Symphony Consulting Newsletter – Q4 2003
"Preparing for the Next Upturn"
The writing is on the wall: an economic recovery - sporadic
and incremental as it may be - is beginning to take shape and will likely
continue into 2004. In September, the Institute of Supply Management’s
index of manufacturing activity jumped from 53.7 to 57, demonstrating that
strength is building in the manufacturing sector. At the same time, worldwide
semiconductor sales rose 6.5% from August to September, supplemented with
reports that semiconductor fabs are close to capacity. In a recently published
commodity report, nearly 40% of the electronic components had increasing
lead-times. In Cisco’s recent earnings call, John Chambers expressed
concern about “supply” due to suppliers’ inability to react
to demand changes, attributable to limited capacity.
So what’s different about the recovery in this business
cycle? In previous business upturns, component manufactures like semiconductor
fabs invested in additional capacity when they began to approach 90% of capacity.
That is not happening this time. Although semiconductor equipment companies
are starting to see a modest increase in orders, that capacity will not come
on-line for 12 to 18 months.
Tight capacity, low inventory levels and continued recovery
into 2004 could result in disruptions in supply and unplanned price increases.
So how do you respond and prepare for these changes in market conditions?
- Review and update your contracts with suppliers. Most contracts need to
go through a complete review, with key terms such as liability, flexibility,
pricing, and cost management to be renegotiated. This exercise will force
productive dialogue between you and your suppliers, ensuring that updated
contracts reflect the changing business environment from when they were originally
written.
- Build flexibility in your supply chain to protect against demand fluctuations.
The migration from recession to recovery requires flexibility. Most companies
have also increased the complexity of their supply chain with outsourcing
to the Far East and through additional product offerings. Demand will continue
to remain uncertain and will likely fluctuate quarter to quarter. Your supply
chain must be able to respond to noticeable changes in demand without causing
you to miss revenue and without exposing you to inventory liability. Supply
buffer programs and postponement manufacturing can go a long way to ensuring
that your supply chain works smart, not just hard.
- Make sure your lead-times are accurate and regularly updated. As inventories
are depleted and capacities limited, lead-times are expected to extend on
short notice. Also, try to understand what is driving the lead-time and what
can be done to reduce it. Accurate lead-times are the safest means of preventing
shortages and inventory exposure.
- Secure your future supply and pricing through long-term agreements with
key suppliers. Initiate discussions to lock-in pricing and secure long-term
supply before it is too late. Long-term agreements can reduce your supplier’s
risk of doing business and can be reciprocated by them through preferential
pricing and supply agreements.
- Don’t let supply chain issues deteriorate. There may be problems
in your organization or at your suppliers that have led to excess inventory,
shortages, or unfavorable PPV. As the economy recovers and volumes grow,
these problems will only be exacerbated if they are not solved quickly. Understand
the root cause of these problems with your suppliers by reviewing your processes
of forecasting and planning, supplier selection and management, ECO management,
component selection, and system maintenance.
The start of an economic recovery is one of your last opportunities
to be proactive. No one can predict with certainty the magnitude and the
timing of the recovery, but we do know that the investments you make in addressing
these issues now will foretell your company’s ability to share in a
more prosperous market.
Helping companies achieve these initiatives is part
of Symphony’s core competency. We can offer you the expertise and
the resource bandwidth that you need to work with your suppliers and contract
manufacturers towards achieving bottom line results.
