selected markets to maximize profitable growth by answering the following questions:
- What is the best strategy to achieve our growth objectives?
- Will a merger or acquisition be required? Can it accelerate achievement of our goals?
- What is the market, what is available and how can we penetrate it?
- How do we serve the customer and achieve our profit objectives?
- What does the customer expect and how can we deliver the best value proposition?
- Is the investment feasible? How profitable will it be?
Many high-tech companies develop great strategic market plans, but fall short in the execution. You see this a lot today, with the strong economic rebound, demand for many products often exceeds supply, resulting in allocation for many manufactures, distributors and retailers.
When a company finds itself on allocation, it adversely affects sales, margin realization and can even disrupt or cut short the life cycle of the product(s). By performing a thorough strategic market plan, high-tech companies:
- Initiate new growth plans with better visibility into the challenges and opportunities by comparing the value proposition of alternative paths.
- Improve their timing and entry point into new markets.
- Achieve more effective distribution strategies in their sourcing, supply and distribution channels to improve cost, quality and reliability of supply.
- Develop more effective partnerships and acquisitions that deliver higher strategic value.
- Find cost reductions (margin enhancements) by incorporating dual sourcing strategies, improved inventory management from manufacturing through distribution, and comprehensive transportation and distribution strategies.
For high-tech companies, the rapid pace of technology advancements and market acceptance place a premium on the speed in which they can enter markets and react to forces that impact the balance between demand and supply.
The old cliché, “time is money,” still holds true. In the high-tech industry, how well the product meets market expectations and how prepared the organization is to meet these challenges will often dictate to what degree a product achieves its full potential. More on strategic market planning.
In 2009, many companies were forced to react to economic changes. The past 18 months have seen many companies evaluating their supply chain footprint, reducing suppliers, changing suppliers and pushing to receive quicker payment, while leaning heavily on payment terms.
Companies hurried to achieve quick results and attempted to preserve cash, amidst trying to maintain the foundation of their business. This has left many supplier relationships dampened, broken and, in many cases, severed.
And while it may be premature to declare that recessionary impacts on day-to-day operations have ended, economic indicators such as the Institute of Supply Management’s (ISM) Purchasing Managers Index (PMI) and U.S. Commerce Department indicators are all pointing towards a favorable future for 2010.
Akin to the old Hollywood cliché of the sun breaking through clouds after a violent storm, a brighter 2010 is definitely on the horizon and it is time to wade through the debris and pick-up the supplier relationship pieces.
As with most companies, there are varying kinds/levels of relationships with suppliers based on their relative size, importance to the business, and many, many other factors. Also like most companies, it is likely that during the past 18 months attention has been focused on critical business needs, which did not include moving supplier relationships forward.
In some cases, the economic conditions may have forced decisions with suppliers that negatively impacted the relationship.
To get back on track with these suppliers, the first step is to assess the current state of the relationship. The following questions will help with the assessment:
- What actions were taken over the last 18 months with that supplier and why?
- What were the outcomes, and what is the supplier’s current position?
- How does the supplier feel toward the company, and how does the company feel toward the supplier?
- Is the existing relationship dampened, broken, or severed?
Understanding the answers to these questions helps define many of the next steps. View the executive briefing on Supplier Relationships.
In the high-tech industry, the recent economic downturn has forced many companies and their suppliers to reduce their labor force, capacity, and subsequently their ability to buffer against supply chain interruptions. In the last 6 months, demand has significantly returned to an industry with wanting supply.
For members of this supply chain and their customers, the risk to supply continuity is extremely high and in many products allocation has been enacted. Industry analysts predict that demand outpacing supply will continue through 2010 and 2011.
Therefore, all members of the high-tech supply chain need to enact a risk management program to address supply chain concerns.
Specific supply chain concerns include:
- Supplier Stability (cash flow/credit markets)
- Capacity/Supply
- Supply Quality (cash-strapped supplier cutting corners)
- Supply Chain Length
- Many partners = volatility
- Inventory and visibility
- Increased time-to-market for a product that meets a frequently changing consumer appetite
- Energy price exposure for longer transport (volatile energy prices)
- Outsource Management Practices (sourcing, foundries, assembly)
- Government Regulation – (environmental laws, tariffs, etc.)
