Canadian Shipper


Managing supply chain agility in the fast paced electronics industry

The world of consumer electronics is a rapidly evolving marketplace, one in which manufacturers deal with product price erosion and the challenges that come with selling into many layered vertical markets.

According to a 2012 CapGemini Third Party Logistics study on The State of Logistics Outsourcing, challenges also include “supply constraints, mashed together supply chains and retail channels that introduce cost, safety stock, forecast challenges and additional time into logistics processes.”

Increasing pressure to lower costs and manage material and suppliers more efficiently “has triggered a preference among electronics companies for asset lightness, outsourcing both production and logistics, especially in emerging markets. For example, one industry trend is toward fewer original equipment manufacturers (OEMs) actually manufacturing, moving or storing their own products, using third-party logistics providers for these services,” said the Cap Gemini study.

“Certain categories of electronics are going through a lot of rapid change, for example extreme TVs, putting a lot of pressure on both forward and reverse supply chains,” said Curtis Greve, a principal at Greve-Davis, and an expert in reverse logistics and aftermarket services.

He pointed to the trend of consolidation in parts of the electronics industry, with many more manufacturers outsourcing manufacturing itself.

“There are only three companies in the world that make all the flat screen TVs. The brand name is really almost the middle man between manufacturer and reseller,” noted Greve.

Laptops, meanwhile, outside of those produced by Apple, have become commodities of sorts, he said.

“There have been no material changes in PCs in the last two years, but the prices have really fallen. This has really impacted the reverse supply chain in a significant way,” said Greve.

While there may be more make-to-order models in computer products, with TVs, for example, the larger the item, the more expensive it is to specialize.

“A bigger impact is the fact that the vast majority are made in Asia and ordered three to six months out. Big screen TVs have a return rate that is 8-9 % of total sales. When they are returned, people are really working hard to get a recovery value between 15-20%,” said Greve.

With about 60-65 % of those goods, depending on the item, there’s also nothing functionally wrong with them. Rather, it’s a case of purchasers wanting to upgrade the product, or feeling buyer’s remorse, said Greve.

There was a surge in returned products in January, with electronics and clothing topping the list of items. Consulting firm Accenture estimated that returns would cost electronics stores and makers US $17 billion this year.

Making the initial buying experience more satisfactory, and reducing the chance that the item will be returned, is something more manufacturers and retailers need to do, said John Dillender, an executive consultant, in consumer electronics reverse logistics processes with Toronto-based Infernotions Technologies Ltd.

“It is imperative for manufacturers to make products that create a fantastic ‘Out of Box Experience’. Too often the focus is getting the best and latest gadget to the market quickly with little thought given to what happens when the box is open. Although reverse logistics is a reality, the goal should be to eliminate the waste and inefficiencies BEFORE the product is launched.  The size or type of product does not matter in this case,” he said.

“Simple things such as ‘Start Here’ posters were developed with large easy to follow icons or pictures, as an example.  Plug and play is also a huge part of the experience. Eliminate the hard to follow installation process. End users just want to load the disk or turn on the product, answer a couple of simple questions and they are off and running.  This concept can be applied to anything. This philosophy needs to come from the CEO on down.  Up front it looks like it will be costly to support, but on the back end the long term impact on improving customer satisfaction reduces returns and will increase customer loyalty sales, and reduces costs while increasing profits,” said Dillender.

With high levels of returns a reality in electronics, the reverse supply chain takes on a prominent role, all the more so because of issues around parts retrieval and product disposition.

“The big issue on the reverse side is that the complexity of the manufacturing has increased. The average smartphone has about $8 worth of rare metals in it. The inflation rate on rare metals is over 1000%. The majority of these metals come out of China, which has used these as a tool to get what they want. To some degree this has caused disputes,” said Greve.

In a January 2012 manufacturing study from Price Waterhouse Coopers, (“Minerals and metals scarcity in manufacturing: A ‘ticking time bomb’”), 78% of high tech sector respondents indicated that scarcity was a “pressing issue” for their industry.

“While lots of companies have been trying to source rare metals from elsewhere, it makes the end of life and returns process a viable opportunity on the one hand, but also a potential risk for the manufacturer, because a lot of these are not good for the environment,” said Greve.

