New rules for global component
sourcing: the quality imperative
in electronics
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An Economist Intelligence Unit white paper
sponsored by Agilent Technologies
New rules for global component sourcing: the quality imperative in electronics
Preface
New rules for global component sourcing: the quality
imperative in electronics is an Economist Intelligence
Unit white paper, sponsored by Agilent Technologies.
The Economist Intelligence Unit bears sole
responsibility for this report. The Economist
Intelligence Unit’s editorial team executed the survey,
conducted the interviews and wrote the report. The
findings and views expressed in this report do not
necessarily reflect the views of the sponsor. John du
Pre Gauntt is the author of the report.
Our research drew on two main initiatives:
We conducted a global online survey in September
2004 of 70 senior executives on the topic of global
component sourcing.
To supplement the survey results, we also
conducted in-depth interviews with senior executives
at a number of companies in the electronics industry.
Our thanks are due to all survey respondents and
interviewees for their time and insights.
October 2004
© The Economist Intelligence Unit 2004
1
New rules for global component sourcing: the quality imperative in electronics
Executive summary
T
he rules are changing for global sourcing in the
electronics industry, according to a new survey
conducted by the Economist Intelligence Unit
in co-operation with Agilent Technologies.
Traditional relationships between Original Equipment
Manufacturers (OEMs) such as Sony or Philips and their
sourcing partners are in a state of flux as world-class
production and best practice increasingly originate
from Asia.
Previously, global sourcing consisted of OEMs
turning over low-margin high-volume production to
Electronic Manufacturing Service (EMS) providers
and/or Original Design Manufacturers (ODMs). But
that arrangement has been transformed as OEMs
depend more on outsourced manufacturing for highend electronics.
At the same time, the increasing complexity of
electronic products and the demand for greater
customisation have pushed the quality imperative to
the top of executive agendas in both OEM and
EMS/ODM organisations. OEMs and their
manufacturing partners are working hard to
standardise best practices in order to reap the
economic benefits of global sourcing without
jeopardising quality.
The survey and in-depth interviews suggest that
2
© The Economist Intelligence Unit 2004
global sourcing is evolving from a tactical to a
strategic business process. The next stage will force
companies to share demand forecasts, production
schedules, distribution plans and/or intellectual
property, sensitive information that tends to be tightly
controlled within organisations.
Two forces are shaping the next generation of global
sourcing:
● Dealing with complexity: Historically, quality
depended upon how faithfully an overseas
manufacturer copied an OEM’s test and inspection
procedures. But the growing contribution of
software inside electronics and the need to handle
mass customisation have raised the bar for test
and inspection.
● Globalised best practice: Regardless of
geographic location for outsourced
manufacturing, a small set of global OEMs and
their sourcing partners are creating industrystandard best practices for quality control in order
to manage the risk and reap the benefit of a global
production network. Even so, companies have yet
to agree on the scope and degree of information
sharing needed to make these best practices work.
New rules for global component sourcing: the quality imperative in electronics
Introduction
T
he rules are changing for global sourcing,
according to a survey of 70 senior executives
in the electronics industry conducted by the
Economist Intelligence Unit in co-operation
with Agilent Technologies. Evenly split between
organisations with more than US$500m in annual
revenue and smaller companies with less than
US$500m, the survey highlights the fact that global
sourcing is becoming a strategic business process, as
world-class electronics production concentrates in
Asia.
Industry analysts define global sourcing as the
business process of identifying, evaluating,
negotiating and configuring supply chains across
multiple suppliers and geographies in order to cut
cost, improve performance and mitigate risk. This
white paper focuses on global sourcing for
components and sub-assemblies within the electronics
industry because electronics manufacturers have
progressed furthest in developing technical and
commercial best practice to ensure quality in global
production networks.
Global sourcing strategies come in various forms.
When asked how they would describe their company’s
global sourcing initiatives, the survey respondents
were almost evenly split between those that engaged
in international sourcing on an as-needed basis, those
that employed a specific geographic or functional
angle, and those that have fully integrated global
sourcing into all business units.