- Currency Exposure (with global sourcing and transfer pricing)
High-tech companies that execute a comprehensive risk management program that addresses these concerns will achieve a measureable advantage over their competitors. Activities to be considered that will yield this advantage are:
- Map total supply chain – including supplier source location, manufacturing locations, distribution locations and modes of transportation. This picture of the supply chain will help highlight potential vulnerabilities within the supply chain to weather catastrophes, localized political/economic issues and exposure to transportation issues and energy price volatility (Asia to US).
- Build a comprehensive bill of materials and understand each sub-component that comprises your direct product/material. Often the sub-components’ suppliers can be the source of supply failure. Intervention at the second or third-level supplier may be required to secure your supply.
- Thoroughly investigate primary suppliers – understand financial stability, capacity, and the supplier’s financial health. Establish supply health measurement rankings for all important metrics of the supplier.
- Investigate the regulator’s proposal for source/product impacts and review supply chain adaptive requirements for pending legislation.
- Systematically review supply chain operations. Perform trial run interrupt scenarios and evaluate operational response. Are recovery plans established? Is ownership clear and the process documented? Using technology available today, evaluate future environment, political and economic scenarios and supply chain performance outcomes. Test your supply chain – document deficiencies, plan improvements and test again. Practice sharpens the ability to perform under pressure and will also increase supply chain agility.
The high-tech sector, by its very nature, is considered relatively flexible, adopting to ever-changing and constantly evolving business models, which brings this sector to the forefront of the sustainability movement. However, focus on the 5 R’s (Reinvent, Redesign, Reduce, Reuse, and Recycle) and product lifecycle management (PLM) are driving fundamental shifts in thought processes across the industry. Sustainability for high-tech supply chains is more of a norm these days, rather than an option.
Considering the complex and global nature of high-tech supply chains, it is not sufficient for companies to restrict their sustainability initiatives within their organizations. Industry leaders like IBM are working to implement a new program to address sustainability and environmental aspects of its nearly 30,000-member-strong supply chain.
The program covers suppliers in 90 nations, according to IBM’s Smarter Planet blog. Starting this year, IBM is asking each of its suppliers to define an environmental management system suitable to their particular business operations.
At the same time, it is important that “sustainability effort” itself is sustainable, i.e. process and product changes that result in long-term competitive advantage.
Some executives may see this as cost savings rather than revenue-generating opportunities. However, innovations in green engineering could be patented and become a future source of revenue.
Organizations reviewing sustainability of a high-tech supply chain need to consider the following:
- Design for sustainability ensures that you can educate your engineers and enforce a conscious design strategy for energy efficiency, material efficacy/compliance and toxics reduction strategies during the development lifecycle.
- Sustainable manufacturing utilizes powerful intelligence gathered using simulation to create environmentally friendly plants and processes for lifecycle compliance during production.
- Sustainable service and end-of-life (EOL) policy enables lifecycle extension by extending the product's useful life and providing proper instructions for re-use, recycling and disposal at end-of-life.
- Governance, compliance and reporting gives you complete control in governing an enterprise sustainability strategy, and ensuring complete visibility and communication of best practices and processes. Reporting on sustainability targets and compliance is available, including industry-standard forms that can be leveraged throughout your enterprise. More information on sustainability.
Very few, if any, other industries require the level of supply chain visibility and collaboration amongst trading partners that is required in the high-tech industry.
Combined with the vast network of global trading partners, whose interconnectedness is required to deliver the latest products to enterprises and consumers throughout the world, are increasingly shorter product life cycles, and in many cases completely outsourced design, manufacturing, and logistics activities. Continuous communication of high quality information throughout the extended supply chain is critical.
Collaboration -- and visibility into supply and demand changes -- is required from the silicon wafer foundries to the original design manufactures (ODMs), contract manufactures (CMs), and original equipment manufacturers (OEMs), all the way to the retail outlets and end consumers.
Timely and accurate information is the only way that high-tech companies can improve forecast accuracy, balance costs and service levels, and keep small problems from becoming large, global ones. More information on global management and supply chain visibility.
Over the past 30 years, Tompkins has evolved with the marketplace to become the leading provider of global supply chain services, distribution operations consulting, technology implementation, material handling integration, and benchmarking and best practices. You can find further information at www.tompkinsinc.com.
In supporting Tompkins' global supply chain capabilities, Technomic Asia, a Tompkins International company based in Shanghai, China (www.technomicasia.com), specializes in assisting businesses to both establish operations in Asia and to improve their processes and performance as part of their overall supply chain strategies.
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