New Value Chain Strategies Defining the Electronics Industry


Today's OEMs and turnkey EMS players look across value chains to link up with the best suppliers and these relationships can change as strategies shift. Suppliers must demonstrate the ability to share information, focus on quality and value creation, and be especially agile during market movements. Lead firms require these capabilities of their partners in order to realize business objectives and compete successfully in the global marketplace.


The evolution from supply chains to value chains
Supply chains in the electronics industry are centered on the production cycle of the product, from planning, design, and raw material procurement to delivery of a finished product to the end-market consumer. The goal of the supply chain is to maximize efficiency and coordinate processes along the product development path, from start to finish (i.e., linearly). The extended supply chain was the next step in adding relationships beyond the actual product itself, so that each partner contributed to the creation of a product.

As supply chains grew and organizations became increasingly involved in formalized partnerships, a new structure emerged: the inter-organizational supply network. Relationships expanded across these networks. Collaborative efforts produced additional value to the products and to the partners involved in the chain. Combined with information technology and telecommunications advances, these inter-organizational networks continued to evolve.

Value chains (and value chain analysis) emerged as a new business management concept. The goal of a value chain is to maximize value creation along each step for each partner in the chain (including the customer), simultaneous with minimizing costs. Furthermore, the value chain extends beyond the supply chain's final step of product delivery to the end user, into service and aftermarket support. This requires partners who can supply and service these new endpoints to add value for the end user.

Supply chains are highly compartmentalized in nature and limited in the type of information shared and the direction that the information travels. Value chains, on the other hand, are necessarily collaborative networks requiring coordinated efforts, high levels of trust, and shared forecasting and inventory management. Value chains are seen as a major differentiator among organizations.

Value chains and the electronics industry
In the electronics industry the first steps towards value chains came in the form of manufacturing outsourcing. Spinning off research and design business units from the manufacturing groups resulted in a number of efficiencies. Decentralization also helped control costs as electronics markets became increasingly volatile. These now separate organizations could focus on their areas of expertise, derive the most value from their efforts and produce more efficiently. Networks expanded as more organizations became involved in business processes and the types of relationships began to shift as well. The new value chains were based on collaboration, trust, and mutual recognition of expertise (from sourcing, to forecasting, to consumer presentation, and to post-production service).

In the electronics industry the product design and manufacturing processes are distributed among value chain partners. Business theorists at the University of California Irvine's Personal Computing Industry Center and the Massachusetts Institute of Technology Industrial Performance Center underscore that by breaking up the product life cycle into chunks, or modules, the electronics industry has been able to maximize the benefits of complex value chain relationships, making the industry a special case study. Breaking up the product life cycle, coupled with the complex relationships along the value chain, represents not only a new business strategy but also a new level of trust and collaboration unprecedented in electronics or other industries.

Dr. Timothy Sturgeon of the Massachusetts Institute of Technology tells Smith MarketWatch the fact that the electronics industry supports an open market "is a function of the high level of modularity in and of itself that enables value chain efficiencies." These efficiencies are made possible, to a great extent, because of the pooling of opportunities from a variety of suppliers. Economies of scale can be realized because standard components can be procured, then combined in unique ways or can undergo unique processes that lead to distinctly branded final products.

The changing roles of suppliers
Today's suppliers in the electronics industry span geographic boundaries, have varying levels and areas of expertise, differ in procurement and manufacturing capabilities, and offer distinct support and value to the entire product life cycle. The outsourcing space has changed significantly, as the electronics industry is presently experiencing an increase of what Manufacturing Market Insider and Nokia refer to as "the mega-vertical suppliers" (MMI Vol. 17:8, p.1). These suppliers, according to MMI and Nokia, "offer in addition to design and manufacturing an integrated supply chain of internally supplied components" (MMI Vol. 17:8 p.1).

As suppliers changed, the electronics industry began to break up the product life cycle into pieces or modules (Sturgeon & Lee 2001 According to Sturgeon & Lee, there is an important "industry-wide virtuous cycle between lead firm strategic outsourcing and the development of supplier competencies" (ibid 2001:1). In other words, there is simultaneous development that continues today where pieces of a lead firm's process are outsourced to suppliers. The suppliers offering increasing levels and types of expertise are also becoming more differentiated as some are more able to contribute value to the entire chain.

The electronics industry's dynamic nature is due to the highly volatile nature of the products, product life cycles, and the end markets. OEMs face numerous strategic and competitive challenges on a regular basis. These challenges trigger suppliers and other value chain partners to develop new business strategies and values to be realized during the product life cycle and beyond, to service and support.

Some suppliers have undergone significant changes in recent years to transform their unique market knowledge and global agility into programs that can be shared with their value chain partners. In some cases the number of suppliers can be managed because the best partners are able to fulfill a broader set of critical business needs, enriching the network and maximizing efficiency across the value chain.

Balance must be reached in the number of suppliers to keep the relationships manageable but still realize economies of scale. According to Dr. Sturgeon's research, OEMs realize that one is too few, but that the appropriate number and type of suppliers is dependent upon the type of component and the point in the product's lifecycle (Sturgeon 2003:39

In addition, financial analysts often evaluate an entire chain's performance as a means for gauging the health of the lead firms' and EMS suppliers' stock valuation. Therefore, strategic planning must include the multi-layered network ties, collaborative levels, and relationships among value chain partners.

The role of a top independent distributor like Smith & Associates is particularly important in an electronics manufacturing value chain. Lead firms and their partners use the electronics component open market as a critical tool when faced with change. Accelerated new product introductions may require open market purchases to supplement planned supply. Excess inventory may need to be redistributed. Complex service arrangements might require expert management of older inventory. Smith and others with broad global networks, market knowledge and flexible delivery systems are sought after partners.

The new global value chain as a business strategy
Today's business strategies are very different from those in the 1980s. The electronics industry is a complex set of highly collaborative networks that link and unlink to create value and produce innovative and continuously evolving products for an increasingly astute end market consumer.

To maintain the value realized by many of these partnerships it is imperative that the value chain partners have an understanding of the market's complexity. Spot prices and ASPs remain volatile, as was experienced during 1H07 with memory chips, so suppliers must understand how to help buffer their value chain partners from these market risks. In the quick-paced life cycle of electronic components, it is also essential to secure adequate stock to meet production demand and for service and repair requirements. As such, supply partners must be able to assist with complex global sourcing and inventory management.

Financial analysts are keen to monitor these inventory management strategies, not only at individual companies but also along the chain. As the 12 August 2007 Citigroup Supply Chain Inventory Analysis points out regarding Cisco's successful Lean implementations, the supply/value chain partners still show room for lean efficiencies. As more companies adopt Lean Practices they are requiring their suppliers to collaborate in stricter inventory management practices.

Recent news stories about value chain leaders such as Nokia, Cisco, Dell, and Apple, underscore that the manner in which organizations implement business strategies based on the types of value chains they adopt is the manner in which they are differentiated and are able to lead in their marketplace(s). Value chains are necessary for the product life cycle to be realized; and the types of relationships, the depth of value, and the flexibility that partners can contribute to the process can mean the difference between being a market leader and being a follower.

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