By Joe Bellini
As market conditions continue to change, manufacturers are looking for any extra advantage against their competitors. Could a manufacturing execution system be the solution?
Manufacturing is becoming increasingly more complex as product lifecycles shrink and product mix grows, adding to the challenges of effectively managing in a globally expanding and dynamic market. Without adequate visibility to end-user demands and the ability to drive supply chain events to shop floor execution systems in real-time, manufacturers risk costly downtime due to the wrong product mix, material shortages or obsolete finished goods inventory as customer demands change.
As more manufacturing shifts to low-cost regions, visibility to events occurring in the supply chain becomes increasingly critical to the performance of the enterprise. Manufacturers must have real-time access to global enterprise information to help make better decisions and the ability to implement those decisions on the shop floor.
Lack of Supply Chain Visibility
How can a company make smart decisions about what to produce when there is inadequate visibility at the enterprise business application level about what product is moving through manufacturing?
Creating a manufacturing plan that reflects real-world market conditions is unlikely when the data used to create it (typically based on a forecast) is old or non-existent. It is impossible to be responsive to dynamic events, such as an unexpected quality failure at a subcontractor, without a consolidated, real-time view of the enterprise. World-class manufacturing companies recognize that the ability to share real-time information across their extended manufacturing and supply chain network provides significant competitive advantage in terms of fulfilling customer demands and increasing profitability and shareholder value.
As manufacturing shifts from forecast-based planning to demand-based planning, companies are being driven to rethink how their manufacturing applications connect with other enterprise applications such as enterprise resource planning (ERP) and supply chain planning (SCP) systems. If a large distributor signals a demand change for a particular product, manufacturing must be able to adapt and respond in real-time to change production schedules and product mix to meet the new requirement. Providing greater visibility of real-time demand signals directly to the shop floor allows business managers to make more informed decisions.
The Gaps in Supply Chain and ERP
Current SCP and ERP applications were designed to improve enterprise operational efficiency. Yet, after millions of dollars of investment and implementation of these systems, manufacturers are still asking the fundamental, overarching question: What should I make?
While planning and supply chain systems have improved a manufacturer's efficiency, many of these enterprise systems exist within their own silo of information, unable to share real-time data with other enterprise systems. Additionally, manufacturing has been missing within enterprise strategies with most of the focus going toward supply chain optimization of existing finished goods. Typical supply chain solutions optimize the flow of finished goods through the supply chain network to the end customer. They do a good job determining the most efficient way to coordinate with all the supply chain resources, such as transportation, distribution and warehousing, as the product moves through the channel.
These strategies worked when manufacturing forecasts were accurate enough to meet market demands and product mix was lower, production volumes were higher and product lifecycles were longer. But beginning in the late 1990s this was no longer the case. As product lifecycles began to shrink and more product mix started moving through manufacturing, forecast-based manufacturing plans were no longer a valid predictor that finished goods inventory would be in synch with customer orders and demand. Unless manufacturers can link all of their strategic initiatives together in real-time, including planning ERP, product lifecycle management (PLM), manufacturing (Six-Sigma, lean) and their extended supply chain, enterprise performance will not achieve the levels of efficiency and profitability needed to survive in today's dynamic market.
Extending the Value of SCP and ERP Systems
SCP and ERP applications promise to use all of the relevant information in the enterprise and produce plans that allow the company to run at its optimum level of performance. However, once real-world market demands and variability are introduced, the plans these systems create are quickly out of date. For example, because of the batch processing nature of these systems, their output can be days or even weeks behind actual market events. This creates a system that is incapable of catching up and is perpetually unable to produce a plan that allows manufacturing to make the exact products for exactly the right customers within the exact timeframe.
Today's enterprise planning systems collect and analyze information based on assuming a high degree of predictability. This approach makes real-time event visibility and execution virtually impossible. Consider a sub-contractor who has a yield problem with a specific product. The status of the supplier's product is collected on a daily basis, but by the time this information arrives back into the manufacturer's master planning system, it could be two days late, or longer.
To further complicate this hypothetical example, imagine that the manufacturer just committed a delivery date to one of its best customers based on the assumed availability of the faulty part from its subcontractor. Changes in manufacturing status can occur by the hour or even the minute. The lack of real-time visibility and the inability to react to these types of common events prevents enterprise planning systems from providing the kind of information manufacturers need to make better business decisions.
