Supply chain integrationSeptember 30, 2015
Performance management in procurement – Truth or fallacyOctober 9, 2015
The latest iPhone 6s and iPhone 6s Plus were recently launched and immediately went to on create sales records. However there has been some controversy called the “Chipgate” (keeping with the naming tradition of “Antennagate” and “Bendgate”) and the below video provides a quick insight.
This is clearly a nightmarish scenario for procurement professionals but before going forward we would like to clarify the following:
- We are not specialists or experts in chip design, mobile phone design or manufacturing
- Our assumption is (and this one is probably correct) that new iPhones are probably the most anticipated devices in the most competitive industry in the world. An industry where unfulfilled demand will probably result in lost customers
- We don’t have any insight in Apple procurement, design or manufacturing process
- We will be only using this example to help readers and procurement professionals take precautions avoid such a situation occurring in their organization
Just 7 points we illustrate how a procurement professional can avoid such a situation , as far as possible
- Understand your product and its critical components – Understand your critical components which could be a bottleneck in manufacturing and prepare for contingencies. For example in this case the processor is obviously critical to a phone impacting not just the speed of operations but event energy consumption and battery life to a large extent.
- Always be prepared for unforeseen supply issues and the problem of plenty – If you are lucky enough to work for a company like Apple (where demand seems to be growing with each iteration), supplier management will be key as single suppliers may not be able to meet demand. You will have to work with multiple suppliers for the same component, even for critical components like the processor. As you know this is often the case for critical components. The usage of multiple suppliers cited here is purely from a supplier production capacity vs demand perspective; we are not talking about using multiple suppliers from a supplier risk management perspective. For all components, especially critical components, it always makes sense to identify alternate suppliers in case of contingencies
- Understand product and component specifications – Just to clarify (and feel free to correct us in the comments if we are wrong) both the A9 chips are designed by Apple. They are manufactured by different probably using different processes. They are of different sizes but the perceptible performance is almost the same. When a contract manufacturing assignment is given, suppliers may have different perspectives on the same and sometimes may try to customize it to their strengths. Proactively prototype and check if this acceptable. Trade-offs may be made at this level. Contracts can have stringent acceptance criteria and supplier performance on different product parameters can be regularly captured and benchmarked
- Understand product performance and benchmarks – If you are forced to make operational trade-offs, you need to test both the prototypes and the final product on performance parameters. For example in this case it seems 3 key performance parameters are affected.
- Speed of tasks
- The battery life
- Size (they seem to different sizes) and space management and layout may have been changed
While the speed of tasks is almost the same and would be within acceptable parameters, the battery life is affected significantly.
- Negotiate these and include them in the contract – It may be important to include both the manufacturing parameters as well as performance parameters in contacts and define an acceptable range of performance. Once these are negotiated with suppliers, they need be included in the contracts with penalties.
- Test performance and report back to the supplier – Once a shipment is received test with proper sampling and report back to the supplier. Historical performance can be stored, trends analyzed and that can be critical parameters to the re-negotiation of contracts. Having done all of these you may find that you can manage multiple suppliers for critical components well but there may be a case (such as this one) where you make trade-offs such as accepting variable performance across suppliers. This leads us to the 7th point, which in this case probably the most important.
- Prepare the organization
- Understand that in today’s connected world, nothing will go unnoticed – 15-20 years ago media was a few TV stations, a few radio stations and a few newspapers who could reach a vast number of people with revelations such as these. They could be managed. This is not the case anymore. Social media has given hobbyists and fans a voice and more importantly a community. This community uses a collective wisdom and social tools to reach a wider audience. Hundreds of thousands of people knew of and had collectively contributed to the wider understanding of “Chipgate” before a single mainstream media outlet reported of the same.
- If the organization has followed the above 6 steps and then decided to make a performance / supply trade-off they would know that it is just a matter of time before performance variations are revealed. In which case they should be prepared with responses to media, customers, legal and financial challenges if any.
To know how the various modules of Zycus’ Source-to-Pay Procurement suite can help you with first 6 steps, reach out to us here.
I collaborated with Yash Asher from the Zycus marketing team to write the post. Thanks Yash for bringing “Chipgate” to my attention.
This is the 1st in a series of posts on “Practical Procurement” where we examine real world events and their impact on procurement and business. The 2nd post in this series provbides a procurments view of product recall and can be read here.