New rules for global component sourcing: the quality...

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New rules for global componentsourcing: the quality imperative in electronics

An Economist Intelligence Unit white papersponsored by Agilent Technologies

© The Economist Intelligence Unit 2004 1

New rules for global component sourcing: the quality imperative in electronics

New rules for global component sourcing: the qualityimperative in electronics is an Economist IntelligenceUnit white paper, sponsored by Agilent Technologies.

The Economist Intelligence Unit bears soleresponsibility for this report. The EconomistIntelligence Unit’s editorial team executed the survey,conducted the interviews and wrote the report. Thefindings and views expressed in this report do notnecessarily reflect the views of the sponsor. John duPre Gauntt is the author of the report.

Our research drew on two main initiatives:We conducted a global online survey in September2004 of 70 senior executives on the topic of globalcomponent sourcing.

To supplement the survey results, we alsoconducted in-depth interviews with senior executivesat a number of companies in the electronics industry.

Our thanks are due to all survey respondents andinterviewees for their time and insights.

October 2004

Preface

2 © The Economist Intelligence Unit 2004


The rules are changing for global sourcing in theelectronics industry, according to a new surveyconducted by the Economist Intelligence Unitin co-operation with Agilent Technologies.

Traditional relationships between Original EquipmentManufacturers (OEMs) such as Sony or Philips and theirsourcing partners are in a state of flux as world-classproduction and best practice increasingly originatefrom Asia.

Previously, global sourcing consisted of OEMsturning over low-margin high-volume production toElectronic Manufacturing Service (EMS) providersand/or Original Design Manufacturers (ODMs). Butthat arrangement has been transformed as OEMsdepend more on outsourced manufacturing for high-end electronics.

At the same time, the increasing complexity ofelectronic products and the demand for greatercustomisation have pushed the quality imperative tothe top of executive agendas in both OEM andEMS/ODM organisations. OEMs and theirmanufacturing partners are working hard tostandardise best practices in order to reap theeconomic benefits of global sourcing withoutjeopardising quality.

The survey and in-depth interviews suggest that

global sourcing is evolving from a tactical to astrategic business process. The next stage will forcecompanies to share demand forecasts, productionschedules, distribution plans and/or intellectualproperty, sensitive information that tends to be tightlycontrolled within organisations.

Two forces are shaping the next generation of globalsourcing:

● Dealing with complexity: Historically, qualitydepended upon how faithfully an overseasmanufacturer copied an OEM’s test and inspectionprocedures. But the growing contribution ofsoftware inside electronics and the need to handlemass customisation have raised the bar for testand inspection.

● Globalised best practice: Regardless ofgeographic location for outsourcedmanufacturing, a small set of global OEMs andtheir sourcing partners are creating industry-standard best practices for quality control in orderto manage the risk and reap the benefit of a globalproduction network. Even so, companies have yetto agree on the scope and degree of informationsharing needed to make these best practices work.

Executive summary



The rules are changing for global sourcing,according to a survey of 70 senior executivesin the electronics industry conducted by theEconomist Intelligence Unit in co-operation

with Agilent Technologies. Evenly split betweenorganisations with more than US$500m in annualrevenue and smaller companies with less thanUS$500m, the survey highlights the fact that globalsourcing is becoming a strategic business process, asworld-class electronics production concentrates inAsia.

Industry analysts define global sourcing as thebusiness process of identifying, evaluating,negotiating and configuring supply chains acrossmultiple suppliers and geographies in order to cutcost, improve performance and mitigate risk. Thiswhite paper focuses on global sourcing forcomponents and sub-assemblies within the electronicsindustry because electronics manufacturers haveprogressed furthest in developing technical and

commercial best practice to ensure quality in globalproduction networks.

Global sourcing strategies come in various forms.When asked how they would describe their company’sglobal sourcing initiatives, the survey respondentswere almost evenly split between those that engagedin international sourcing on an as-needed basis, thosethat employed a specific geographic or functionalangle, and those that have fully integrated globalsourcing into all business units.