Manufacturing's Role in Improving Supply Chain Effectiveness
Companies must have flexible and adaptive supply chains capable of reacting in real-time to changing market dynamics. To truly optimize supply chain performance, applications must be able to “see” within the four walls of the factory in order to provide manufacturing managers with visibility to supply chain key performance indicators (KPIs). If the channel has too much of product “A” it makes no sense for manufacturing to continue making more of it, even if directed to do so by the master plan. Without the ability to share real-time market information, a company's lean manufacturing and supply chain initiatives cannot improve overall enterprise performance.
Manufacturing managers are beginning to realize that they must link real-time manufacturing applications that support the dynamically changing engineering bill of materials (eBOM), manufacturing bill of materials (mBOM), product mix, option content and shorter product lifecycles into supply chain execution strategies to improve manufacturing effectiveness. Making supply chain decisions based on real-time information from the shop-floor, and conversely changing product mix based on real-time information from the supply chain, can dramatically improve overall enterprise performance.
Bi-directional Contact with the Manufacturing Floor
Greater visibility to manufacturing data is a critical step toward providing manufacturers with the information needed to make more informed business decisions. But to enable a real-time enterprise, the applications must support bi-directional communication with other enterprise systems and the shop floor. Because this effort is not always straightforward or easy, traditional supply chain applications have historically excluded the manufacturing floor. For example, if the supply chain execution system decides that the priority of a product in manufacturing must change, it needs to pass this change to the manufacturing execution system (MES) to ensure that the operations are being managed in real-time.
Multi-site Collaborative Manufacturing
Improving enterprise performance begins by ensuring that all nodes in the enterprise are able to share critical information in real-time, such as tool setup data, tracking data, quality information, order information, lot history and BOM, regardless of the shop floor or manufacturing system used at each site. Multiple sites must operate as a single entity, ensuring the optimal use of all resources across all the sites. This becomes particularly important as more manufacturing moves offshore and supply chains become intricately complex with a worldwide web of suppliers and contract manufacturers.
Product Lifecycles and Quality
Everything that happens on the factory floor, both good and bad, will quickly affect other nodes throughout the enterprise. World-class manufacturing companies that understand these issues are implementing systems that share quality and PLM information just as readily as they share other manufacturing data. This helps prevent scrapped and stale inventory as the result of poor quality or poorly planned products. For highly regulated industries such as medical device manufacturing, having real-time access to supply chain information and connecting it to the manufacturing floor is key to meeting the compliance audits now mandated by government regulations.
Summary
As market conditions continue to change, manufacturers are looking for any extra advantage against their competitors. World-class organizations are spending considerable effort and money to connect, in real-time, their manufacturing with the rest of their supply network to gain strategic advantage and make their manufacturing truly demand driven.
A number of leading MES providers have begun working with ERP suppliers to begin bridging the historical gap between ERP systems and the shop floor. Based on an evolving set of industry standards such as SOAP, JMS, XML, NetWeaver, ISA95 and others, applications are being developed that will allow ERP and MES to share information in real-time. As these applications begin to enter the market, manufacturers will have the ability to be more adaptive to shifts in customer buying patterns, supplier issues, and other supply chain issues; all of which contribute to a company's ability to develop loyal customers and grow shareholder value.
Sidebar Case Study: Adaptive Inc.
Increasing Return on Investment (ROI): Supply Chain Visibility
Adaptive Inc. has multiple suppliers, customers and manufacturing sites for its products. Figure 2 shows the company;s distribution chain: two manufacturing sites running different manufacturing execution systems (MES) and a third-party supplier that is also using a different MES system. Prior to implementing a real-time SCE solution, Adaptive struggled with getting a consolidated view of its entire operations.
Real-time adapters provide a continuous stream of current information out of their various enterprise systems, which is aggregated into a common data model and used for compiling real-time reports to a Web-based dashboard. Adaptive also uses the dashboard to provide alerts should any of the real-time data indicate an exception has occurred. Adaptive is now able to recognize problems immediately and has instant access to the most current enterprise information obtained through consolidated reports, allowing for quick analysis and resolution.
