L09_NewParadigmsInSCDesign042715

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New Paradigmsin

Supply Chain Design

Sandeep DuggalCEO, Extron Inc.

April 2015


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© Extron 20152

Agenda

Historical perspective

What’s changed?

Rethinking the model

New supply chain design and Last Mile Manufacturing

Impact on U.S. jobs

Q&A


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Why Supply Chain design is important

Supply Chain performance can make orbreak a company

– Competitiveness

– Capital utilization – Control of Intellectual Property

Particularly important to NEW companies!

SC costs are structurally controllable

80/20 rule applies to offshoring gains

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Historical Perspective:Supply Chain Evolution

Stage 1: Internal Operations

Stage 2: Leveraged/Outsourced Operations

Stage 3: Globalization / Offshoring

Stage 4: Optimization / Reshoring

Stage 5: ???


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Globalization of supply chains

Enablers of globalization

– Transportation advances:

Container transportation

Intermodal technology

Air transportation

– Communications technology / networks

– Design technology (CAD/CAM)

– Lower overseas wage costs: powerful incentive

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First offshoring wave: Assembly

Second offshoring wave: Capital-intensive work

– Semiconductors – Plastics

– PCBA

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1. Assembly

2. Capital-intensive Mfg


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Current Globalized Supply Chain

Contact Mfr (CM)

Component

Supplier

Component

Supplier

Component

Supplier

Air or

Ocean

Transport CustomerDistribution

Demand Signal (EDI)

Returns

Parts &

Accessories

OEM (ORIGINAL EQUIPMENT MANUFACTURER)

GLOBALIZED LOCAL or GLOBAL

Warranty pool

Advance

replacement

Field engineering

and service

Configuration

ORIGIN

• Low labor cost

• High conc. ofcomponent suppliers

MARKET

• Volatile demand

• Significant pre-& post-salelogistics activity


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Far-flung supply chains – Source is often far-removed from end-customer.

Arms-length management of suppliers – We live in a world where the largest shoemaker doesn’tactually make shoes. It only designs and markets them.

Pendulum has swung very far – Beginning to swing back,

due to a number of CHANGE DRIVERS….

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New Change Drivers (vs 1980’s and 1990’s)

Category

Economic change

New Perspectives/Knowledge

Geopolitical change

Change Driver

Wage gap vs Asia is disappearing

Retail evolution: customization, life cycles

Oil prices up (transportation cost)

Exchange rates changing

Business economics now understood

IP leakage experiences

Ethics, travel realities

Business interruption awareness

Government/social change

“Buy American” trend

Security concerns

Changing regulations


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Business risks exposed

Sourcing Risk

• Vendor leverage,concentration

IP Leakage

• Unwanted tech transfer

• 2015 fcst: $1.7 T inpirated items3

Costs

• Hidden, increasing

• Changing customer dynamics

Responsiveness

• Timeliness

• Adaptability to volatility

Source: 1. IDC; 2. BDA China; 3. Business Action to Stop Counterfeiting & Piracy, 2011;


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Impact of supply chain interruption

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Can have major long-range effects on corporate performance.

Study: 800 companies with supply chain disruption (1989-2000):

– Stock returns: 33-40% lower

– Share price volatility: +13% higher

– Sales growth: -7% lower

– Costs: +11% higher

– Inventories: +14% higher

– Recovery time: 2 years

Source: Kevin B. Hendricks and Vinod R. Singhal “An Empirical Analysis of the Effect of Supply Chain Disruptions on Long -Run

Stock Price Performance and Equity Risk

of the Firm” 1/5/09.


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Impact of IP loss

IP can be viewed as a national and corporate asset.

Offshoring effectively creating competition

– Pirated:

86% of software sold in China1

38% of cellphone handsets2

– Equals technology transfer

– Reduced entry barriers for new competitors

Must factor this reality into economics of supply chaindecision.

12 Source: 1. IDC; 2. BDA China; 3. Business Action to Stop Counterfeiting & Piracy, 2011;


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Net result

Vulnerability

– Despite best intentions to become morecompetitive

#1 Risk to Revenue

– Supply chain risk is top-ranked for greatestpotential risk to revenue (recent study of more

than 600 financial executives worldwide)1

13Source: FM Global “Risk Management in a Global Economy”


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Solution:Rethinking the Model for Maneuverability

How maneuverable are you?

– “Do you have an Adaptive Supply Chain?”