Within the survey pool, the different levels ofintegration of global sourcing across larger andsmaller companies were striking. Among larger firms,nearly one-third reported that they employed globalsourcing in all business units, compared with only 14%for smaller companies.

Integrating global sourcing into all business unitsis as much about managing demand swings asoptimising a company's cost structure. LargeIntegrated Device Manufacturers (IDMs) often work

Introduction

1. How would you describe your company's global sourcing initiatives? Please choose the answer that best applies.(% respondents)

Engaged in international sourcing on as-needed basis 34

Specific geographic or functional sourcing is integrated into corporate strategy 21

Global sourcing is fully integrated into all business units and processes 20

Engaged in domestic sourcing only 11

International sourcing is determined by departmental sourcing needs 11

Don’t know 1



with contract chip manufacturers to optimise capacity.“Using contract manufacturers helps these IDMsbecause they will not have to build anothermultibillion-dollar fabrication plant just to get a 20%bump in capacity if the market heats up,” says JackTrautman, president of the Automated Test Group forAgilent Technologies. “Equally important, thatincremental capacity becomes a lot easier to turn off ina downturn than laying off employees ordecommissioning a factory.”

Nearly all organisations involved in the surveysource a significant portion of their total supply fromoffshore providers. Half of all companies report that

they currently procure more than 15% of their totalsupply from offshore. Within three years, a total of 53%of respondents say that they expect to source morethan 20% of their total supply from overseas providers.

When the supply base of the survey pool is brokendown into specific product categories, the amount ofoffshore sourcing expands even further. Printed circuitboards, electronic components such as liquid crystaldisplays (LCDs) and sub-assemblies constituted wellover 50% of the current total supply sourced by largercompanies from overseas.

Such flexibility and breadth for sourcing high-quality low-cost electronics components support

The following list shows the main playersinvolved in global sourcing for electronics,where they add value, and their typicalrelationship with each other.

Original Equipment Manufacturer (OEM):the company behind the “brand name” of aproduct. In the electronics industry, well-known OEMs include IBM, HP, Sony,Motorola, Samsung, Nortel, Panasonic,Nokia, Philips, and so forth. OEMs tradi-tionally designed, manufactured, marketedand provided customer support for theirproducts. However, in many cases of globalsourcing, the OEM only owns the designand all manufacturing is outsourced tocontract manufacturers.

Electronic Manufacturing Service (EMS):the company that performs manufacturingon behalf of an OEM. Typically, the EMSprovider does not own any intellectual

property, branding or distribution rightsto the end-product. EMS companiesinstead invest in their manufacturingcapabilities to offer contract productionservices to OEMs. Example EMS companieswould be Flextronics, Solectron andCelestica.

Original Design Manufacturer (ODM): acompany developing and manufacturingelectronics that are ultimately sold asbranded products by OEMs such as Dell.ODMs differ from EMS providers in that theyown intellectual property in addition tooffering manufacturing services. ODMdesigns account for more than one-half ofall notebook computers and almost three-quarters of desktop motherboard designssold world-wide. Largely based in Taiwanwith some in South Korea, ODM companiesinclude BenQ, Compal, Arima, Quanta,Seowon and Telson.

Packaging, sub-assembly and testingcompanies: semiconductors start out asround wafers that must be sliced out,mounted into a package with metal leads,and then loaded onto printed circuitboards for testing and shipment to manu-facturers. Nearly 100% of this work is out-sourced to companies such as ASE Test inTaiwan and UTAC in Singapore.

Integrated Device Manufacturer (IDMs):a semiconductor company that not onlydesigns its own chips, but manufacturesthem as well. IDMs are companies likeIntel, AMD, Texas Instruments, Freescale(formerly Motorola's chip division), STMicro, Infineon, Toshiba, NEC, among oth-ers. In contrast to IDMs, there are so-called “fabless” semiconductor companiesthat concentrate exclusively on semicon-ductor design and contract out all theirproduction.