What to Make Next? Multi-site Decision Execution
Using the real-time data from its supply chain, Adaptive can now use more advanced logic to make challenging product routing decision between sites as shown in Figure 3. For example, if the third-party supplier falls behind on a certain part because of an unexpected machine outage, the system sees this exception as it occurs and begins to take action. The system can be configured to automatically act on a decision (to prevent any delays from occurring) or to present the options and wait for confirmation before execution. The execution commands are then sent directly out to the different manufacturing systems for immediate problem resolution in minutes or even seconds. Now Adaptive is reducing its work-in-process (WIP) and, as a result, driving a shorter lead-time.
The Last Frontier: Collaborative Manufacturing
Now Adaptive's manufacturing and assembly sites adjust priorities and product based on demand-driven changes in the market. The real-time manufacturing applications let all of Adaptive's sites share tool setup data, tracking data, quality information, order information, lot history and bill of materials (BOM), regardless of the shop floor or manufacturing system used at each site. Multiple sites can operate as a single entity, thus ensuring the optimal use of all resources in the sites. Adaptive's global manufacturing environment is fully collaborative, both internally and with its extended supply chain of suppliers and customers, providing efficiency and the ability to react in real-time to changes in the demand and the supply chain.
About the Author: Joe Bellini is the executive vice president and general manager of Brooks Software, a provider of real-time applications for enterprises with complex manufacturing operations, using RFID systems.
Chinese component suppliers are getting stronger, but how far can they go?
By Akiko Kashiwagi and Dennis Normile -- Electronic Business, 2/1/2006
As Chinese consumers eagerly snapped up mobile phones through the 1990s, international and local electronics makers alike cashed in. But for Shenzhen Jingfeng Technology Development, the mobile phone ring tone was more like a death knell. The Shenzhen-based maker of miniature crystal resonators, filters and oscillators had achieved modest success in supplying components for pagers made in China, which were doomed by the growing popularity of mobile phones.
Recognizing the inevitable in the late 1990s, Shenzhen Jingfeng started seeking new customers, eyeing particularly the international firms moving electronics production to China. "We knew that their requirements were strict," says corporate sales manager Dolphina Gao, but the company felt that it might have a cost advantage over imported crystal components. Shenzhen Jingfeng's big chance came when a batch of samples passed an initial screening by Japan's Sharp. To close a deal, however, Shenzhen Jingfeng had to practically reinvent itself. Previously, Gao says, management did little more than oversee the buying of supplies and the selling of finished products. To bring management techniques up to date, the company got consultants from Hong Kong to help it adopt the Plan-Do-Check-Act cycle, a scheme to continuously improve quality. It introduced enterprise resource planning applications to improve overall business operations, and it created a customer service department.
On the production side, the company modernized its equipment and bought the latest testing devices from the United States and Japan. It added 10 engineers to upgrade products and hired a retired Japanese engineer as a consultant to improve technology and efficiency. It all finally paid off. In 2002, nearly two years after it had shipped those first samples, Shenzhen Jingfeng became the first indigenous Chinese company on Sharp's list of digital TV tuner suppliers.
“There is a cost that isn’t visible
in your bill of materials.” —Mike Hegedus, Elcoteq
It is unlikely to be the last. As more of the world's electronics industry moves to China, Shenzhen Jingfeng's story is being repeated. To cut costs and boost efficiency, international original equipment manufacturers (OEMs) and electronics manufacturing services (EMS) companies are augmenting their supply chains with indigenous Chinese electronics suppliers. The benefits are considerable: cost savings ranging from 5 percent to 50 percent as well as shorter lead times for parts needed to supply factories in China.
But Mike Hegedus, director of supply chain, sourcing and IT for Elcoteq, an electronics manufacturing services (EMS) company in San Diego, warns, "There is a cost that isn't visible in your bill of materials." He explains that unlike well-established suppliers, indigenous Chinese companies typically need guidance and management support from the buyer. Companies can find high-quality suppliers, he says, but those suppliers need help in improving consistency. He adds that every Chinese company Elcoteq has dealt with has needed to upgrade its inventory management and delivery capabilities. The bottom line, Hegedus says, is that when dealing with Chinese suppliers, "There are definite cost savings to be found, but you have to do a lot more homework and invest in some level of supplier development."
In search of lower costs
Separating the amount of electronics production by indigenous Chinese companies from China's overall electronics output is difficult, analysts say. But it is undoubtedly growing, as international electronics firms locate production bases in China and China's own brand-name manufacturers penetrate worldwide markets. According to Reed Business Research (a division of EB's parent company), China's share of global electronics production rose from 5.2 percent in 1999 to an estimated 15.7 percent in 2005 (chart, at right).
