This continues a series of columns from practitioners I respect. The category "Real Deal" describes them well.
This time it is Bob Ferrari, a top notch supply chain and enterprise software industry analyst. He is the Founder and Executive Editor of the Supply Chain Matters blog and managing Director of the Ferrari Consulting and Research Group LLC.
“When we met recently, we discussed Vinnie’s recent book The New Technology Elite, and in particular, Chapter 2, The “Industrialization” of Technology. Vinnie discusses the global supply chain fulfillment capabilities of high tech and consumer electronics providers like Apple and Hewlett Packard. Vinnie asked me to elaborate how demand forecasting and supply chain execution in the high-tech industry differs from that of traditional supply chain leaders as in the CPG industry that I have tracked for years now.
In the past four fiscal quarters Apple shipped over a 177 million iPhones, iPads and Mac computers. That is an average of over 485,000 device fulfillments per day, 7 days a week. That volume represents extraordinary global supply chain management strategies and capabilities. A global supply chain can further present many opportunities for disruption or glitches, but firms like Apple and HP have invested in supply chain processes that are response oriented and risk aware.
Some of the answers were touched upon in the book. The mastery of both physical and informational capabilities related to the global supply chain with an expectation that there is never a static plan, but rather constant proactive response to whatever the business and the supply chain requires. High tech industry players were the first to dive into global outsourcing and the establishment of an elaborate global network of suppliers and contract manufacturers. This is an industry with a long history of continuous, high-frequency product innovation cycles. This translated to the need for the supply chain to be highly connected and able to support agility, flexibility and responsiveness to constantly changing business needs.
These companies learned that planning the supply chain based on traditional supply chain planning and demand forecasting techniques, namely historic data and plans driving future plans, was not going to be sufficient. Achieving upwards of 50 percent forecast accuracy would be the best one can expect given the constant cycles of new product introduced in the market. More importantly, the clock speed of the business does not allow for a sequential demand planning process, but rather a continuous, net change planning process A holistic strategy of demand-driven supply chain response, supported by highly interconnected planning methodology, was essential.
Supply chain design shifted toward what is commonly described as combination push-pull supply chain models. In the push component, the most critical long-lead components, such as semiconductor laden devices are secured by longer-term, annualized purchasing agreements where capacity and flexibility needs are negotiated in a long-term planning window. Certain high tech companies invest large amounts of up-front cash to secure both a steady supply stream and a contingency upside or downside to accommodate whatever the market brings. In the case of Apple, this amounted to billions of dollars. Procurement supply teams continuously manage the overall supply flow based on both dynamic production schedules and continuous information received from product demand channels. One the other key benefits of this long-term supply commitment strategy is that in times of major supply disruption, such as the 2011 tsunami in northern Japan, and later, the floods that impacted Thailand, these companies were not as highly impacted as other industry players.
The “pull” aspect essentially involves a network of contract manufacturers that assemble, package and ship the final product. The world’s largest, Foxconn, is a partner to many high tech companies including Apple. Contract manufacturers have invested in high volume production capabilities that include the ability to ‘flex” up or down rather quickly based on market demand, and in some cases, have built vertical manufacturing capabilities that can accommodate the production of metal casings and other components. They have established robust B2B information connectivity and supply chain application connections with their OEM partners and fostered processes with agility in-mind. It is not uncommon for many of these contract manufacturers to be able to respond to changed product output requirements overnight. There have been published stories of Foxconn responding to Apple last-minute requests by literally calling back a complete shift of workers, or responding to a requested product change in a matter of a day. Dynamic CRM and online fulfillment capabilities constantly monitor both on-hand, in-transit, and planned product inventories, dynamically offering promotions for those products on-hand, as well as predicting fulfillment needs based on actual buying activities.
Underpinning high tech supply chain business processes are highly interactive sales and operations planning processes that bring together the many cross-functional and B2B supply chain teams in daily, weekly and monthly reviews. Supply chains are highly connected with B2B networks and highly collaborative information technology. The overall planning, synchronized execution and information intelligence of these super-agile supply chains are designed with principles of demand response, supported by deep informational intelligence, real-time scenario-based planning and what-if business intelligence capabilities. The demand fulfillment plan is a continuous flow of information supported by a combination of response-based planning and synchronized execution processes.
In summary, the answer to Vinnie’s question is that you and I take for granted that our smartphone, electronic tablet, laptop and other cool product fulfillment needs are instantly gratified because extraordinary supply chains have in reality, married advanced supply chain practices, planning and fulfillment response within the “industrialization” of information technology.”
Bob can be reached via Twitter @bob_ferrari