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Supply
Chain Asia
By Michael Alan Hamlin
Novemberr 04, 2002
Professor Hau L. Lee is director
of the Stanford Global Supply Chain Management Forum and a professor
at Stanford Graduate School of Business. He is also one of the world's
preeminent authorities on supply chain management. Born in Hong
Kong, Lee educated himself at Hong Kong University, London Business
School, and the Wharton School at the University of Pennsylvania.
Last week he was in Hong Kong to speak at a Stanford Alumni conference,
and we met up on the sidelines and spoke about trends in supply
chain management.
Professor Lee said the global economic
crisis and the war on terror have caused some profound problems
that will provoke equally profound changes in the way supply chains
operate. "There are two trends," he told me. First, "a
lot of companies have not taken accountability for inventory (of
manufactured goods) committed to suppliers. This has highlighted
poor contractual relationships between original equipment manufacturers
(OEMs) and their suppliers. Suppliers built according to forecast
(at the onset of these crises) and expected OEMs to take the inventory.
They will try to resist getting caught in that trap in the future."
As a result, "confused lines
of responsibility is becoming a big issue." Lee noted that
one major contract manufacturer was stuck with US$4.4 billion in
inventory when corporations abruptly cut spending on technology,
and technology vendors subsequently refused to take delivery of
inventory. But he is careful to point out that what he believes
are enlightened firms haven't left their suppliers in the lurch.
"Cisco actually took responsibility
for their forecasts and the inventory build up so that suppliers
wouldn't go away." Lee notes that for many who monitor the
technology sector, Cisco's decision to write down billions of dollars
worth of inventory meant "it was no longer a poster child for
supply chain management." Those who believe so are shortsighted,
he argues. "When the economy recovers, Cisco will be the only
IT infrastructure firm with a network capable of quickly gearing
up to match demand."
The second major trend in supply
chain management has to do with efforts by suppliers to make sure
the debacle isn't repeated. Suppliers with the leverage to do so
are working to have inventory accountability clearly defined in
new agreements. "Going forward, suppliers want to make responsibility
very clear." A new phenomenon - the increasing prevalence of
vendor hubs - has added to suppliers' concerns, and the urgency
with which they seek to address accountability issues.
"Vendor hubs are a new phenomenon,"
Lee explained. "Typically they are owned by logistics companies.
Ownership of products shipped to hubs transfers to OEMs only when
product is picked up from hubs by OEMs. This is what I calls this
a vending machine solution to supply chain management." The
hubs can offer some relief for suppliers, however. For a discount,
hub operators will frequently assume ownership of inventory in their
care. But suppliers are far from happy.
"All OEMs are demanding that
suppliers ship to hubs, but big suppliers are refusing, such as
Intel. Ironically, the least able to do this are the ones most susceptible
to this pressure." That's because many contract suppliers work
for one or a limited number of OEMs, and as a result have little
leverage with customers that dominate their businesses. Meanwhile,
to finance inventory for their customers, they borrow money at high
interest rates. The result is weak suppliers that lack the resources
to quickly increase or shift production to new components when markets
improve.
"The way the supply chain works
is dictated by the biggest player. But this is not healthy,"
Lee cautioned. "Like any chain, it is as strong only as its
weakest link."
Lee pointed again to Cisco as an
OEM with the strategic foresight not to fall into that trap. "Cisco
may no longer a poster child, but is quietly strengthening its supply
chain. First, it is helping write off inventory to keep suppliers
strong. Second, it is investing in hubs so that first, second, and
third tier suppliers are connected to the hubs. This will strengthen
Cisco's capacity to respond to recovery."
That's because connecting multi-tiered
suppliers makes a dramatic difference in an OEM's capacity to quickly
capitalize on market shifts, according to Lee. "Suppliers all
see instantly. As a result, instead of taking six months or a year
to gear up, its supplier network can begin responding to a market
recovery in as little as a month." To further enhance responsiveness,
Lee said Cisco has been creating production planning systems that
are likewise visible to all suppliers.
"Cisco chose to do these things
despite a dramatic pull back in the industry. As a result, Cisco
is proving that it is a strong SC company," Lee said.
Lee believes that liberalization
is another factor that will profoundly alter supply chain management,
especially in Asia. "This is a great opportunity. Asian SMEs
typically have strong relationships with just one or a very limited
set of major customers. Liberalization presents the chance to join
a larger network that will improve their leverage and terms of trade.
They will no longer be passive in determining terms of trade, allowing
customers to dictate to them." They will have the option of
choosing customers to serve.
But Asian suppliers will need to
change their mindset to take advantage of these opportunities, Lee
said. "Before SMEs just waited and did what their 'masters'
told them to do." Now, they must develop the networks that
facilitate the development of relationships with truly profitable,
even nurturing, customers like Cisco. Thanks to technology, they
can take a step further, Lee said. "They can even start selling
to their customers' customers."
And it's important to remember that
if suppliers hadn't suffered through the fallout of the economic
downturn and the demands of liberalization, they wouldn't have these
opportunities. There is a silver lining, after all. At least for
those prepared to see it.
(Michael Alan Hamlin is the managing
director of consultancy TeamAsia and the author of three books on
Asian economies and companies. His latest book is Marketing Asian
Places, of which he is a co-author (Wiley, 2001). Write him at mahamlin@teamasia.com.).
Copyright © 2002 Michael Alan
Hamlin. All Rights Reserved.
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