Within the survey pool, the different levels of
integration of global sourcing across larger and
smaller companies were striking. Among larger firms,
nearly one-third reported that they employed global
sourcing in all business units, compared with only 14%
for smaller companies.
Integrating global sourcing into all business units
is as much about managing demand swings as
optimising a company's cost structure. Large
Integrated Device Manufacturers (IDMs) often work
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
© The Economist Intelligence Unit 2004
3
New rules for global component sourcing: the quality imperative in electronics
with contract chip manufacturers to optimise capacity.
“Using contract manufacturers helps these IDMs
because they will not have to build another
multibillion-dollar fabrication plant just to get a 20%
bump in capacity if the market heats up,” says Jack
Trautman, president of the Automated Test Group for
Agilent Technologies. “Equally important, that
incremental capacity becomes a lot easier to turn off in
a downturn than laying off employees or
decommissioning a factory.”
Nearly all organisations involved in the survey
source a significant portion of their total supply from
offshore providers. Half of all companies report that
they currently procure more than 15% of their total
supply from offshore. Within three years, a total of 53%
of respondents say that they expect to source more
than 20% of their total supply from overseas providers.
When the supply base of the survey pool is broken
down into specific product categories, the amount of
offshore sourcing expands even further. Printed circuit
boards, electronic components such as liquid crystal
displays (LCDs) and sub-assemblies constituted well
over 50% of the current total supply sourced by larger
companies from overseas.
Such flexibility and breadth for sourcing highquality low-cost electronics components support
A global sourcing taxonomy
The following list shows the main players
involved in global sourcing for electronics,
where they add value, and their typical
relationship with each other.
Original Equipment Manufacturer (OEM):
the company behind the “brand name” of a
product. In the electronics industry, wellknown OEMs include IBM, HP, Sony,
Motorola, Samsung, Nortel, Panasonic,
Nokia, Philips, and so forth. OEMs traditionally designed, manufactured, marketed
and provided customer support for their
products. However, in many cases of global
sourcing, the OEM only owns the design
and all manufacturing is outsourced to
contract manufacturers.
Electronic Manufacturing Service (EMS):
the company that performs manufacturing
on behalf of an OEM. Typically, the EMS
provider does not own any intellectual
4
property, branding or distribution rights
to the end-product. EMS companies
instead invest in their manufacturing
capabilities to offer contract production
services to OEMs. Example EMS companies
would be Flextronics, Solectron and
Celestica.
Original Design Manufacturer (ODM): a
company developing and manufacturing
electronics that are ultimately sold as
branded products by OEMs such as Dell.
ODMs differ from EMS providers in that they
own intellectual property in addition to
offering manufacturing services. ODM
designs account for more than one-half of
all notebook computers and almost threequarters of desktop motherboard designs
sold world-wide. Largely based in Taiwan
with some in South Korea, ODM companies
include BenQ, Compal, Arima, Quanta,
Seowon and Telson.
© The Economist Intelligence Unit 2004
Packaging, sub-assembly and testing
companies: semiconductors start out as
round wafers that must be sliced out,
mounted into a package with metal leads,
and then loaded onto printed circuit
boards for testing and shipment to manufacturers. Nearly 100% of this work is outsourced to companies such as ASE Test in
Taiwan and UTAC in Singapore.
Integrated Device Manufacturer (IDMs):
a semiconductor company that not only
designs its own chips, but manufactures
them as well. IDMs are companies like
Intel, AMD, Texas Instruments, Freescale
(formerly Motorola's chip division), ST
Micro, Infineon, Toshiba, NEC, among others. In contrast to IDMs, there are socalled “fabless” semiconductor companies
that concentrate exclusively on semiconductor design and contract out all their
production.
New rules for global component sourcing: the quality imperative in electronics
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
5-10% 16
10-15% 16
companies that own no manufacturing capability but
outsource 100% of their production to contract
manufacturers. So-called “fabless” semiconductor
producers such as Qualcomm, Broadcom or Xylinx
concentrate on design expertise and being very agile
at contracting for the production, testing and
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
5-10% 9
More than
20% 53
10-15% 16
15-20% 13
packaging of their products with “foundry” companies
such as Taiwan Semiconductor Manufacturing
Corporation (TSMC), which own the actual
manufacturing facilities.
