Extron Case Study - network appliance
Summary of Facts
Product: Configurable Network Appliance Number of SKUs: 10+ SKUs from 1 basic “vanilla”
Number of SKUs: painted, custom sheet metal chassis enclosing a multi layer PCBA and
IO secured by 4 threaded fasteners, various software options
- Volatile demand/poor forecast causing high inventory levels
- High freight costs for fully packaged product
- Less than container load shipments to meet demand
- Significant use of expedited air freight to meet unforecasted demand
- Strong need to preserve Global supply base, but increase flexibility
Detailed Case Narration
Client B’s product is a Network appliance and is sold in an extremely volatile market segment. The product is sold to many different customers, each requiring their own varying levels of OEM labeling, packaging, hardware and software configurations.
The level of variation to this single base platform made final configuration overseas problematic for a number of reasons (although many similar companies still use this approach). Transporting fully configured products by air was cost prohibitive due to the size of the final packaging leaving no alternative but to fill cargo containers and ship them via ocean transit. Ocean shipment carried with it a greater risk of transit damage and pilferage and the extended lead time required for ocean transportation almost guaranteed that the product would be close to obsolescence when it reached its final destination.
With eight weeks between the factory and the customer, the client was forced to anticipate the market well into the future and lock in its configuration options well in advance and then warehouse those completed configurations. Every transaction from this point in the supply chain would increase cost, which in turn would directly erode margins. As one could imagine the forecast rarely represented actual demand, so the transactions were numerous. Reworking products with lesser demand into those with higher demand was commonplace and was never factored into the sales price or company projections. Several times there was no ability to remanufacture products into current models at all. No rework capability meant out of date inventory needed to be “dumped” at a greatly reduced price, often not adequate enough to offset the initial manufacturing cost. Several times during the year, the client was forced to air ship fully configured units at substantial extra cost in addition to sending less than container load shipments at additional cost. In addition, products typically depreciated during the time spend on the container ship, further reducing profit.
With this dilemma, the client contacted Extron. Extron’s consultants were able to quickly identify the shortcomings in the supply chain methodology and, as usual were able to remedy the situation with a tailor-made solutions package. The client’s supply chain model made them entirely dependent upon Asian manufacturing sources and bonded them to a product lead-time destined to make even marginal forecasting performance to actual demand a statistical improbability.
Extron quickly identified that certain components of the products were STABLE, meaning unlikely to be revised through multiple iterations of the client’s product. These components could be efficiently manufactured in Asia and shipped in bulk by air for significantly less than finished products were shipped by sea or shipped by sea for even further cost reductions
This opened the door to the implementation of a postponement manufacturing chain, which is a supply/manufacturing pipeline that postpones the final assembly and configuration of products until it is actually necessary. Extron recommended the client establish final assembly facilities in the US and Europe, closer to the markets. Non-volatile components are bulk shipped in from Asia; volatile components are procured from domestic sources reducing lead-time and improving cash flow.
In the Extron Glocal Postponement model final configuration, labeling and packaging are postponed until just before shipment to the end customers. All these activities are now driven by actual demand and produce revenue. The client saves money because they only have to inventory non-volatile components rather than massive shelves full of final configured products. Now only the products that the customer orders need to be assembled almost eliminating rework, inventory depreciation and obsolescence. Additionally the new supply chain also makes rework on returns received a financially viable option, eliminating potentially crippling losses due to the forced dumping of aging inventory.
The client realized immediate results from the model change; foremost of these was an increased level of responsiveness to their customers needs, but they were also very pleased with a reduced inventory of 30%, returning a substantial amount of cash to operations and limited exposure to inventory obsolescence. A COGS improvement of 8% and an improvement of annual inventory turns from 8 to 12.
Demand volatility from end customers has become the norm and manufacturers need to incorporate this variable into every aspect of their product and supply chain development and also into their production schedules. Now that the client no longer had an ocean between them and their final configuration facility response times were reduced from months to days, even hours.
There is no doubt that Asia is currently the factory floor of the world and any company that wants to compete needs to take advantage of this fact, however removing dependence on Asia (except where it was appropriate), and deferring final configuration until it is absolutely required made this clients pipeline more flexible, efficient and cost effective.
For more information, please contact Extron at email@example.com