International electronics companies are looking to local Chinese suppliers for lower costs and speedier delivery and to bypass import delays. So far, the parts they source from indigenous Chinese electronics firms are concentrated at the lower end of the value chain. Hegedus says Elcoteq is currently buying connectors, batteries, power supplies and some printed circuit boards from Chinese suppliers for its worldwide operations. For its three assembly plants in China, Elcoteq also turns to local manufacturers for larger mechanical parts, enclosures and racks. Hegedus says such parts are too expensive to air-freight and that surface shipping is often too slow.
Ken Schmidt, general manager of sourcing for China and Southeast Asia at Sony Ericsson Mobile Communications, says the company has been sourcing such components as speakers, microphones and vibrating motors for its mobile phones from local Chinese companies and is looking to expand its list of Chinese suppliers further. But both Hegedus and Schmidt say semiconductors and high-end components must still be imported or bought from the increasing numbers of international suppliers setting up shop in China.
Still, relying on local Chinese companies for commodity products can mean significant cost savings. Dwight Nordstrom, chairman of Pacific Resources International (PRI), a Beijing-based consulting firm that works with 2 factories in China, says sourcing in China generally means savings of 30 percent to 40 percent for plastics and anywhere from 5 percent to 40 percent for electronics. He feels that a Chinese supply chain adds to a company's competitive edge. "Once we go through bill-of-materials pricing, our factories normally win more than 50 percent of the projects they quote on," says Nordstrom, who is also cochair of the sourcing forum of the American Chamber of Commerce in China.
“Even though the Chinese companies are getting better, the international companies are getting better too.”
—Dwight Nordstrom, Pacific Resources International
The price advantages global EMS companies such as Elcoteq and EMS vendor Jabil Circuit realize from using Chinese component suppliers are so great that they often find themselves acting as matchmakers between the suppliers and skeptical OEMs, which ultimately decide which suppliers' components get designed into their products. "There are OEMs that are very open to working with these suppliers, and there are those that are not," he says. He adds that some OEMs simply remain skeptical of Chinese quality whereas others balk at putting in the time and effort to qualify new suppliers.
Know your supplier
Hegedus and others acknowledge that finding and managing indigenous Chinese suppliers takes more time and effort than dealing with established international companies, and they say that executives in corporate headquarters need to recognize and support that reality. The additional homework typically starts with skepticism about such basics as the authenticity of International Standards Organization certification. PRI's Nordstrom says there are good certifiers and bad ones. If a local Chinese company has granted ISO certification to a potential supplier, "I don't believe that that supplier actually has ISO certification," he says.
With or without ISO certification, William Wang, vice president of business operations at supply chain management and procurement consultancy Beijing Indserve Communication System Integration, says potential suppliers must first convince buyers they can achieve "pilot quality," or that samples meet basic product quality requirements. But then the going gets tougher. Wang, formerly a sourcing manager for Motorola, says few Chinese companies have yet acquired the experience and the tools needed to ensure consistently high quality when producing parts in the tens of millions. "For that, they need to invest in equipment and testing machines," he says.
Hegedus adds that especially for EMS firms, simply producing quality at tremendously high volumes "is not the business we're in." What EMS firms need are suppliers that can adroitly adjust volumes and product specifications while keeping quality high to match the fast-changing needs of their customers. Elcoteq tries to assess a supplier's ability to meet small-batch orders, he notes.
Once a potential supplier has demonstrated that it has the basic quality control skills, companies often offer further support in improving manufacturing processes and boosting yields as well as training in the Six Sigma quality control process. If a supplier's learning curve turns out to be steep, "We have to have more management support," says M.S. Gay, director of the integrated supply chain for Motorola's Tiangjin Site, one of the company's largest manufacturing bases. To solve problems, Motorola's sourcing team works with a supplier's top management, asking: "Is it a talent issue? Is it a resource issue? Or is it investment in equipment or space or what?" Corporate spokesperson Chen Lei adds that Motorola has similar programs for suppliers worldwide but that coming up to speed requires a bit more work on the part of the company's Chinese suppliers.