Even though OEMs are looking to economise on
procurement through global sourcing, they must
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
© The Economist Intelligence Unit 2004
5
New rules for global component sourcing: the quality imperative in electronics
carefully manage risks to ensure that hiccups in one
part of a sourcing network do not have an adverse
impact on everything else. In early 2004, Nintendo
and Sony ran into a shortage of LCD screens right at
the point they had planned to launch new handheld
gaming devices because surging demand for mobile
phones had eaten into the available supply. Both
companies expect to pay higher prices for LCD units
well into 2005.
Consequently, global sourcing has become literally
too important to leave exclusively to the procurement
department. “Global sourcing is a multi-department
decision,” according to Merle Hinrichs, president of
Global Sources, a leading sourcing information
services provider in the Asia-Pacific region. “Along
with a financial issue, you have a compliance issue, an
engineering issue, a manufacturing, assembly and
packaging issue which typically engage all of these
departments before a sourcing relationship can be
established.”
In companies with less than US$500m in revenue,
nearly one-half responded that the global sourcing
agenda is driven by the executive suite, whereas larger
organisations tended to have more direct involvement
by operations departments. Nearly one-quarter of
larger companies reported that global sourcing
agendas were heavily influenced by operational
considerations, implying more formal global sourcing
business units.
Whether driven by executive-level, procurement or
operations departments, the survey suggests that
global sourcing strategies are no longer focused
exclusively on finding the best “deal”. The sheer
complexity of modern electronics manufacture implies
that global sourcing is becoming a competitive
differentiator between firms.
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
6
© The Economist Intelligence Unit 2004
New rules for global component sourcing: the quality imperative in electronics
Dealing with complexity
I
n the past, an OEM’s “make-or-buy” decision
boiled down to seizing a tactical opportunity to
reduce costs or meet a specialised production
need. Global sourcing involved an OEM working
with local suppliers in low-cost countries to take an
existing design and cut costs, while intellectual
property (IP) and branding remained with the OEM.
Yet the sheer complexity of electronic product
design and manufacture coupled with intense
competition means that the time is long past when
OEMs could think of electronic components as mere
building blocks. “So much of the intelligence and
functionality of an electronic device is contained in
one or two pieces of silicon to where chip design and
overall system design are virtually indistinguishable,”
says Fred Weber, chief technology officer for Advanced
Micro Devices (AMD).
The semiconductor industry includes, on the one
hand, those companies that concentrate on
manufacturing excellence and production innovation
and, on the other, those that concentrate on design
and development of new functionality. “It's getting to
the point where a lot of the state-of-the-art
manufacturing processes have migrated out of the
traditional IDMs into these new players,” notes Mr
Trautman. “At the same time, competitive advantage
among IDMs is evolving towards design and time-tomarket, which compels them to tap deeper into this
global infrastructure for semiconductor
manufacturing, 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
© The Economist Intelligence Unit 2004
7
New rules for global component sourcing: the quality imperative in electronics
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
Time-to-market is crucial as product lifecycles for
electronic products are fleeting. The overall cost of
electronic components, while important, is not the
only factor in determining the eventual value of a
globally sourced component or manufacturing service.
Survey participants indicated that other aspects such
as reducing inventories, tapping a more global talent
pool or access to indigenous markets are emerging
alongside basic cost as global sourcing drivers.
In addition to physical manufacturing, professional
services such as managing inventories, supporting
end-customers and fulfilment are becoming part of
global sourcing agreements. According to an industry
insider, the cost of many electronic components is
sufficiently transparent to reveal a “market price” for
the bill of materials. Hence the majority of sourcing
negotiations hinge on value-added and aftermarket
The bullwhip effect
If only people consumed at the same speed
that goods are produced, life would be
much simpler for OEMs and their partners.
But consumers and businesses tend to
clump big purchases, display seasonal tendencies and change demand for products
for no apparent reason.