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Rethinking Supply Chain Architecture

Think of Supply Chain in two components

– Globalized

– “Last Mile” (Localized) Manufacturing

– This constitutes the GLOCALTM

Supply Chain

Add control at every step

– AVL, Sub-contractors, Component suppliers

– Provides OEM with several NEW controls

Structurally build in IP firewalls / reshore critical IP

Risk management structure

Transportation cost control structure

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New: “Last Mile” Supply Chain

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• A more flexible structure (allows freight cost mgt, inventory mgt)• A differentiation factor (customized configuration, speed, cost)

Contact Mfr (CM)

Component

Supplier

Component

Supplier

Component

Supplier

Air or

Ocean

Transport

FRONT END SC

(GLOBALIZED)

Final Config Customer

LAST MILE SC

(IN-MARKET)

OEM (ORIGINAL EQUIPMENT MANUFACTURER)

Distribution

Demand Signal (EDI)

Service

Inventory Mgmt

Demo-Loaner

Alt. Channel

Fulfillment

Returns Mgmt

Advantages:

More control points / levers Reduced IP RiskLower landed costs Reduced concentration riskLower inventories More flexibility

Tiered


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Managing IP risk:Firewall sensitive components

Common ComponentSupplier(Overseas)

Component A

Component B

Component C

IP-sensitive Components

Components D/E/F/G

“Last Mile”

Integration

ABC

+

D/E/F/G

+integrative software

ContractManufacturer:Pre-manufactured“platform”

A+B+C

A+B+C


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Advantages of the New Model

Increase Performance

– Last Mile Manufacturing = in-market operations advantages

– Analytical approach to supply chain redesign process

– Flexible, ultra-responsive, better speed to market

Reduce Risk

– Protect intellectual property from theft

– Reduced supply chain risk

Reduce Cost

– Convert fixed costs to variable costs

– Reduced transportation costs, minimize last-minute shipping – Reduced inventory

– Use globalized sources intelligently, experience-based

Improve Focus

– Local manufacturing, but clients get to focus on their core competencies


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Reshoring of supply chains

First offshoring wave: Assembly

Second offshoring wave: Capital-intensive work

Third wave (Reshoring): Assembly

Beginning of fourth wave: – “Next-generation” capital-intensive work (i.e., Tesla)

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1. Assembly


3. Assembly



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Additional consideration: Returns

Increasingly important aspect of SC design

– New reality: social media / Internet can make or

break your companyOnline reviews, blogs: Twitter, Yelp, Angie’s List, etc.

– High consumer expectations for how well you handlereturns – and WHERE you handle them!

New thinking should apply to both

– Forward supply chains

– Reverse supply chains20


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Is it working? Example:

Product: Configurable Mass Storage Device

SKUs: 10+

Challenges:

– Volatile demand / poor forecast / high inventory – Client/OEM effectively “owns” channel inventory via price-

protection agreements

– Changing requirements from retailers

– High freight costs for fully packaged product

– Use of air freight to meet demand volatility

– Strong price erosion (-5%/mo) and obsolescence

– Preserve global supply base, but increase flexibility


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Other considerations

Bring economically-justified jobs back to U.S.A.

– 500,000-1 million new jobs in high-tech alone

– Domestic supply chain jobs (“last mile” is here).

– Good fit with current skill set for available workforce

Requires an openness to becoming involvedwith your supply chain

– Hands-on / deep involvement

– Tremendous return on time invested

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Implementation steps

Start small

One geography

One product line

Design “postponement” into your product

Realign existing / ill-suited partners

Requires an openness to becominginvolved with your supply chain

– Hands-on / deep involvement

– Tremendous return on time invested24


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Summary

Supply chain globalization / offshoring trend hasreached full extension

Systemic changes have exposed hidden risks

Problems created: sourcing risks, IP leakage, costissues, flexibility issues

Companies rethinking architecture

New “last mile” solution solves significant cost,

flexibility, security issues. Improves fault-tolerance

Applies to returns as well, only in reverse

Easy to implement in stages

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Get involved

.org site:

– LastMileManufacturing.org

LinkedIn group: – Last Mile Manufacturing and Onshoring

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Thank You

Sandeep Duggal

Extron, Inc.

496 S. Abbott Avenue,Milpitas, CA 95035

(510) 353-0177

[email protected]

L09_NewParadigmsInSCDesign042715

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