Global Supply Chain

We have all gotten used to buying products at retail stores that were made in other countries. Little thought typically goes into the steps that preceded the purchase. Yet the challenges involved in establishing a profitable and sustainable global product development, manufacturing and delivery operation can be overwhelming. As today’s cable subscribers gain increased access to international video programming, it is useful to note that the infrastructure over which these and other such services ride has long since tied into a global supply chain. Not unlike the case in other industries, cable’s technology vendors have brought to market many products—from analog decoder boxes to digital set-tops to drop passives to cable modems to fiber-optic cable—with passports attached. The point of describing this chain and the associated challenges is not to excuse late deliveries or any other difficulties in product management. Rather, it is to raise the level of understanding of how technology vendors have evolved and what we have been able to achieve for our customers in this age of rapidly changing market demands and increasingly short product life cycles. Others who follow these guidelines could do the same. Our story is tied to having been a provider of telephone over HFC technology for more than 10 years. This market formed in the mid-1990s in the United States as large cable operators such as Comcast, Cox and Time Warner deployed technology that allowed them to provide local phone service over their video networks. The technology used was complex and proprietary, but it worked. In fact, it worked so well that product volumes increased to the point that it made sense to manufacture in lower cost areas such as the Philippines and Mexico. The early success also paved the way for standardization, and voice over Internet protocol (VoIP) specifications were developed to enable interoperability, increased competition and lower costs. Differentiation and R&D Even as we have outsourced certain parts of the product design and manufacturing to remote locations around the world, protecting the degree of product differentiation necessary for success has become more difficult. In the case of our VoIP products, high-volume manufacturing is performed in China, but the magic in the product is in the design of the hardware and firmware, as well as the system integration and support. These elements of the product are difficult to replicate and—we trust—provide a sustainable advantage over the competition. Meanwhile, developing new products today is much more complex than before. We work closely with development partners in India, Taiwan, China and Poland to take advantage of unique skill sets and lower labor costs. Our development plans are also dependent on many different suppliers and vendors for firmware features and new application-specific integrated circuits (ASICs). Finally, actual product manufacturing occurs in many different countries, including China, Taiwan, the Philippines, Mexico, Ireland and the United States. We act as a master contractor, assigning work to each of the parties involved, and we take primary ownership of developing product requirements, system architecture and product testing. This requires significant attention to project estimating and planning, defining and negotiating responsibilities, accounting for costs, and staying on budget. Manufacturing ops Have you ever bought a banana split from a vending machine at the office? Some things require a genuine, high-skill specialized factory. Banana splits, microprocessors, high-performance cars and brain surgery all require very special facilities and skills. If your market needs high expertise and you provide that expertise, it’s advisable to hold on to that special skill very tightly. Warren Buffet, arguably the world’s greatest stock market investor, refers to companies as having "high walls and deep moats" to serve as citadels against the competition. We all need to make sure we don’t sell our walls and moats. That said, for most of us, creating, staffing and managing a dedicated factory is folly. Supply arrangements can be readily made today with manufacturers of various tiers. Once you understand your product requirements and examine the suitable manufacturing companies, you will undoubtedly locate multiple companies that will offer greater manufacturing skills and resources than most of us would dare attempt. Locating the ideal manufacturing partner is critical, but is also challenging. First, most manufacturing facilities possess certain specialty skills. The factory that makes 10 million cell phones per year will be structured and resourced accordingly. It is vital to locate a factory that already has directly relevant manufacturing experience. Present and future scale must be considered. The initial volume requirement may be modest, especially during the development phase. However, you will need the resources to scale to meet growing opportunities. If you can gain the attention of a tier-one or tier two-manufacturer, then scaling is more easily attained. Whether you settle on one of the big-name manufacturing companies or a more specialized factory, achieving expected scaling is an important aspect of your future success. There is no best way, but if at all possible, you should avoid changing factory sites to obtain increased output. That is to say, if feasible, avoid starting your low-volume production at one location with the intention of moving later to a lower cost location when high volume becomes a requirement. There is no such thing as a seamless factory transition. Moving from a smaller North American location to a low-cost offshore center will be painful and will resemble starting from scratch. The only thing seamless will be the stark absence of a "seam" or any connection between the transferring factories. If possible, take your product from cradle to grave in the same site. If you want to improve something, start by measuring it. We have consistently used a supplier scorecard to objectively provide feedback on product quality, responsiveness, on-time delivery, etc., on a quarterly basis. If volumes can justify it, a second manufacturer in a different geographical location can provide diversity and foster a competitive environment. Market demand Even if you understand your market and the factors that differentiate your product, it is very difficult to accurately predict and forecast customer demand. Statistical process control expert Edward Deming spoke of the impossibility of forecasting accurately, yet that impossible quest toward accuracy is an imperative to success. We recommend a mix of close customer relationships, strong market knowledge, integrated computer modeling tools and periodic internal review processes. Even then, it takes some analytical skills and a lot of courage to get it right. The process should be structured, yet flexible. If your team reviews backlog and demand weekly, that’s great. However, if an unexpected demand materializes on Tuesday evening, you can’t afford to wait for the next planned weekly material requirements planning (MRP) run to dictate the next action. A week in the 21st century can break a deal. Import/export The Far East is just as far away as ever. Likewise, Mexico, Brazil, Ireland and Europe are where they have always been. It may be faster to get there and you can send e-mails in an instant, but it is still a long trip if you take it in a container vessel and have to follow all those international rules. Let’s talk rules first. NAFTA, RoHS, INCO terms, tariff, compliance, importer of record, VAT, local content … these are just a few. Ignoring any may economically or legally limit your entry into a market. Much like the other aspects of the supply chain, it is imperative to possess the necessary resources to determine successfully which rules apply to you, determine how to comply, and then implement processes to ensure compliance. International trade compliance is not optional, and ignorance of the requirements is most certainly no excuse. Government agencies are also notoriously understaffed; therefore, your company could effectively engage in trade for years and then find you have been noncompliant the whole time. You will need to develop a workable mix of in-house skilled resources and external service providers to navigate these waters. Now let’s talk cost. Transportation costs, duties, tariffs, licenses, port entry fees, brokerage fees, fuel surcharge, insurance, inventory buffer, expediting fees, logistics partners commissions, software tools, staff and inventory stockouts … that’s about it. Many of the intricacies of physical logistics are special to the field, and unless you are willing to invest substantial effort in a logistics and trade compliance team, you will most likely utilize one of the many companies that offer logistic management services. These services range from simple transportation to management of all necessary documentation and process—all for a fee. We typically engage several international trade companies to augment the internal trade staff. Improvement and change High-def beats analog. Dialup pales by comparison to broadband. Your products today are competing with tomorrow’s products, your pricing today is competing with tomorrow’s pricing, and your features today are competing with tomorrow’s features. You are never finished with a product, its features, cost or its value solution. Every aspect of your offering, including your internal processes and systems, requires continuous improvement. Within the broadband cable industry, unusual effort has been expended on developing specifications to ensure product interoperability, foster competition and reduce product costs. Specifications provide relative certainty regarding a product’s requirements and are an incentive for companies to invest in expensive programs such as silicon ASIC integration. This is an endless cycle as newer technologies are applied to boost the level of integration and reduce the overall product cost, while increasing speeds and features. This, in turn, increases the importance of good change management to ensure rapid product introduction, as well as effective product discontinuation. Poor practices in this area have killed more than one company, as higher cost slow-moving inventory is cleared at negative margin prices. Bruce McClelland is ARRIS VP & GM Broadband CPE, and Dick Knight is director of supply management. Reach them at [email protected] and [email protected].