These demand signals become more
dissonant the further one moves away from
the end-customer and towards the
manufacturer, causing a phenomenon
commonly called “the bullwhip effect”,
according to Weiyee In, managing director
of research for TerraNova Institutional. “You
have a situation where the further up you
move in the value chain, the greater the
variability of inventory and demand
information and the greater the amount of
8
dollars involved,” he says.
If retailers feel that there will be extra
demand for a particular product, they will
often place an order for an extra unit. When
the order is received by the distributors, it is
not uncommon for them to order an extra
unit in anticipation of further orders by other
retailers. Because there is an inherent bias
against fully trusting the demand signals of
partners in a supply chain, partners tend to
create buffers or stockpiled inventories.
According to Mr In, three forces are
amplifying the bullwhip effect: front-end
transparency, front-end efficiency, and
end-customer empowerment. Heightened
competition and the use of electronic
commerce allow the buyer to “see” the
progress of a transaction from order to
© The Economist Intelligence Unit 2004
delivery, building expectations even as it
places extra demands upon the supply
chain. The second force involves greater
efficiencies for allowing an end-customer to
configure or customise their order to be
transmitted back to the manufacturing
facilities. Finally, competition and the
growing penetration of electronic
commerce have empowered customers as
never before. Price discovery, terms and
conditions, and a host of other factors can
be automatically checked across various
suppliers. “What has happened is that the
efficiency and the transparency of the frontend from the customer to the retailer to the
distributor have improved because of
electronic commerce, but the back-end is
still catching up,” he says.
New rules for global component sourcing: the quality imperative in electronics
11. Approximately what percent of the total production cost of your
company's best-selling product category can be attributed to software?
(% respondents)
80–100% 10
services such as warehousing and logistics, which were
revealed by the survey to be nearly as important as
manufacturing prowess for driving discussions.
The service element becomes key as electronic
products themselves become more intelligent.
Whether referring to digital music players that
combine sound reproduction with digital rights
protection, or cellular phones that double as e-mail or
instant messaging platforms, the value proposition of
electronics increasingly lies in software and its smooth
functioning. Survey participants noted that software
accounts for nearly one-third of the total input cost of
their best-selling product categories.
On top of the software component, the amount of
customisation that goes into electronic products has
ballooned. In the case of personal computers, the
industry has migrated to build-to-order (BTO) and
configure-to-order (CTO) production models that
enable vendors to start production only after an enduser has picked among alternatives such as LCD panel
sizes, processing speeds memory and styling. For
example, Taiwan notebook ODMs often ship a strippeddown PC “chassis” to an OEM client or its designated
assembly centre (often located in China) rather than
the finished product.
Not surprisingly, the survey revealed few companies
60–80% 9
0–20% 30
40–60% 21
20–40% 30
(less than 10%) that only offered a “standard” product
with little or no customisation. Participants showed a
marked preference for allowing end-users to specify
broad levels of functionality and style in the product or
offering several versions of a product that customers
can choose between, with little or no modification.
The investment bank Goldman Sachs notes that
before global sourcing became a key differentiating
factor, OEMs used vertical integration to make
changes and turn around prototypes with close
mapping to production because marketing, R&D, and
manufacturing goals were aligned at the corporate
level, where trade-offs between divisions could be
negotiated internally. However, as 100% vertical
integration becomes less desirable, establishing and
optimising best practices to ensure quality at lower
cost over extended supply chains has become a
primary differentiator in the industry.
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
© The Economist Intelligence Unit 2004
9
New rules for global component sourcing: the quality imperative in electronics
Best practice in global sourcing
A
long with the benefits of global sourcing
come the risks to the OEM of a partner’s noncompliance or underperformance.
Consequently, many OEMs are developing
more holistic best practices for certifying suppliers,
judging the value they provide and raising the overall
performance of their global sourcing networks.
Questions of certification and quality control grow
in importance as more OEM production is transferred
offshore. For many OEMs, it is no longer sufficient for
their global sourcing partners to test for quality at the
end of a production run. Instead, they are looking for
test and inspection procedures at every step of
manufacturing.
