Enhancing Revenue Potential Through Supply Flexibility
Mini-Case Study: How can supply shortages on a product’s bill-of-materials be addressed without stocking up on inventory when there are no additional sources that can supply the part? How can an organization reduce the burden of chasing part when there is an upside to demand? In what ways can a company prepare itself for a turnaround in the market without making hard commitments to the supply base?
These are all questions that virtually everyone faces particularly in a market that is dynamic. Availability of supply is a critical factor in making revenue shipments. As the market turns the corner, the focus is starting to shift back towards supply availability. Issues such as capacity reservations, allocations, “most-favored” terms, and flexibility models are being discussed to ensure that shortages do not impact shipments.
Problem: Company A generates about $250M of annual revenues in manufacturing RF and wireless products and outsources its production to a tier-1 contract manufacturer. The contract manufacturer continuously ran into shortages, causing shipment delays to Company A. This, in turn, caused it to miss its quarterly revenue shipments more than once. Most of the shortages occurred with several custom and semi-custom semiconductor and frequency control devices. Component order lead-times were long (16-26 weeks), and demand fluctuated significantly inside this window. Too often, the company and its contract manufacturer were unable to accommodate upside demand. Not only did the company miss revenue, but unsatisfied customers cancelled orders, leaving them with excess inventory (See Inventory Prevention white paper).
Solution: Symphony Consulting took a the following approach to solving the problem:
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Reduction of Order Lead-time through a Strategic WIP Inventory Program: The approach was to understand the manufacturing process and determine where un-customized, strategic buffers could be stocked. This allowed the supplier to reduce the order lead-time from 16-26 weeks to just the time that it took in order to complete the final manufacturing processes, leading to a lead-time reduction of 50% to 75%. Since the inventory was stocked at a lower stage with much lower value, the supplier was willing to hold more units in inventory and allow the company additional supply flexibility to meet upsides. An electronic weekly forecast was established and served as the foundation for this program.
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FGI Strategic Buffer Program: In order to provide upside flexibility, a forecast based, buffer stock program was developed to stock finished goods inventory at the component supplier. An electronic feed was sent to the contract manufacturer, which was electronically fed to the component supplier, on a weekly basis, triggering the shipment of the parts that were needed for production during the following week. Inventory that was once brought in weeks in advance of production was now resident at the supplier (or a designated distributor), and shipped based on real demand. Some commitments were established to protect the supplier against stagnant inventory, but the agreement also allowed parts to be diverted to other customers if demand did not materialize.
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Capacity Reservation: Realizing that supply flexibility was more difficult to attain with custom and semi-custom components, the supply agreements were renegotiated with specific capacity reservation clauses. This became the mechanism that forced dialogue between the OEM and the supplier’s production operation. The suppliers and the OEM discussed, in face-to-face meetings, exactly how forecasts were to be sent and interpreted, and the expectation for supply of material based on these forecasts. Through this effort, capacity was reserved to meet demand upsides without starting production.
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Information Velocity: Perhaps one of the most critical benefits of these programs was the electronic links that allowed information to flow to suppliers in a real-time fashion, rather than through Excel spreadsheets and hard copy purchase orders. Suppliers could now act immediately based on the latest information rather than waiting for a manual process to trigger activity via a phone call or an e-mail.
Result: The end result was that end-of-quarter revenue surprises became a much smaller issue in the company. Within two quarters of putting these programs in place, the number of occurrences where a shipment was delayed due to shortages dropped by 75%. In softer terms, the suppliers with whom these agreements signed considered themselves an extension of the customer’s business. Their senior level management was aware of and interested in how the relationship was being managed, and kept a close eye on how it was performing relative to expectations.
