-
- News
- Books
Featured Books
- smt007 Magazine
Latest Issues
Current IssueComing to Terms With AI
In this issue, we examine the profound effect artificial intelligence and machine learning are having on manufacturing and business processes. We follow technology, innovation, and money as automation becomes the new key indicator of growth in our industry.
Box Build
One trend is to add box build and final assembly to your product offering. In this issue, we explore the opportunities and risks of adding system assembly to your service portfolio.
IPC APEX EXPO 2024 Pre-show
This month’s issue devotes its pages to a comprehensive preview of the IPC APEX EXPO 2024 event. Whether your role is technical or business, if you're new-to-the-industry or seasoned veteran, you'll find value throughout this program.
- Articles
- Columns
Search Console
- Links
- Events
||| MENU - smt007 Magazine
Electronic Commerce and the Electronics Industry
December 31, 1969 |Estimated reading time: 12 minutes
Hyper-competition has shifted business models across virtually all markets, but perhaps none as dramatically as the electronics industry. A decade ago, product innovation itself was enough to support sustainable competitive advantage. But innovation creates opportunity, which spawns competition, forcing companies to either keep pace or wither on the vine.
Today, companies are acutely aware that the only way to thrive amid this new landscape is to keep pace with innovation, increase customer service levels and reduce costs.
For many companies, the answer to this seemingly counter-intuitive requirement is electronic commerce (e-commerce). As virtually all industries experience dramatic change in the way business is being conducted, pressure from multiple directions forces companies to rapidly deliver e-commerce capability. Quickened product innovation and compressed technology adoption cycles have accelerated the rate of change, fundamentally recasting the nature of business-to-business transactions. While forward-looking companies have already migrated timeworn channels and processes to the Internet, others stand idle, paralyzed by fear and stubborn insistence that e-commerce is merely a flash in the pan. For many, electronic commerce signals boundless opportunities, inciting companies to develop innovative e-commerce strategies; for others, it begets a fundamental change that is disorienting, creating a state of paralysis that will inevitably lead to lost competitiveness.
The reality is that the way companies interact with suppliers and channel partners will never be the same. Today, electronic commerce is a proven way to increase competitiveness - tomorrow it will be a survival strategy. Downstream trading partners will demand not only transaction capability, but also sophisticated functionality that may extend accurate real-time visibility into upstream inventories. Manufacturers, after all, make production judgements based on the availability of resources in the supplier pipeline; likewise, distributors make fulfillment judgements based on the finished goods and production schedules in their upstream pipeline. It`s too compelling a proposition to dismiss. Trading partners will demand this level of supply chain integration, which implies a level of sophistication beyond a typical business-to-consumer e-commerce solution.
According to industry analysts at Gartner Group, the evolution of e-commerce has assumed a quickened pace, exceeding all but the most wild-eyed predictions. In fact, Gartner concludes that critical mass has yet to be achieved, which suggests that explosive growth remains on the horizon (Figure 1).
This is not a high-minded view of the future - this is the current state of business. Companies focused exclusively on product and price attributes can no longer sustain competitive advantage. The answer for many has become electronic commerce, introducing breakthrough efficiency to trading relationships and adopting a maniacal attitude about delivering world-class customer service. Perhaps more than any other single market, the electronics industry stands to benefit from e-commerce.
It enables companies to reduce transaction costs, improving order processing and order-management efficiency. As a result, companies can recover and reallocate resources toward advanced manufacturing technologies and product development initiatives. E-commerce has enabled many companies to extend market reach into new geographies, exploiting regional opportunity previously beyond the scope of their business. And by delivering real-time access to the information trading partners required to be successful, e-commerce enables manufacturers and distributors to secure preferred supplier status with channel partners, which can buy a company considerable leverage in price negotiation.
The electronics industry supply chain is rapidly evolving and e-commerce is creating a powerful opportunity to improve today`s competitive position, while realigning to match tomorrow`s business requirements. Companies that take these business requirements seriously will be poised to translate e-commerce into a tremendous market opportunity.
An Industry Poised for Change
Once a wellspring of opportunity for the new entrant, heightened global competition, trends toward commoditization and compressed product life cycles have exerted downward pressure on margins, making profitability a tenuous proposition for any player in the electronics industry. No longer do electronics companies have latitude for inefficiency, strategic missteps or failure to respond to changing market conditions. Companies that apply innovative strategies, and leverage technology to execute on these strategies, will be the only ones permitted to survive and thrive.
Many electronics industry players have looked to consolidation as a strategy for enhancing competitiveness, introducing scale economies and reducing overhead. But consolidation alone does not address all of these challenges, nor is it a viable strategy for all industry participants. Electronic commerce presents an opportunity for virtually all manufacturers and distributors to significantly reduce cost, grow revenue and radically improve customer service capability.