Testing and inspection also play a vital role in
reducing the time it takes to produce and deliver
products to the market. Many OEMs retain a certain
level of test and inspection capability in-house to
validate their designs, while setting the stage for
large-scale manufacturing. “OEMs employ testing
capability during the design phase not only to make
sure that it works according to its specification, but
also to help jump-start volume production,” says Mr
Trautman. Often, OEMs look for global sourcing
partners that have a similar ability to test and
measure. This enables the OEM to transfer test design
and data directly to a live production system.
Software, however, remains a nettlesome area for
standardised quality assurance. According to Gordon
Aspin, chief operating officer for TTPCom, a supplier of
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
© The Economist Intelligence Unit 2004
New rules for global component sourcing: the quality imperative in electronics
intellectual property for telecommunications, formal
certification is just one part of the quality assurance
(QA) process that is used to maintain a software
product’s compatibility with multiple product lines.
“We have a formal test and measurement system that
involves a separate delivery team from the R&D team
that developed the software in the first place,” he
says. “These people not only put the software through
our internal QA process but work with bigger
customers and manufacturers to ensure that it works
in their final product.”
The survey participants said that they employed a
combination of elements to enable them to certify their
suppliers: global quality standards such as ISO 9000 or
Six Sigma, on-site inspections and company-specific
methodologies. In the case of larger companies, there
is an overriding need to adopt global standards. More
than 70% said that it is a primary procedure used to
certify a potential supplier. “One aspect that global
sourcing has brought about has been increased
standardisation because many world-class buyers don’t
even consider a company that does not subscribe to
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)
Other 1
Inventory
management 10
Logistics and
delivery 34
Price/cost 54
Execution
against the
sourcing contract 40
Quality control 47
these standards”, notes Mr Hinrichs. Chinese contract
manufacturers are rapidly adopting global standards of
quality assurance as a prerequisite to bid for OEM
business. Minimum certification requirements and the
segmenting of suppliers are two methods respondents
use to set up a global sourcing network. Once the
network is set up, the survey revealed that the top four
factors for judging subsequent performance of a
sourcing relationship included price/cost, quality
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
© The Economist Intelligence Unit 2004
11
New rules for global component sourcing: the quality imperative in electronics
control, execution against the sourcing contract, along
with logistics and delivery. The difference between
smaller and larger companies was most pronounced
after price/cost considerations were excluded. Larger
companies with revenue of over US$500m reported
that quality control and contract execution held
virtually the same importance to them as the overall
cost. Yet smaller companies considered quality control
and contract execution (43% and 30% respectively) as
slightly less crucial.
The survey showed that best practices are evolving
beyond the ability to “score” a supplier on a set of
price, quality and contract metrics. As global sourcing
becomes more strategic, OEMs’ efforts to raise
performance of their supplier networks are expanding
to include shared business processes. The survey
revealed that OEM customers are sharing production
schedules and certain business risks with their
preferred suppliers. Larger companies are even
investing to provide training in total quality
management for their sourcing partners.
Yet global sourcing requires a substantial amount
of risk management by both the OEM and its sourcing
provider to make things work. Creating the fabled
“win-win” relationship between the OEM and the
contract manufacturer or ODM is fraught with
difficulty. Depending on the geographic location of
the sourcing provider, risk management concerns for
the OEM vary between losing control over
intellectual property to the inherent problems of
mitigating risks involved with long-distance
business relationships that require multiple handoffs. “There is something in human nature that says
that if you have lunch with someone everyday, you
tend to know them better than if you speak with
them on the phone once a week and see them once a
year,” says Mr Weber at AMD.
Beyond the cultural or intellectual property issues
lies the very real problem of co-ordinating demand
forecasts. More than any other risk management area,
it is here where the tension between an OEM sharing
too 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
12
© The Economist Intelligence Unit 2004
New rules for global component sourcing: the quality imperative in electronics
information comes into view. “While some OEMs/IDMs
may be willing to share their highly confidential point
forecasts with their manufacturing partners, the
problem is that these monthly forecasts are highly
likely to change. If a contract manufacturer were to
put capacity in place based solely on these forecasts,
they would probably get it wrong,” says Mr Trautman
at Agilent. “Instead, what contract manufacturers
need are range forecasts that tell them the likelihood
of demand falling within a certain range within a
certain period of time.”