A global sourcing taxonomy



companies that own no manufacturing capability butoutsource 100% of their production to contractmanufacturers. So-called “fabless” semiconductorproducers such as Qualcomm, Broadcom or Xylinxconcentrate on design expertise and being very agileat contracting for the production, testing and

packaging of their products with “foundry” companiessuch as Taiwan Semiconductor ManufacturingCorporation (TSMC), which own the actualmanufacturing facilities.

Even though OEMs are looking to economise onprocurement through global sourcing, they must

3. Approximately what percent of your company's supply base is sourced from offshore suppliers? (% respondents)

Less than 5% 19

More than 20% 40

15-20% 10 10-15% 16

5-10% 16

4. Approximately what percent of your company's supply base do you expect to be sourced from offshore suppliers in three years' time? (% respondents)

Less than 5% 7

More than 20% 53

15-20% 13

10-15% 16

5-10% 9

6. What types of goods does your company primarily source from offshore providers? Please choose up to three types of goods. (% respondents)

IT products (eg, printed circuit boards) 64

Electronic components 50

Sub-assemblies 36

Standard and custom parts 19

Office equipment 16

Raw materials 16

Paper and packaging 10

Plastics 3

Chemicals 0

Other 11



2. Which department primarily drives the global sourcing agenda in your company? Please choose one.(% respondents)

Executive 40

Procurement 21

Operations 19

Finance 6

Manufacturing 4

Marketing 4

Other 6

carefully manage risks to ensure that hiccups in onepart of a sourcing network do not have an adverseimpact on everything else. In early 2004, Nintendoand Sony ran into a shortage of LCD screens right atthe point they had planned to launch new handheldgaming devices because surging demand for mobilephones had eaten into the available supply. Bothcompanies expect to pay higher prices for LCD unitswell into 2005.

Consequently, global sourcing has become literallytoo important to leave exclusively to the procurementdepartment. “Global sourcing is a multi-departmentdecision,” according to Merle Hinrichs, president ofGlobal Sources, a leading sourcing informationservices provider in the Asia-Pacific region. “Alongwith a financial issue, you have a compliance issue, anengineering issue, a manufacturing, assembly andpackaging issue which typically engage all of these

departments before a sourcing relationship can beestablished.”

In companies with less than US$500m in revenue,nearly one-half responded that the global sourcingagenda is driven by the executive suite, whereas largerorganisations tended to have more direct involvementby operations departments. Nearly one-quarter oflarger companies reported that global sourcingagendas were heavily influenced by operationalconsiderations, implying more formal global sourcingbusiness units.

Whether driven by executive-level, procurement oroperations departments, the survey suggests thatglobal sourcing strategies are no longer focusedexclusively on finding the best “deal”. The sheercomplexity of modern electronics manufacture impliesthat global sourcing is becoming a competitivedifferentiator between firms.



Dealing with complexity

In the past, an OEM’s “make-or-buy” decisionboiled down to seizing a tactical opportunity toreduce costs or meet a specialised productionneed. Global sourcing involved an OEM working

with local suppliers in low-cost countries to take anexisting design and cut costs, while intellectualproperty (IP) and branding remained with the OEM.

Yet the sheer complexity of electronic productdesign and manufacture coupled with intensecompetition means that the time is long past whenOEMs could think of electronic components as merebuilding blocks. “So much of the intelligence andfunctionality of an electronic device is contained inone or two pieces of silicon to where chip design andoverall system design are virtually indistinguishable,”

says Fred Weber, chief technology officer for AdvancedMicro Devices (AMD).

The semiconductor industry includes, on the onehand, those companies that concentrate onmanufacturing excellence and production innovationand, on the other, those that concentrate on designand development of new functionality. “It's getting tothe point where a lot of the state-of-the-artmanufacturing processes have migrated out of thetraditional IDMs into these new players,” notes MrTrautman. “At the same time, competitive advantageamong IDMs is evolving towards design and time-to-market, which compels them to tap deeper into thisglobal infrastructure for semiconductormanufacturing, packaging and test.”

