From SCDigest's On-Target e-Magazine

April 25, 2012

Supply Chain News: When Outsourcing Production, it is Increasingly Important to Keep Control of the Bill of Materials, Leading Academic and Practitioner Both Say

Focus on Supplier Relationship Management with Tier Ones can Cause Issues, Choi and Linton Say; Downstream Visibility Helped LG Electronics See Demand was Accelerating in 2009 before Many Competitors Did

SDigest Editorial Staff 

The trend towards outsourcing in industrial and high tech products roll on, with many companies adopting a strategy of using a smaller group of contract manufacturers not only to deliver the final product but increasingly to identify and manage the components that go into those finished SKUs or major assemblies.

SCDigest Says: The focus on supplier relationship management with top tier suppliers has been “a bit of a trap” for procurement organizations, Linton said. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

This is risky business, say both Dr. Tom Choi of Arizona State University and Tom Linton, now Senior Vice President and Chief Procurement Officer at contract manufacturer Flextronics, formally in a similar role at LG Electronics, a maker of consumer electronics.

Choi and Linton made their comments on a recent Videocast on our Supply Chain Television Channel, focused on “Managing Risk in a Multi-Tier Supply Chain.” That excellent broadcast is now available on-demand: Videocast on Managing Risk in a Multi-Tier Supply Chain.

The issue, Choi made clear, is primarily related to companies that operate multi-tier supply chains: components that go into larger assemblies that go into the final product. Such supply chains commonly have three or four levels, and at times maybe even more.

“What are the dangers in “giving away” the bill of materials to top tier suppliers?” Choi asked at the beginning of the broadcast. “It has to do with the risk of outsourcing your sourcing.”

It boils down to how much of the sourcing decisions companies are willing to delegate to top tier suppliers, and whether companies really understand the risks they are taking and opportunities they may be missing from use of extensive delegation to suppliers, Choi and Linton both said.

Choi noted that we tend to look for problems or solutions in areas that are visible to us. In the supply chain, if a company cannot really see its second and third tier supply chains, how is it possible to make improvements or gain intelligence in these areas that it cannot see, Choi asked.

He challenged companies to understand what percent of their total supply chains they really have visibility too.

Choi says that in recent years there have been a spate of books and articles on strategic sourcing and how to manage these top suppliers (tier one) to a company, but not nearly so much on the impact of how the top tier manages its own supply chain and suppliers.

“We’re proposing here that a good chunk of the suppliers a buying company manages should come from its lower tier suppliers,” Choi said.

Linton then said that during his time at LG, the company was very hamstrung in its relationship with Qualcomm, a major provider of chip technology and which held a variety of patents that virtually locked it in as a supply source. But Qualcomm was a “fabless” supplier, meaning it contracted out to others to have the chips it designs produced. LG had little or no relationships back into Qualcomm’s supply chain.

“We knew we had neither the power nor the relationship in order to control our top tier supplier,” Linton said. He decided to make a bold move beyond the first tier relationship and proactively make connections beyond Qualcomm directly with its second and third tier suppliers. He said this was done “to demonstrate that at the top of the chain you can do things throughout the chain,” and also to “understand what was going on deeper in the supply chain so that we could make some better decisions.

And that move paid off quickly. Early in 2009, as the financial crisis was still unfolding, LG like most electronics companies was not sure if this was going to be a deep, depression-like scenario that would dramatically reduce demand, a more normal recession pattern, or perhaps even one where demand would snap back sharply after the initial early decline.

LG visited a couple of leading foundries, such as Taiwan’s TSMC, that manufactured chips for Qualcomm. “We were able to much better understand by going upstream into the supply chain what the market dynamics were, and we could see that things were already starting to turn around,” as the foundries had growing demand and backlog across their customers bases.

(Sourcing and Procurement Article Continues Below)