Issues for Electronics Distributors
- Average selling prices are expected to continue to decline, further squeezing margins and forcing distributors to identify cost-saving strategies.
- Contract manufacturers (CM) are becoming increasingly entrenched in the supply chain. As more manufacturing is outsourced to CMs, distributors will have an increasingly difficult time increasing - even maintaining - market share.
- Faced with an abundance of choice, channel partners are demanding value-added services, which generally include e-commerce capability.
With heightened competition, razor-thin margins and growing expenses required to meet channel partner expectations, e-commerce can be a strategic differentiator. Properly implemented, it can provide a number of advantages:
1. Reduced operating costs: By operating online, organizations can minimize human intervention, paperwork and opportunity for error, significantly reducing transaction costs.
2. Real-time information: Better e-commerce technologies integrate directly to a host order-management system, enabling customers to make more efficient purchasing decisions. This translates into better customer service.
3. Increased revenues and customer service levels: The Internet provides the solution for continuous access to the global marketplace, transcending geography and extending a company`s reach into new markets. This can dramatically stimulate top-line revenue growth.
Issues for OEMs and CMs
1. As companies clamor to stay ahead of obsolescence, shortening product life cycles make time-to-market a critical consideration.
2. Hyper-competition has squeezed margins and fueled a trend toward deflationary pricing.
3. Responsibility for manufacturing process R&D is being forced downstream to CMs. Scarce capital resources present difficulties in keeping pace with technological advancement.
As a result, OEMs and CMs must develop strategies to get products to market more quickly and to reduce costs to offset margin erosion and decline in average selling prices. E-commerce strategies can deliver on these necessities in the following ways:
Increase sales by reducing back orders. Back orders introduce significant costs for manufacturers and distributors. E-commerce can extend immediate product substitutions to business buyers, which enhances customer service, increases average order size and reduces the need to manage the back-order fulfillment process.
Reduced operating costs. CMs and OEMs can significantly reduce operating costs by shifting order-management burden to the Internet. By minimizing human intervention, paperwork and opportunity for error transaction, costs fall through the floor.
Looking Beyond Price/Performance
The reality today is that competitive advantage in the electronics industry is found not in the price/performance mix, but rather in the ability to quickly respond to new market demands. Unlike yesterday`s reality, barriers to entry are of little consequence. Today, companies must establish barriers to exit, drawing customers ever closer by making the relationship as easy and efficient as possible. The company that tightens customer alignment locks in a very powerful competitive advantage - an advantage far less susceptible to competitive erosion.
E-commerce is rapidly becoming the chosen model for striking this alignment - primarily, through electronic marketplaces and Web storefronts. Unlike electronic data interchange (EDI), these models don`t require long-term, tightly integrated business commitments and end-user financial investment. Today`s competitive environment, to be sure, would never tolerate the rigidity and economic and process investment required by EDI as an exclusive model for e-commerce. But that is not to say that EDI does not have a role in trading partner relationships. Today, the e-commerce framework includes a broad portfolio of complementary technologies (Figure 2).
E-marketplaces and Web storefronts will have a striking impact on the electronics industry. Consisting of online trading communities and online auctions, e-marketplaces are generally operated by third-party organizations. Web storefronts, on the other hand, are rolled out and maintained by the manufacturer or distributor as a way to enhance interactions with customers.
Online Trading Communities
Online trading communities enable companies to pool buying power, aggregating purchases to leverage economies of scale. While this model enables manufacturers and distributors to negotiate more competitive pricing on raw materials and components, it also extends the same benefit downstream, enabling channel partners to protect hard-won margin. When applied with even distribution across the supply chain, trading communities can thin margins for each participant, stripping any incremental benefit afforded by the model.
Also known as trading exchanges or hubs, trading communities are online marketplaces that bring together buyers and sellers, facilitating near real-time transfer of information, payment and resources. It also enables buyers to post requirements for hard-to-find products, efficiently matching supply and demand for even the most esoteric product profile. Trading communities enable buyers to streamline the procurement process, reduce transaction costs and gain access to a broad array of resources.
While one might assume the trading community model would only pressure upstream suppliers, it can actually extend a number of strategic and cost benefits. Trading communities enable sellers to efficiently broaden market reach, presenting product offerings to a larger market than they could reach independently. It also enables sellers to reduce marketing and selling costs by tapping into predictable demand, and to efficiently find takers for obsolete or excess inventory accruing expensive holding costs.
Online Auctions
Online auctions have the potential to change the nature of price, dynamically shifting it from cost-plus to demand-based in nature. Online auctions alter trading relationships from enduring, mutually beneficial arrangements to fleeting and opportunistic transactions, shifting buying power downstream. Rather than relying on long-held partnerships, companies will do business with whichever company can provide the best deal at the moment.
Like online trading communities, auctions enable companies to turn surplus inventory into incremental revenue. For the buyer, auctions can sometimes mean additional leverage and an opportunity to control costs.