5. What are the most important business benefits underpinning your company's global sourcing initiatives? Please choose up to three benefits.(% respondents)

Reduce labour costs 56

Reduce direct materials costs 40

Access to unique materials, services or R&D assets 37

Reduce the carrying cost of inventory 36

Optimise regulatory or taxation strategies 23

Comply with local content rules for markets such as NAFTA or EU 19

Position materials closer to the point of manufacture 16

Position materials closer to customers 14



If only people consumed at the same speedthat goods are produced, life would bemuch simpler for OEMs and their partners.But consumers and businesses tend toclump big purchases, display seasonal ten-dencies and change demand for productsfor no apparent reason.

These demand signals become moredissonant the further one moves away fromthe end-customer and towards themanufacturer, causing a phenomenoncommonly called “the bullwhip effect”,according to Weiyee In, managing directorof research for TerraNova Institutional. “Youhave a situation where the further up youmove in the value chain, the greater thevariability of inventory and demandinformation and the greater the amount of

dollars involved,” he says. If retailers feel that there will be extra

demand for a particular product, they willoften place an order for an extra unit. Whenthe order is received by the distributors, it isnot uncommon for them to order an extraunit in anticipation of further orders by otherretailers. Because there is an inherent biasagainst fully trusting the demand signals ofpartners in a supply chain, partners tend tocreate buffers or stockpiled inventories.

According to Mr In, three forces areamplifying the bullwhip effect: front-endtransparency, front-end efficiency, andend-customer empowerment. Heightenedcompetition and the use of electroniccommerce allow the buyer to “see” theprogress of a transaction from order to

delivery, building expectations even as itplaces extra demands upon the supplychain. The second force involves greaterefficiencies for allowing an end-customer toconfigure or customise their order to betransmitted back to the manufacturingfacilities. Finally, competition and thegrowing penetration of electroniccommerce have empowered customers asnever before. Price discovery, terms andconditions, and a host of other factors canbe automatically checked across varioussuppliers. “What has happened is that theefficiency and the transparency of the front-end from the customer to the retailer to thedistributor have improved because ofelectronic commerce, but the back-end isstill catching up,” he says.

The bullwhip effect

Time-to-market is crucial as product lifecycles forelectronic products are fleeting. The overall cost ofelectronic components, while important, is not theonly factor in determining the eventual value of aglobally sourced component or manufacturing service.Survey participants indicated that other aspects suchas reducing inventories, tapping a more global talentpool or access to indigenous markets are emergingalongside basic cost as global sourcing drivers.

In addition to physical manufacturing, professionalservices such as managing inventories, supportingend-customers and fulfilment are becoming part ofglobal sourcing agreements. According to an industryinsider, the cost of many electronic components issufficiently transparent to reveal a “market price” forthe bill of materials. Hence the majority of sourcingnegotiations hinge on value-added and aftermarket

7. What are the most important aftermarket services provided by your company's global sourcing partners? Please choose up to three services. (% respondents)

Fulfillment services 54

End-customer support 40

Inventory management 34

Warehousing 24

Transportation 23

Returns management 13

Spare parts management 13

Recycling 4

Other 9



services such as warehousing and logistics, which wererevealed by the survey to be nearly as important asmanufacturing prowess for driving discussions.

The service element becomes key as electronicproducts themselves become more intelligent.Whether referring to digital music players thatcombine sound reproduction with digital rightsprotection, or cellular phones that double as e-mail orinstant messaging platforms, the value proposition ofelectronics increasingly lies in software and its smoothfunctioning. Survey participants noted that softwareaccounts for nearly one-third of the total input cost oftheir best-selling product categories.

On top of the software component, the amount ofcustomisation that goes into electronic products hasballooned. In the case of personal computers, theindustry has migrated to build-to-order (BTO) andconfigure-to-order (CTO) production models thatenable vendors to start production only after an end-user has picked among alternatives such as LCD panelsizes, processing speeds memory and styling. Forexample, Taiwan notebook ODMs often ship a stripped-down PC “chassis” to an OEM client or its designatedassembly centre (often located in China) rather thanthe finished product.

Not surprisingly, the survey revealed few companies

(less than 10%) that only offered a “standard” productwith little or no customisation. Participants showed amarked preference for allowing end-users to specifybroad levels of functionality and style in the product oroffering several versions of a product that customerscan choose between, with little or no modification.