Survey participants agreed with Mr Trautman that
demand forecasting was the most difficult risk
management issue for them to control. Over half of all
companies, large and small, rated responsiveness to
demand shifts as the number one risk they faced. Many
shudder when they recall Cisco Systems being forced
to write off US$2bn in inventory during 2001 because
it 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 benefits
promised by the initial purchase cost. OEMs that have
outsourced manufacturing face an additional
challenge in determining whether or not the primary
inputs such as LCD screens or DRAM chips are being
procured at the lowest possible cost. Large OEMs such
as HP or Motorola often compensate for these tensions
by “price-masking”. The OEM goes to the market to
procure components at the lowest possible price and
then turns them over to the EMS or ODM provider to
use in the production process.
The result is that global sourcing has moved out of
the corporate back-office. Large OEMs and their
partners are being questioned about their sourcing
policies by investors, regulators and the public as
never before.
© The Economist Intelligence Unit 2004
13
New rules for global component sourcing: the quality imperative in electronics
Hard work ahead
G
lobal sourcing takes work and investment to
succeed. The survey suggested that OEMs
will differentiate by how well they can coordinate their supplier chains with their
distribution and sales channels. This requires better
organisational practices for ensuring that quality, lowcost and lasting business relationships can co-exist in
global sourcing networks.
The spread of global sourcing practices raises the
question of the future structure of the electronic
industry now that design, development,
manufacture and distribution are decentralised.
Will OEMs be reduced to becoming merely brands
and channels to customers? Will a growing number
of Asian manufacturers emulate the success of
global brands such as Sony or Samsung? Which
industry segment will hold the ultimate power to
decide how quality standards are determined and
implemented?
These issues and more will be decided by
electronics executives in the future. How they respond
to the challenge will determine whether global
sourcing fulfils its promise or becomes a treadmill for
both 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
14
© The Economist Intelligence Unit 2004
Appendix: Survey results
New rules for global component sourcing: the quality imperative in electronics
Appendix: Survey results
Responses received: 70
Please note that not all answers add up to 100, because of rounding or because respondents could give multiple
answers 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
© The Economist Intelligence Unit 2004
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Appendix: Survey results
New rules for global component sourcing: the quality imperative in electronics
3. Approximately what percent of your company's supply base is sourced from
offshore suppliers?
(% respondents)
Less than 5% 19
More than 20% 40
5-10% 16
10-15% 16
15-20% 10
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
5-10% 9
More than 20% 53
10-15% 16
15-20% 13
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
16
© The Economist Intelligence Unit 2004
Appendix: Survey results
New rules for global component sourcing: the quality imperative in electronics
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
© The Economist Intelligence Unit 2004
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Appendix: Survey results
New rules for global component sourcing: the quality imperative in electronics
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
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)
Other 1
Inventory
management 10
Logistics and
delivery 34
Execution
against the
sourcing contract 40
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© The Economist Intelligence Unit 2004
Price/cost 54
Quality control 47
Appendix: Survey results
New rules for global component sourcing: the quality imperative in electronics
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)
80–100% 10
60–80% 9
0–20% 30
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
© The Economist Intelligence Unit 2004
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Appendix: Survey results
New rules for global component sourcing: the quality imperative in electronics
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)
80–100% 7
60–80% 3
1–20% 17
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
20
© The Economist Intelligence Unit 2004
Appendix: Survey results
New rules for global component sourcing: the quality imperative in electronics
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
© The Economist Intelligence Unit 2004
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Appendix: Survey results
New rules for global component sourcing: the quality imperative in electronics
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 6
Board member 4
Other C-level executive 3
Other 9
22
© The Economist Intelligence Unit 2004
© The Economist Intelligence Unit 2004
23
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New rules for global component
sourcing: the quality imperative
in electronics
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