Better supply chain information, now what?
By Ed Sperling, Editor in Chief -- 5/25/2007
Brian McNally, president of global alliance and supply chain at Arrow Electronics, and Alex Iuorio, VP of supplier business development at Avnet—the two largest electronics distributors on the planet—sat down with Electronic News/Electronic Business to talk about the rise of global information gathering as a competitive weapon. What follows are excerpts of that conversation.
Q: Since the 2001 downturn, information gathering has been considered critical, and Avnet and Arrow are both privy to a flood of data. What do you do with it?
Iuorio: There are two things we use information for. First is what’s derived from the design chain with a demand-creation effort. We take that information to get a picture of what’s being used in the customer base and figure out what’s actionable for laying down our asset pipelines. We are in an industry where price/performance in processors, for example, moves every 31 days. Yesterday’s information is not as important as what is being designed in and will move to production. The other side of it is, now that we’ve been able to negotiate, as a community, better prices with our manufacturers relative to aggregated volume, we can take that information and make volume buys. Everyone wins with that. We win because we’re able to procure a better cost, and the customer wins because we’re able to pass on better prices.
McNally: There are interesting dynamics around the supply chain because of all the process data we have. Understanding customers’ consumption patterns and trying to track it back, much like other industries have in retail, to figure out what is being consumed, is an area that is absolutely critical. As time goes on, more and more of our business is becoming forecast-related instead of purchase-related. We get a broader brush of what the customers are consuming for a bill of material, sometimes by end products and sometimes by sub-assemblies. We try to make sense out of that data and help suppliers and customers position inventory in advance of that demand. That’s one of the things we’ve done with a pool of forecast information. We also use it to help suppliers plan their demand out so they can stock different products at different stages of their lives to reduce risk in the supply chain. The other area that’s important is around global information. Because it’s easier and more seamless to move production and design around, companies are more disparate in their approach to solving the supply chain problem for their customers. Information, and speed of information, is absolutely critical in that environment. Whether the information has to do with demand or communication about changes in demand or design, creating an information flow is critical.
Q: There are still some holes in your information flow, though, particularly business done directly between third-tier OEMs and the foundries. Is it necessary to fill in all the gaps?
McNally: We have a reasonable look at the consumption data. We don’t deal with the FPGA or DSP on the cell phone, but we may be providing connectors or capacitors. We see pieces of it because we touch so many products. If we see the bill of materials, then we see some slice of the problem. The thing we take for granted—and we built it more than a decade ago—is the linkage with our suppliers. When you look at the millions of components we get feeds on and the lead-time changes, you have a pretty good window into the market.
Iuorio: I agree. Where we reside in the supply chain, while not perfect, gives us a better picture of consumption.
Q: Can you turn that information into new business opportunities?
McNally: We have an information service offering, as does Avnet. The data we provide is a different vantage point than most other people can provide because we actually touch the customers and consumers. The other opportunity is in the complex supply chain. Providing that information and integrating it with the service model is absolutely critical to your success. It’s not like you get a fee for the information, but the fact that your service level is increasing and fill rates are going up is a direct result of pretty good information. If we followed what the customer forecast told us to do, we’d both be out of business.
Iuorio: Absolutely. We influence the actual design equation by corralling the engineering community and persuading them to use mainstream products. Engineers, left unchecked, will not design in mainstream products that are readily available for broad-based usage and which reduce risk. It’s steering the design environment into the right components and then it’s utilizing our supply infrastructure to manage the flow of those components.
Iuorio: Two ways. First is from the environment that our account managers and field engineers work in day-to-day. There, besides the basic informational aspects of the customer, you’re also logging designs, bills of material and what is being designed today that will result in products in the future. That allows us to set our asset strategy based on that information. The other side is taking the tens of thousands of transactions that we engage in day-to-day, month-to-month and quarter-to-quarter, and using that information to make sure you’re making the right moves in the commodity world. It’s the commodity aspect and the differentiated product aspect.
McNally: One area we focus on is quoting. We process a lot of quotes. We have the data that results in those quotes that ties back to the projects. It’s a rich set of data. In addition, we also have a part-number database and RoHS data. That is partly from our suppliers, partly from our customers and partly from third-party outside sources. It’s important to have very good data there because making a mistake could be costly for everyone in the supply chain. That’s an area where we have embellished the data to make sure it is complete and accurate. The final piece is part of our CRM (customer-relationship management) system, which is a design-win database, so we know the parts and the components that engineers have spec’d in.
Q: How good is this information for predicting a slowdown or pickup in business?
McNally: We have another database we didn’t mention, on which we’ve plotted the cycles back for 20 years. We use different measures of our demand against those cycles.
Q: Do they still apply?
McNally: Absolutely. Even though the cycles have become smaller, they are still very predictable. Can we get it every time? No. Will we get it wrong sometimes? Yes. But most economists make a living being wrong sometimes.
Iuorio: Our ability to predict the cycles is somewhat suspect. It’s better today because of the speed at which information flows. But one would have to argue that being at the center of the supply chain and seeing the order flow—and most important the cancellation flow for orders affected—that’s a pretty good indication of where the cycle will go. In 2000 we were posting record numbers and record profit numbers, but toward the end of 2000 we saw our cancellation rate and order change rate jump from the high teens to almost 40 percent. In the midst of celebrating great revenues, we were also taking substantial product off the backlog, much to the surprise and chagrin of our supplier base. It turned out to be not enough. We took off about half of what we should have taken off. Can we predict the cycle? Yes, although a little late. But when order cancellations jump up, it’s an indication not only that double ordering occurred but the order fill wasn’t happening.
Q: Given the updates to your systems, can you react faster?
McNally: What we’re able to see is the change. It’s usually right, but it’s going to be up or down. The rate of change and the slope of decline or increase is the most challenging piece. Taking the broad macro that revenue and consumption are going to go up is one thing. Knowing what to do with that—which customers, which end sets—is more challenging. In general, though, we can lower the time.
Q: What’s missing to measure that rate of increase? Better information from your customers?
McNally: The customers often don’t know. They’ll tend to be late on both sides.
Iuorio: If we could get a view into our customer’s customers, we’d have a better view.
McNally: And there’s big money in that. How many handsets get consumed next month is an important piece of information.
Q: We all get asked questions when we register products. Is that the kind of information you need?
Iuorio: Customer forecasts are inherently inaccurate. If we can push the design community into the right products—the right price and the right availability, both short-term and long-term—then the variability based on any given end customer or segment are insulated from the hundreds of thousands of customers we both deal with. I don’t know that the solution is to drive accurate forecasts. Even if a customer had what they thought was accurate—and they’re usually not—everyone is so stinging from the previous downturn that they’re not willing to share it. We have to make sure we have the right pipelines and the right design activity to steer the customer in the right direction.
Q: Can you use this information across geographies to add efficiency and speed response in your own business?
McNally: Yes. The actions you take are customer-supplier-geography specific. Understanding the demand patterns between regions and countries is critical. China by itself is the size of North America.
Iuorio: Our ability to sense demand patterns and use our global pipeline and direct it to the point of need is what differentiates our companies from the rest of the industry.
Q: Are there holes in the information network between regions?
Iuorio: It’s better. I would argue, though, there’s a difference between a company that thinks globally and acts regionally versus one that thinks globally and acts globally.
Q: Is this a real competitive advantage in places like China?
McNally: Their competitive advantage against us is the local market knowledge and the strength of the relationship with their customer base. The regional there tends to be more narrowly focused in their product offering, so it creates a competitive barrier to becoming a global broad-line distributor. But that’s not their value proposition.
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