The investment bank Goldman Sachs notes thatbefore global sourcing became a key differentiatingfactor, OEMs used vertical integration to makechanges and turn around prototypes with closemapping to production because marketing, R&D, andmanufacturing goals were aligned at the corporatelevel, where trade-offs between divisions could benegotiated internally. However, as 100% verticalintegration becomes less desirable, establishing andoptimising best practices to ensure quality at lowercost over extended supply chains has become aprimary differentiator in the industry.

11. Approximately what percent of the total production cost of your company's best-selling product category can be attributed to software? (% respondents)

0–20% 30

80–100% 10

60–80% 9

40–60% 21

20–40% 30

12. Which statement most accurately describes the level of customisation that goes into your company's best-selling product category?(% respondents)

We allow the end-user to specify broad levels of functionality and style in the product 29

We offer basic customisation at the level of style and limited functionality 26

We offer several versions of the product that customers can choose between with little or no modification 23

We build the product according to customer specifications almost from the ground up 14

We offer a standard product with little or no customisation 9



8. What are the primary procedures used by your company to certify suppliers in its global sourcing network? Select all that apply.(% respondents)

Require a supplier to be certified by a global quality assurance standard, such as ISO 9000 or Six Sigma 60

Require a supplier to undergo an on-site inspection and submit sample parts for inspection, test and approval 50

Require suppliers to follow our company-specific quality methodology 49

Require suppliers to employ specific test and inspection equipment to ensure zero-defect shipments 31

Require suppliers to demonstrate their ability to handle product recall and reverse logistics 24

Rely on third-party certification service providers to evaluate and periodically review supplier performance 20

Require suppliers to pre-test and pre-certify all shipments they make to us 20

Other 7

Along with the benefits of global sourcingcome the risks to the OEM of a partner’s non-compliance or underperformance.Consequently, many OEMs are developing

more holistic best practices for certifying suppliers,judging the value they provide and raising the overallperformance of their global sourcing networks.

Questions of certification and quality control growin importance as more OEM production is transferredoffshore. For many OEMs, it is no longer sufficient fortheir global sourcing partners to test for quality at theend of a production run. Instead, they are looking fortest and inspection procedures at every step ofmanufacturing.

Testing and inspection also play a vital role in

reducing the time it takes to produce and deliverproducts to the market. Many OEMs retain a certainlevel of test and inspection capability in-house tovalidate their designs, while setting the stage forlarge-scale manufacturing. “OEMs employ testingcapability during the design phase not only to makesure that it works according to its specification, butalso to help jump-start volume production,” says MrTrautman. Often, OEMs look for global sourcingpartners that have a similar ability to test andmeasure. This enables the OEM to transfer test designand data directly to a live production system.

Software, however, remains a nettlesome area forstandardised quality assurance. According to GordonAspin, chief operating officer for TTPCom, a supplier of

Best practice in global sourcing



intellectual property for telecommunications, formalcertification is just one part of the quality assurance(QA) process that is used to maintain a softwareproduct’s compatibility with multiple product lines.“We have a formal test and measurement system thatinvolves a separate delivery team from the R&D teamthat developed the software in the first place,” hesays. “These people not only put the software throughour internal QA process but work with biggercustomers and manufacturers to ensure that it worksin their final product.”

The survey participants said that they employed acombination of elements to enable them to certify theirsuppliers: global quality standards such as ISO 9000 orSix Sigma, on-site inspections and company-specificmethodologies. In the case of larger companies, thereis an overriding need to adopt global standards. Morethan 70% said that it is a primary procedure used tocertify a potential supplier. “One aspect that globalsourcing has brought about has been increasedstandardisation because many world-class buyers don’teven consider a company that does not subscribe to

these standards”, notes Mr Hinrichs. Chinese contractmanufacturers are rapidly adopting global standards ofquality assurance as a prerequisite to bid for OEMbusiness. Minimum certification requirements and thesegmenting of suppliers are two methods respondentsuse to set up a global sourcing network. Once thenetwork is set up, the survey revealed that the top fourfactors for judging subsequent performance of asourcing relationship included price/cost, quality

