Lifting the Fog From Inventory Risk Management
AMR Research Alert
January 16, 2003
Vinay Asgekar
As High-Tech companies turn to outsourcing to get the most out of their capital dollars, supply chain control gets more complex with the introduction of partners such as Contract Manufacturers (CMs) and distributors. Although Original Equipment Manufacturers (OEMs) still have direct design relationships with the semiconductor suppliers, the purchasing relationship comes about through the OEMs’ partners, making inventory ownership ambiguous, blurring inventory visibility across the supply chain, and establishing ad hoc processes between the partners for managing supply chain execution.
The last industry downturn made these evident, as seen in the huge inventory overhang. However, it doesn’t have to be that way. To safeguard against such risk in the future, companies must create a framework that not only defines a clear financial ownership of the material, but also establishes inventory visibility and a risk management process between the partners. This requires access to inventory data, translating that to the actual risk profile by applying the liability terms, and maintaining the historical pegging-to-demand scenarios. Fogbreak has a product designed to address exactly this problem by facilitating inventory visibility and tracking the liabilities based on contractual agreements across extended supply chain partners.
A semiconductor test equipment company with fully outsourced supply chain operations is using Fogbreak’s application to gain control over its inventories at a contract manufacturer. Since the company issues a purchase order to the CM to initiate material acquisition based on a forecast, it assumes full responsibility for the component inventories that the CMs purchase on its behalf. But in the past, it had no visibility and hence no way of knowing its full liabilities. Despite established Electronic Data Interchange (EDI) connectivity to its CMs, the company had no access to component inventories nor a process in place to tie inventory to its demand and control it.
With Fogbreak’s application, the company now has established integration points to the component inventories at its CMs and can rationalize the inventory levels and control liabilities according to different demand scenarios. The company reviews the results with its partners twice a week and can assess not only the inventory exposures resulting from demand swings, but also establish inventory support for possible upswings and lead-time pull-ins. With the visibility, the company is also able to manage engineering builds and has improved its support for launch of new products in the market. Now that it has a vehicle to control and manage its risk, the company plans to reduce its order fulfillment time by establishing strategic inventory levels for critical material at its CMs.
As companies increasingly move toward outsourcing, managing a mix of internal operations and operations at CMs is becoming more difficult for most supply chain executives. Tools like Fogbreak can extend the traditional inventory management functionality by creating visibility into partners’ operations and integrating contractual agreements to provide the risk control that the supply chain executives need.
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