Electronics Production | October 05, 2011
Risk Factor #3: The demand cycle has shortened
In the first article of this series we wrote about OEMs demanding continual, on-going price reductions even during times when costs are clearly going up (not down) and why this practice damages everyone involved with the transaction. Then in the second ...
article we reported on how the dramatic drop in respect for the value of the supply chain has resulted in OEMs targeting their own employees (especially those who manage outsourcing programs) for elimination. What we called the pink slip approach to a better bottom line. On the surface all of the above seems irrational — the extreme of foot-shooting. But maybe something in the demand cycle has changed in some profound way that would justify these actions? Let’s take a deeper look. - Have product volumes increased so dramatically that economies-of-scale are offsetting escalating costs? Ah, sadly, no… volume and batch sizes are down across most sectors. - Have OEMs moved their supply solution geographically closer to their enterprise thus requiring less administrative support? Ah, again, no… OEMs are outsourcing more tasks, more often, to locations that are more geographically remote. - Has the demand cycle lengthened, which would add flexibility to enable these actions? Ah, definitely no to that! In fact the demand cycle, or the time span between when a consumer orders a product and when they expect to receive it, has shortened — dramatically. And this is true in virtually every market the industry serves. No one wants to wait, for anything. It doesn’t matter if it’s a consumer, commercial or industrial product, the buyer wants the purchase delivered immediately. Therefore most OEMs simply don’t know what they need until something is sold and then they need it right away. Hasn’t this always been the case? Yes but not to the extreme it is today. Back in the day when business was practiced as an art form by well-seasoned professionals, OEMs maintained finished goods inventories and operated in-house manufacturing capabilities (in addition to outsourcing) which dramatically improved their response times. Did this increase their inventory levels? Of course it did. Yet, it worked. It was a cost of doing business and as with any cost it needed to be carefully managed and controlled but successful companies learned to use it as a competitive advantage. Then we decided it was an outdated approach that needed to be replaced. For a few years Lean looked like the answer but Western industry simply couldn’t bring itself to fully embrace the approach with its many operational disciplines. And a half-hearted Lean implementation is a bit like what they say about being half pregnant. It’s impossible. So we ended up with today’s dysfunctional pathology where OEMs refuse to place firm commitments, the outsourcing industry is afraid to order anything until the last possible minute, the downstream supply chain routinely labels everything as non-cancelable/non-returnable, and the “overnight delivery” service industry reaps the rewards of everyone else being behind the demand curve. A geographically remote, highly fragmented, sequential solution driven by a forecast based model intended to provide a strategic just-in-time-requirement via a tactical solution called Outsourcing. Does anyone believe this is working? If not, what is the answer? Maybe it is time to rethink where we’ve been. If we can’t bring ourselves to fully embrace Lean then maybe it is time to try something we know will work. If the demand cycle has shortened then the supply solution needs to be shortened to facilitate the requirement. We know that building in the region for the region (be it internal or external) speeds things up and is easier to administer than a cross-hemispheric solution spread over a dozen time zones and we know that a carefully managed finished-goods inventory speeds-up a company’s ability to respond. These are known quantities. Will this transition be easy? No but who ever said business was supposed to be easy? Will it cost more than today’s solution? Yes, especially in the short-term. Will it work? Yes. Bottom-line, successful long-term businesses are not built by leveraging short-term advantages out of the supply chain or padding margins via reductions in staffing levels. Nor do they ignore the realities of the market dynamic; when the demand cycle shortens, it’s time to shorten the supply-solution. The alternative is a continually escalating level of RISK! ----- Note: More information can be found in CBA's website. Follow this link.