9. What are the most important criteria by which your company judges supplier performance in its global sourcing network? Choose no more than two criteria. (% respondents)

Quality control 47

Other 1Inventory management 10

Logistics and delivery 34

Execution against the sourcing contract 40

Price/cost 54

10. What are the best practices used by your company to raise performance across its global sourcing network? Choose up to three practices. (% respondents)

Sharing production schedules with suppliers 47

Sharing business risks with suppliers 46

Giving corrective assistance to suppliers with quality or delivery problems 41

Training suppliers in total quality management 31

Providing annual performance reports, periodic updates, and performance awards 27

Showcasing outstanding suppliers in our general marketing communication 13

Other 3



control, execution against the sourcing contract, alongwith logistics and delivery. The difference betweensmaller and larger companies was most pronouncedafter price/cost considerations were excluded. Largercompanies with revenue of over US$500m reportedthat quality control and contract execution heldvirtually the same importance to them as the overallcost. Yet smaller companies considered quality controland contract execution (43% and 30% respectively) asslightly less crucial.

The survey showed that best practices are evolvingbeyond the ability to “score” a supplier on a set ofprice, quality and contract metrics. As global sourcingbecomes more strategic, OEMs’ efforts to raiseperformance of their supplier networks are expandingto include shared business processes. The surveyrevealed that OEM customers are sharing productionschedules and certain business risks with theirpreferred suppliers. Larger companies are eveninvesting to provide training in total qualitymanagement for their sourcing partners.

Yet global sourcing requires a substantial amountof risk management by both the OEM and its sourcingprovider to make things work. Creating the fabled“win-win” relationship between the OEM and thecontract manufacturer or ODM is fraught withdifficulty. Depending on the geographic location ofthe sourcing provider, risk management concerns forthe OEM vary between losing control overintellectual property to the inherent problems ofmitigating risks involved with long-distancebusiness relationships that require multiple hand-offs. “There is something in human nature that saysthat if you have lunch with someone everyday, youtend to know them better than if you speak withthem on the phone once a week and see them once ayear,” says Mr Weber at AMD.

Beyond the cultural or intellectual property issueslies the very real problem of co-ordinating demandforecasts. More than any other risk management area,it is here where the tension between an OEM sharingtoo much information and sharing too little

14. For your company, what are the biggest risk management issues in developing a global sourcing initiative? Please choose up to three issues. (% respondents)

Ensuring that the sourcing network is responsive toward variations in demand 53

Ensuring that total acquisition costs (materials, logistics, customs) do not erode the net benefits promised by the initial purchase cost 44

Mitigating risks involved with long-distance business relationships and multiple hand-offs 40

Not losing valuable know-how to the vendor 39

Understanding the long-term impact of global sourcing on the company?s supply chain and how it responds to its markets 33

Cross-cultural communication in both negotiation and execution 26

Other 3



information comes into view. “While some OEMs/IDMsmay be willing to share their highly confidential pointforecasts with their manufacturing partners, theproblem is that these monthly forecasts are highlylikely to change. If a contract manufacturer were toput capacity in place based solely on these forecasts,they would probably get it wrong,” says Mr Trautmanat Agilent. “Instead, what contract manufacturersneed are range forecasts that tell them the likelihoodof demand falling within a certain range within acertain period of time.”

Survey participants agreed with Mr Trautman thatdemand forecasting was the most difficult riskmanagement issue for them to control. Over half of allcompanies, large and small, rated responsiveness todemand shifts as the number one risk they faced. Manyshudder when they recall Cisco Systems being forcedto write off US$2bn in inventory during 2001 becauseit could not scale down its supply chain fast enough

when market demand softened.Another major concern for large companies was

ensuring that total acquisition costs (materials,assembly and logistics) did not erode the benefitspromised by the initial purchase cost. OEMs that haveoutsourced manufacturing face an additionalchallenge in determining whether or not the primaryinputs such as LCD screens or DRAM chips are beingprocured at the lowest possible cost. Large OEMs suchas HP or Motorola often compensate for these tensionsby “price-masking”. The OEM goes to the market toprocure components at the lowest possible price andthen turns them over to the EMS or ODM provider touse in the production process.