Scarcity could create supplier and global trade compliance risks, as well as issues with parts supply.

“There are people who use slave labour to extract these metals and then sell them. A lot of the companies are struggling to identify the source of the products/resources that they use to manufacture their goods,” he said.

“Products move very rapidly through the lifecycle in electronics — that’s been a trend in the last ten years. This minimizes our ability to go directly to the OEM for parts. We are actively engaged in the parts reclamation process.Parts that can’t be repaired are reinserted into the parts supply chain to serve as an extra set of parts available in the chain,” said Joe Hurley, vice president of business development at Encompass Supply Chain Solutions, Inc.

Encompass’ Parts Distribution division recently finalized an agreement with Sony of Canada Ltd. to distribute replacement parts for a range of consumer electronics products, leveraging its Canadian distribution facility located outside of Toronto in Mississauga, Ont., for inventory warehousing and fulfillment.

 “We were certainly impacted by the parts supply issues coming out of Japan (following the tsunami in spring of 2011), but we carry three to six months worth of inventory so we could shelter the industry from some of the impact. We see the need to have a higher fill rate for just this type of occurrence,” he said.

Parts are sourced from three streams: new, reclaimed, and repaired.

“Say a 50-inch TV has a damaged screen. We work with other entities, get the unit in, pull the circuit boards out of the product, and use them as reclaimed parts. That is actually a growing model from us. As product prices have eroded, it’s no longer cost-effective for manufacturers to carry their own parts infrastructure. We try to get a solution where the partner pays only for parts return, for example. We support over 200 different brands,” said Hurley.

“One of the major things that we do is we make every reasonable effort to turn that return into an opportunity for the client, such as a refurbished or B-stock unit. This also provides a return on that investment. If that product cannot be repaired in a cost effective manner, we make every effort to reuse it. Inevitably there are going to be some residual materials you just can’t get
your return on-we have a network of scrap dealers that will turn these into commodities.

If we refurbish something and it comes back within the warranty period, we’ll either refurbish again or start the process of reclaiming parts,” said Hurley.

The reverse logistics market is a global market, with some $2 billion of products returned by consumers this year alone in the US.

“The secondary market is a critical option for manufacturers: 35-40 % of things sold in the secondary market are liquidated. If you’re selling product on it you’re keeping it in the stream of commerce, avoiding risk of improper use or disposal of your product. There’s also a lot of money involved in liquidated product-if the manufacturer handles the process right, they could reduce the rate of return by 25-50%,” said Greve.

“There’s the gatekeeping function where you verify what you’ve got, and enforce your returns terms and conditions with the customer. The second piece is you look at the product, and determine by condition and profile, whether you’re going to liquidate it on the secondary market — could you get higher net selling as is vs. repairing it? The other part is where are you going to sell it? Back into your market or will that damage your brand name? That means you might want to export it. When you look at repair and refurbishment, you can usually get 95% of the products functional so you can sell them on the secondary market. There’s a 5% scrap rate in electronics,” he said.

The Cap Gemini survey of the electronics industry found that while 59% of electronics shippers said that reducing operating costs was their top challenge, just 28% believed 3PLs could help them with this challenge.

Manufacturers or shippers looking to maximize their relationship with a 3PL on the reverse logistics side would do well to find one that does not just ‘move returns around’, said Greve.

“3PLs need to do a better job of conveying their ability of verbalizing their economies of scale. In the manufacturing industry where I used to work we had enormous internal infrastructure costs. Now product prices have really started to erode-but the cost to repair, and distribute hasn’t really gone down. So 3PLS have to make the message abundantly clear to manufacturers that it doesn’t make sense for them to do it on their own anymore,” said Hurley.

Further price erosion in consumer electronics is a real possibility, he added.

“I don’t think we’ve hit that plateau yet but I’ve been in the industry long enough to know that just as soon as that happens a new technology will come along that will change all that.”

“My gut feeling is that electronic products have gotten much more sophisticated-you have all sorts of features on TVs, and there are more products you can integrate them with. The manufacturers that we have experience with are certainly making the effort to make sure that customer is getting educated appropriately. I definitely think it would be in the manufacturer’s interest to make a better effort on the front end-once the product has been returned the manufacturer is actually in cost recovery mode. We’re here to help them when that return occurs,” he said.