Rising energy costs have put the squeeze on industry and consumers alike throughout North America, but for participants in the electronic supply chain the ramifications of the current fuel crunch can be particularly grievous. A spike in costs at any point in the chain can significantly affect how much it is going to cost to bring a product to market. And, as any electronics industry executive knows, even a few dollars’ difference between two competing products in the consumer market can mean the success of one, and the failure of the other.
Distributors are working overtime to develop more cost-effective processes and strategies to enable their customers on both ends of the supply chain to operate without incurring too sizeable an increase in transportation and logistics costs. The scope of this challenge shouldn’t be underestimated. U.S. business logistics costs in 2005 rose $156 billion from the year before — or 14 percent — to $1.18 trillion total, according to a recent study sponsored by the Council of Supply Chain Management Professionals (CSCMP). That's the largest year-to-year change in more than 30 years, according to CSCMP, which tracks trends in transportation, inventory-carrying and total logistics costs.
A recent statement from General Motors reflects how the issue hits home for individual companies: The car manufacturer said that for every $1 increase in the price of a barrel of oil, its logistics costs go up by $4 million. The going rate for a barrel of crude oil has more than tripled from $25 in 2001 to a high of $77 in August 2006 — that’s a $200-plus million jump for GM's logistics costs in just five years.
As in any battle, there’s strength in unity. For electronics distributors and their customers, weathering the energy storm will require a commitment to increasing visibility and collaboration, says William Brandel, principal of research firm Industry Directions Inc. The firm has performed several surveys in the past two years aimed at gauging the impact of rising energy costs on the supply chain. History has shown that the old model of whipping suppliers for cost reductions doesn’t pay in the long run, and passing costs along to customers is not an option, he says. “So the only viable solution for the electronics supply chain is to achieve higher levels of coordination and better planning and visibility.”
One way to help curb expenses is by streamlining component shipping costs via order aggregation. Moving as many as 300,000 line items a day throughout its distribution centers worldwide, distributor Avnet Inc. is uniquely positioned to take advantage of aggregation opportunities for its customers, says Jerry Biegler, director of transportation services at Avnet Inc., in Phoenix. Aggregation is used across the board in many ways, either by orders, parts or shipments, he says. And it doesn't require that companies sacrifice timeliness or quality. Aggregation doesn't necessarily result in less frequent shipments of components to OEM or EMS customers. Rather, it's often a matter of the distributor being able to make a match between orders coming in separately from two units within a customer’s organization for different projects, and shipping them together.
This is not a value versus cost decision, Biegler says. In this case, if orders are scheduled properly so that Avnet doesn’t have to pipeline inventory, it can still create the value customers expect, while reducing the cost, he says.
While even the most skilled logistics professional can’t avoid passing at least a portion of mounting fuel surcharges along to customers, distributors like Avnet pass along something customers can't put a dollar value on: their expertise. Avnet is doing its best to work with carriers to mitigate the increased costs, Biegler says. But it is also consulting with customers, offering advice so that they can make more informed decisions when it comes to their shipping schedules.
Source:
17th annual State of Logistics Report, 2006
Council of Supply Chain Management Professionals
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Combining its insight into a customer’s requirements with its perspective on the broader supply chain, Avnet can often recommend ways in which OEMs not only can consolidate their shipments, but also use more cost-effective transportation alternatives to reduce spending related to fuel charges.
Optimizing routing selection, for example, represents an opportunity for significant cost savings. Say Avnet needs to move parts from its Chandler, Ariz., facility to a customer in Los Angeles, Biegler explains. In the past it would have just flown the order over. But why fly something when Avnet can hire a driver to transport it there overnight for a tenth the cost of air?
Nu Horizons Electronics Corp., Melville, N.Y., has also found that information can be its customers’ best ally in the battle against rising energy costs. One of the most useful tools to help its customers is the intelligence it accumulates in terms of their ordering behavior, says Steve Mussmacher, vice president of operations for Nu Horizons. When Nu Horizons does account reviews, it often uncovers purchasing patterns that could lend themselves to substantial money-saving techniques.
For example, an account review may reveal that an OEM or EMS customer’s embedded release program, which automatically schedules orders to the distributor based on preset production requirement parameters, does not take advantage of the opportunities to consolidate shipments. Nu Horizons can often show them the disparity between when they release an order and when they actually need it. By bypassing the embedded release, Nu Horizons can make sure that its customers still get everything they need, when they need it, but with one freight cost as opposed to three or four, says Mussmacher.
Rising fuel costs ultimately may prove to be a good thing in at least one respect: The industry is developing new methods to reduce costs that will benefit the supply chain in the future, whether there is a fuel crunch or not, Biegler says.
It’s the nature of the profession to always look for opportunities to reduce spending, while maintaining high service levels, Avnet’s Biegler says. He expects that the techniques Avnet and other distributors employ today will continue to benefit customers even after this fuel predicament is behind the industry.