Hegedus says that after quality, the biggest challenge for virtually all the Chinese suppliers Elcoteq has taken on is improving logistics. "How reliably will they deliver on time? Are they very flexible when your demands change?" he asks. Elcoteq usually helps its Chinese suppliers set up vendor-managed inventory schemes in which the onus is on the supplier to keep a sufficient supply of parts ready for the assembly line at Elcoteq's factories. Elcoteq even helps arrange agreements with shippers. Still, he laments, because Chinese suppliers are not used to such advanced business concepts, "the line can still go down from time to time, because some part that is coming from a Chinese supplier hasn't arrived." He says this happens much more frequently with Chinese than with established international suppliers. As a result, he never single-sources a component until a supplier has a proven track record.
Of course, all this hands-on management has a cost. Mike Ward, vice president in charge of the global supply chain for Jabil, says his company has been building up its corporate infrastructure in China for at least eight years and has hired quality engineers and supply chain managers locally, so as to "communicate more easily with the core supply chain within China."
Costly misses
Nordstrom admits that despite a company's best efforts, problems are almost inevitable. "The companies we work with are doing better than others, but we still make mistakes," he says. Most companies hesitate to reveal details of what has gone wrong, but Hegedus admits that Elcoteq was once burned by a plastic parts supplier that "could not hold its schedules at all." The supplier's problems delayed getting a particular product to market. Hegedus says the company has never used that supplier again but that he's heard through the grapevine that this supplier has ironed out its delivery problems and is keeping new customers happy.
Aggressive Chinese companies are eager to improve, because they realize that the stakes are high. Qualifying to supply an international electronics firm opens the door to rapid growth and a shift from supplying only the local market to potentially developing an international reach. Shenzhen Jingfeng is typical, in that it used its qualification with Sharp to line up other Japanese customers. Gao says that it is now trying to get a foot in the door at the major EMS companies. Chinese companies are also rapidly expanding their product offerings. "Every month our suppliers seem to be in another component business," Hegedus says. "Once they've mastered connectors, they move into batteries and then cables."
Indigenous Chinese companies also face a host of challenges, not the least of which is increasing competition. Not only are local Chinese companies investing in new factories but established international component suppliers are also building production capacity in China to take advantage of the low labor and engineering costs. Sony Ericsson's Schmidt says there may soon be overcapacity in China's electronics manufacturing sector. And Jabil's Ward says global OEMs and EMS companies are looking beyond China to India and other developing countries. As a result, PRI's Nordstrom says that any further shift to Chinese suppliers is likely to be gradual. He notes that at present, indigenous Chinese companies account for 30 percent of PRI's 400 qualified suppliers in China, the rest being international companies. He does not see the ratio changing, because "even though the Chinese companies are getting better, the international companies are getting better too."
Moving up is rough
The locals face a particularly rough time moving further up the technological and value-added curves. Wang of Beijing Indserve Communication System Integration says indigenous companies are now moving into midlevel technologies, including more-sophisticated connection cables and electronic filters. But he adds that sourcing "high-tech or technology-intensive products may be still a problem." Schmidt agrees, noting that his company is starting to source printed circuit boards from Chinese companies. And the next stage will be such electrical devices as resistors and capacitors. "But then the technology gets tougher," he says. Schmidt suggests taking a look at current mobile phones: "The color display? Very difficult technology. The camera? Another assembly that requires a huge investment in technology. And memory and chip sets? These high-end items require pretty significant investments to develop, and it takes years of improvement to become a competent supplier." On top of all that, Schmidt adds, "Suppliers need to invest heavily to keep up with the rate of miniaturization." It is true that China's universities are churning out prodigious numbers of engineers, but they have shown that they are just as, if not more, willing to work for the growing numbers of foreign-affiliated R&D centers as for indigenous companies.
Despite the challenges, a host of Chinese companies are out to prove that they can compete with the best. Shenzhen Jingfeng is certainly not resting on its laurels. Gao says it is planning to send staff to Sigma Six quality control classes. And it is determined to continue up the technology curve. "We believe that our technology is now at the same level as what is available in Korea and Taiwan," she says. Its next goal is to catch up to Japanese suppliers. A company that spent two years landing its first big international customer shouldn't be written off. EB
How far up the technology chain can China's suppliers go? Send your thoughts to feedback@eb.reedbusiness.com
Dennis Normile (dnormile@gol.com) is a science and technology writer based in Tokyo. Akiko Kashiwagi is a freelance writer in Tokyo.