Business-to-business Web Storefronts
While online auctions and trading communities provide certain advantages for both buyers and sellers, they tend to be opportunistic, doing little to establish strong customer relationships - one of the few requirements that won`t fundamentally change in this new business environment. What will change, however, are customers` expectations for value-added services like e-commerce.
Web storefronts, or business-to-business e-commerce systems, are a set of business tools that complement virtually any business strategy. E-commerce systems are typically a set of applications, hosted by either the buyer or seller, integrating directly into the organization`s back-end business systems.
E-commerce systems enable organizations to tightly align with trading partners, providing both customer service and cost-saving capability with implications for both buyer and seller. They are generally split between two complementary models: sell-side (customer facing) or buy-side (procurement) systems.
Sell-side systems replace traditional transaction models like the telephone and fax machine, shifting order-management processes to the Internet. This extends buyers uninterrupted access to transaction capability and the information they need to be successful. Sellers can dramatically reduce transaction costs, grow revenues by expanding market reach and lock in customer relationships with a powerful value-added service.
Buy-side technologies are typically a set of work flows within an organization that aggregate purchases and introduce a greater degree of control over the procurement process. This enables large, fragmented organizations to garner economies of scale and to preclude unauthorized "maverick" purchasing.
Implementing the E-business
The conclusion is clear: Electronics industry players that have yet to define an e-commerce strategy must do so without delay. But pressure to deliver can bring incomplete strategies and flawed execution. An e-commerce strategy must be tightly integrated into the existing business model, leveraging strengths and bolstering weaknesses. Decisions should not be made without significant thought and a defensible blueprint for success. The following suggestions will help.
Build a business case. For all companies, the cost of not investing in e-commerce is unacceptably high: lost competitiveness or even failure. But, as with any capital investment, a company must first build a value case that reconciles costs and benefits. Business issues that can be addressed by e-commerce should be identified and prioritized. Do not invest in nice-to-have bells and whistles; opt instead for the functionality that is central to a successful e-business: streamlined purchasing, strengthened customer relationships, revenue opportunities and cost savings.
Establish a cross-functional team. In addition to a competent and credible internal e-business champion, a team should be established that draws from each relevant functional area of the business. This team should be part of the business case, technology inventory, vendor selection, implementation, rollout, maintenance and ongoing evolution.
Evaluate the infrastructure. The objective of e-commerce is to extend existing resources, leveraging what is already in place. Before launching an initiative, the organization should first evaluate which online options, business systems and enterprise "touch points" relate most closely to the business priorities. Existing systems should be considered for their functionality and contribution, as should systems that must be developed.
Buy when you can, build when you have to. Do not go it alone. Leverage the time-to-market characteristics and product development resources of best-of-class vendors, developing the functionality that is not available for specific needs. Many leading solutions provide tool kits for building custom functionality, ensuring that the solution seamlessly matches your unique business needs. This "packaged capability" combined with an integrated tool kit allows for getting to market quickly with a solution suited for specific needs.
Stick with standards. Be certain that the chosen technologies are based on open standards, ensuring integration with legacy, existing and next-generation technologies. Extensible markup language (XML), perhaps more than any other, has established a loyal base of industry advocates who believe in its merits as the lingua franca for seamless e-commerce capability. Organizations are also being formed to provide information and facilitate development of standards within particular industries. The National Electronics Manufacturing Initiative (NEMI) is a consortium made up of more than 50 electronic equipment manufacturers, suppliers, associations, government agencies and universities. NEMI works with government, universities and other organizations to identify infrastructure weaknesses and set priorities for future industry needs, with the purpose of facilitating North American leadership in electronics.
Set achievable objectives and stick to deadlines. Establish a set of realistic goals and opt for solid functionality over frills. Create a series of reachable milestones, parlaying a number of small successes into overall success. Be disciplined about meeting deadlines, even if it means forgone functionality. Additional functionality can always be rolled out later.
The Outlook Is Good
Analysts predict a positive economic outlook for the electronic industry, pinpointing the main drivers of growth as increased capacity utilization, a relative stabilization of average selling prices, the strengthening of Asian currencies relative to the U.S. dollar, and a dissipating oversupply of electronic components. Coupled with this, analysts predict aggressive adoption of e-commerce as a primary transaction model.
The time is now to build e-commerce into overall business strategies. Remember that it is not merely nice-to-have technology for impressing trading partners - e-commerce is fast becoming the chosen model for transacting with customers and suppliers and will soon become a baseline requirement for conducting business.
DEREK SMYTH is chief operating officer of Ironside Technologies, 7041 Koll Center Parkway, Suite 290, Pleasanton, CA 94566; (905) 415-3900; E-mail: dsmyth@ironside.com; Web site: www.ironside.com.
Figure 1. The growth of e-commerce shows no signs of slowing down.
Figure 2. Today`s e-commerce framework.