The result is that global sourcing has moved out ofthe corporate back-office. Large OEMs and theirpartners are being questioned about their sourcingpolicies by investors, regulators and the public asnever before.



Global sourcing takes work and investment tosucceed. The survey suggested that OEMswill differentiate by how well they can co-ordinate their supplier chains with their

distribution and sales channels. This requires betterorganisational practices for ensuring that quality, low-cost and lasting business relationships can co-exist inglobal sourcing networks.

The spread of global sourcing practices raises thequestion of the future structure of the electronicindustry now that design, development,manufacture and distribution are decentralised.

Will OEMs be reduced to becoming merely brandsand channels to customers? Will a growing numberof Asian manufacturers emulate the success ofglobal brands such as Sony or Samsung? Whichindustry segment will hold the ultimate power todecide how quality standards are determined andimplemented?

These issues and more will be decided byelectronics executives in the future. How they respondto the challenge will determine whether globalsourcing fulfils its promise or becomes a treadmill forboth OEMs and their partners.

15. How do you see the role of Original Equipment Manufacturers (OEMs) evolving as global sourcing grows? Please choose the answer that best applies. (% respondents)

OEMs will differentiate by how well they can co-ordinate their supply chains with their distribution and sales channels 31

OEMs will retain significant manufacturing capacity even as they outsource their standard products 29

OEMs will be reduced to brands, customer relationships and sales channels 23

OEMs will struggle with their sourcing partners to maintain control over the sales channel and the customer relationship 16

Other 0

Hard work ahead


Appendix: Survey resultsNew rules for global component sourcing: the quality imperative in electronics

Appendix: Survey results

Responses received: 70Please note that not all answers add up to 100, because of rounding or because respondents could give multipleanswers to some questions.

1. How would you describe your company's global sourcing initiatives? Please choose the answer that best applies.(% respondents)

Engaged in international sourcing on as-needed basis 34

Specific geographic or functional sourcing is integrated into corporate strategy 21

Global sourcing is fully integrated into all business units and processes 20

Engaged in domestic sourcing only 11

International sourcing is determined by departmental sourcing needs 11

Don’t know 1

2. Which department primarily drives the global sourcing agenda in your company? Please choose one.(% respondents)

Executive 40

Procurement 21

Operations 19

Finance 6

Manufacturing 4

Marketing 4

Other 6



3. Approximately what percent of your company's supply base is sourced from offshore suppliers? (% respondents)

Less than 5% 19

More than 20% 40

15-20% 10 10-15% 16

5-10% 16

4. Approximately what percent of your company's supply base do you expect to be sourced from offshore suppliers in three years' time? (% respondents)

Less than 5% 7

More than 20% 53

15-20% 13

10-15% 16

5-10% 9

5. What are the most important business benefits underpinning your company's global sourcing initiatives? Please choose up to three benefits.(% respondents)

Reduce labour costs 56

Reduce direct materials costs 40

Access to unique materials, services or R&D assets 37

Reduce the carrying cost of inventory 36

Optimise regulatory or taxation strategies 23

Comply with local content rules for markets such as NAFTA or EU 19

Position materials closer to the point of manufacture 16

Position materials closer to customers 14



6. What types of goods does your company primarily source from offshore providers? Please choose up to three types of goods. (% respondents)

IT products (eg, printed circuit boards) 64

Electronic components 50

Sub-assemblies 36

Standard and custom parts 19

Office equipment 16

Raw materials 16

Paper and packaging 10

Plastics 3

Chemicals 0

Other 11

7. What are the most important aftermarket services provided by your company's global sourcing partners? Please choose up to three services. (% respondents)

Fulfillment services 54

End-customer support 40

Inventory management 34

Warehousing 24

Transportation 23

Returns management 13

Spare parts management 13

Recycling 4

Other 9



9. What are the most important criteria by which your company judges supplier performance in its global sourcing network? Choose no more than two criteria. (% respondents)

