Challenges in Electronics Manufacturing Series – Supply Quality and Supplier Management Issues

Supplier Quality Management has a direct impact on a company’s margin, bottom line and eventually shareholder value. Today’s electronics manufacturing industry has global supply chains that are wide, and broad. Managing suppliers, incoming material quality, supplier oversight and control and effective visibility to process tasks are at the heart of manufacturing operations. A smooth running supply chain process is essential for a company to get the products at the expected level of quality, time and function to the customers. When this critical activity fails or falls short, the eventual outcome includes a loss of consumer confidence, adverse market reaction, and loss of shareholder value. Let me illustrate with an example. Apple is a company that is pervasive in everyday life of millions of consumers, through products that are ubiquitous. Apple is known for innovative products, with a reputation for technological leadership and high quality products. This allows Apple to demand premium pricing that the consumers are willing to fork out. What happens when these expectations are not met? Turmoil in the market and a crack in the marketplace allow competitors to capture market share. When iPhone 5 hit the market in September 2012 with much fanfair and huge pent up demand from consumers, it was faced with several quality and supply issues such as: a shortage of the new ‘incell’ screen technology, scratchable anodized aluminum casing, a supply shortage, etc. What precipitated these issues was simply a manufacturing difficulty of incell screens at 3 suppliers due to greater quality control demands placed on those suppliers and Foxconn EMS.

These problems hit Apple in a hard way. Some major implications included reduction in margins from 40% down to 35% with even lower margins expected in the coming quarters.  Their gross margins could collapse even further as Apple brings lower priced models to fend off competition. We have seen Apple’s stock price go from a high of $705 to $395, which has wiped $250B off the valuation of the company.

As Apple lost 26% in 2013, their closest rival, Samsung, gained 13% during the same period. In addition, the stock price valuation shows the pessimism of the investors with a PE of only 9, which is well below the market average of 15. This is despite the overall good financial health of Apple, which has no debt, $150B in cash and short term investments that have the potential to generate an additional $40B of cash in a year. And now, Apple is transitioning the application processors (A5 chip) from Samsung to TSMC, which could lead to complications if TSMC cannot meet Apple’s demands.

This illustration shows how managing suppliers, manufacturing, and controlling quality and bringing the products to market at the level of quality and technological consumers expect can make or break margins and ultimately the shareholder value.

A supply chain as diverse as Apple’s, with suppliers that are globally dispersed and a rapid product life cycle, demands sound enterprise visibility and collaboration across the value chain. A supplier quality management solution that is part of an enterprise quality management system (EQMS) is an essential pillar that can work together with PLM, ERP, SCM and CRM to effectively and efficiently manage all the quality processes that not only manage the issues effectively and in a timely manner, but also provides a collaborative environment for the critical suppliers (ex: Tier 1). An integrated supplier quality management solution would also provide the required metrics and KPIs to effectively and efficiently analyze and manage risk while providing management the necessary visibility to make impactful decisions. What do you gain? Reduced cycle times, operational efficiencies, successful product launches, cost savings resulting in better margins, customer satisfaction, and ultimately increased shareholder value.

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