iSuppli: Efficiency expertise
Privately held startup wants to cure the electronics industry's supply-chain ills.
By Erik Sherman -- Movers and Shakers, 6/15/2001
| AT A GLANCE | |
| iSuppli |
“It is our experience that most companies at a high level paint a very idealized view of how they actually manage their demand and hook it up with their supply,” Lidow says. Phrased less kindly, an enormous number of electronics businesses have little to no understanding of their supply chains, and Lidow doesn’t want their problems to become his problems.
Turning down customers is an unusual approach in a convulsing economy and a crowded bazaar of vendors hawking themselves as supply-chain vendors. But iSuppli is anything but a startup with too much sizzle and not enough steak. In fact, you might say that company management is strictly “meat and potatoes” when it comes to electronics supply-chain issues.
Lidow has been in the electronics industry for 22 years. The vice president of supply chain was formerly vice president of global procurement for IBM. The two people overseeing capacitor planning are the former marketing directors for two of the biggest capacitor manufacturers, and former rivals. The company has acquired Stanford Resources, a research firm specializing in the electronic display industry. From top to bottom, iSuppli has packed its roster with expertise in uncommonly specific component areas.
“What we really didn’t want to do was pioneer a lot of new technology and processes all at once,” Lidow says. “And we therefore wanted to take experience from people that had been living with the problems of the supply chain for many years.” Such a lineup has already proven valuable to iSuppli’s customers. Last year saw a severe shortage of tantalum capacitors, yet Lidow claims that his company’s major clients didn’t experience any downtime because of component unavailability.
“They...have hired a whole bunch of commodity traders that key on different important commodities in the marketplace,” says Vinay Asgekar, an analyst for AMR Research. “They have leverage on negotiations because they have information that most companies don’t necessarily have.”
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| “Everybody is pouring huge amounts of money into trying to control this electronic supply chain, and nobody is satisfied with the result.” |
“They don’t just provide software,” Asgekar notes. “They’re providing a lot of value-added service, and I think that service is useful. Because of that service, they may have showed customers that they have a value proposition that gives a quick ROI.”
Quick return on investment is good for the client, but brings no direct income to iSuppli. Order aggregation passes the cost of the components directly on to the customer without a mark-up. Such giveaways can easily become dot-com-style largesse, which is why iSuppli focuses on finding well-qualified customers. Successful aggregation depends on large, regular component purchases. Companies that cannot accurately forecast, or that rely on large numbers of low-volume purchases, would leave iSuppli with overly high transaction costs. That’s why Lidow is insistent on finding large customers who already have well-running supply-chain management.
“For example, we find that the quality of data that is maintained by our customers is rarely if ever of a high enough quality that they can make very reliable decisions about their sourcing requirements,” Lidow says. “Very often parts are miscategorized [or] they’re no longer accurate. These core problems mean that all the internal decision-making becomes suspect.”
For large customers, the real source of iSuppli’s income is managing those part numbers. For an approximately $250 annual charge for each part number, iSuppli manages the part number, not only sourcing the item, but maintaining the part information. Using the common-sense test, the proposal makes sense for a large company, because the amount of internal cost to periodically verify information for each SKU would likely surpass iSuppli’s charge. Lower prices from aggregated orders become an added benefit. And because it is maintaining much of the part information for multiple clients, iSuppli theoretically makes money.
However, iSuppli is currently running at a deficit, burning though “a little over a million and a half a month,” according to Lidow, who estimates that he has enough money left to break even. At its top levels of service, the company has only five clients. For consulting and market intelligence, he says, the number runs into the dozens.
Referring to a previous briefing from iSuppli, Asgekar says that roughly 40 percent of the company’s revenues come from supply-chain operations and the management of 2000 part numbers, while the market intelligence and consulting services currently provide 60 percent. Even if iSuppli managed 2000 parts for each of its five large customers, that would only represent $2.5 million, or a total revenue of about $6.25 million. That means the company has to roughly triple its revenue just to reach a break-even point. In operation for just over a year, business has not grown as fast as Lidow once thought it would. He had been quoted in early 2000 as believing that iSuppli would have as many as 200 customers by the first quarter of 2001.
Asgekar remains skeptical about how much money the aggregated buying can save customers, since their current volumes “will be large enough to probably place them in the highest level of discounts.” However, he believes iSuppli’s services offer value, and that the company will do fine. “You can always sell the market intelligence and services,” Asgekar says.
Lidow remains confident, if for no other reason than the inefficiencies of the component markets. “Electronic components are about a $300-plus billion dollar market,” he says. “[In the first three months of 2001,] they’ve added about $15 billion of excess inventory, but there was about $45 billion of excess to start with. Everybody is pouring huge amounts of money into trying to control this electronic supply chain, and nobody is satisfied with the result.” And to Lidow, that means opportunity.