Quality control 47

Other 1Inventory management 10

Logistics and delivery 34

Execution against the sourcing contract 40

Price/cost 54

8. What are the primary procedures used by your company to certify suppliers in its global sourcing network? Select all that apply.(% respondents)

Require a supplier to be certified by a global quality assurance standard, such as ISO 9000 or Six Sigma 60

Require a supplier to undergo an on-site inspection and submit sample parts for inspection, test and approval 50

Require suppliers to follow our company-specific quality methodology 49

Require suppliers to employ specific test and inspection equipment to ensure zero-defect shipments 31

Require suppliers to demonstrate their ability to handle product recall and reverse logistics 24

Rely on third-party certification service providers to evaluate and periodically review supplier performance 20

Require suppliers to pre-test and pre-certify all shipments they make to us 20

Other 7



10. What are the best practices used by your company to raise performance across its global sourcing network? Choose up to three practices. (% respondents)

Sharing production schedules with suppliers 47

Sharing business risks with suppliers 46

Giving corrective assistance to suppliers with quality or delivery problems 41

Training suppliers in total quality management 31

Providing annual performance reports, periodic updates, and performance awards 27

Showcasing outstanding suppliers in our general marketing communication 13

Other 3

11. Approximately what percent of the total production cost of your company's best-selling product category can be attributed to software? (% respondents)

0–20% 30

80–100% 10

60–80% 9

40–60% 21

20–40% 30

12. Which statement most accurately describes the level of customisation that goes into your company's best-selling product category?(% respondents)

We allow the end-user to specify broad levels of functionality and style in the product 29

We offer basic customisation at the level of style and limited functionality 26

We offer several versions of the product that customers can choose between with little or no modification 23

We build the product according to customer specifications almost from the ground up 14

We offer a standard product with little or no customisation 9



13. If your company works with Electronics Manufacturing Services (EMS) or Original Design Manufacturers (ODMs), approximately how much of your company?s total manufacturing output do they account for? (% respondents)

1–20% 17

80–100% 7

60–80% 3

40–60% 9

20–40% 13

14. For your company, what are the biggest risk management issues in developing a global sourcing initiative? Please choose up to three issues. (% respondents)

Ensuring that the sourcing network is responsive toward variations in demand 53

Ensuring that total acquisition costs (materials, logistics, customs) do not erode the net benefits promised by the initial purchase cost 44

Mitigating risks involved with long-distance business relationships and multiple hand-offs 40

Not losing valuable know-how to the vendor 39

Understanding the long-term impact of global sourcing on the company?s supply chain and how it responds to its markets 33

Cross-cultural communication in both negotiation and execution 26

Other 3

15. How do you see the role of Original Equipment Manufacturers (OEMs) evolving as global sourcing grows? Please choose the answer that best applies. (% respondents)

OEMs will differentiate by how well they can co-ordinate their supply chains with their distribution and sales channels 31

OEMs will retain significant manufacturing capacity even as they outsource their standard products 29

OEMs will be reduced to brands, customer relationships and sales channels 23

OEMs will struggle with their sourcing partners to maintain control over the sales channel and the customer relationship 16

Other 0



16. What is your primary industry? (% respondents)

Telecoms equipment 36

Computers and computer parts 20

High-tech equipment 19

Consumer electronics 7

Consumer durables 1

Biotechnology 0

Other 17

17. What are your organisation's global annual revenues in US dollars?(% respondents)

$500m or more 47$500m or less 53



18. Which of the following best describes your title? (% respondents)

Head of Department 23

Manager 16

SVP/VP/Director 14

Head of Business Unit 11

CEO/President/Managing director 7

CIO/Technology director 7

CFO/Treasurer/Comptroller 66

Board member 4

Other C-level executive 3

Other 9

While every effort has been taken to verify theaccuracy of this information, neither the EconomistIntelligence Unit Limited nor the sponsor of thisreport can accept any responsibility or liability forreliance by any person on this white paper or any ofthe information, opinions or conclusions set out in thewhite paper.

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New rules for global componentsourcing: the quality imperative in electronics

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