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Restructuring the Supply Chain

By Susannah Patton

August 01, 2005 — CIO —

In late 2003, Qualcomm’s CIO Norm Fjeldheim started seeing signs that the demand for cellular phone chips was rising much faster than expected. Consumers around the world were snatching up cell phones at an unprecedented rate, and manufacturers of the popular handsets were scrambling for more chips. For Qualcomm, which sells chips to the cellular industry, the unexpected cell phone frenzy hit its supply chain where it was most vulnerable. "Our customers were not getting everything they asked for," says Fjeldheim, noting that demand for the chips rose 37 percent in one year. "We could not increase our supply, and some deliveries just weren’t possible."

Out of stock. Whether referring to semiconductor chips or potato chips, these are dreaded words for those in charge of far-flung and increasingly complex supply chains. In Qualcomm’s case, the company not only missed an opportunity to significantly boost revenue but also was forced to reevaluate the way it did business.

Since that period of panic (which lasted for most of 2004), Fjeldheim and his colleagues at Qualcomm have reorganized the supply chain so that they won’t get caught by surprise again. Company officials are bringing supply chain, finance, IT, and sales and marketing together for regular demand-planning sessions. And the company is trying to increase the flexibility of its supply chain by working with multiple suppliers, rather than single suppliers, to build a set of chips. It has also started sharing more information (via Web connections and file downloads) with its 10 chip makers. Should there be another unforeseen spike in demand, Qualcomm will be better able to shift production back and forth between suppliers, if necessary. So far, Qualcomm, which ships 140 million chips per year to cell phone manufacturers such as Samsung and Motorola, has improved its on-time product delivery rate—which had fallen below the 90 percent level during the chip shortage—to 96 percent, a high rate in an industry grappling with shorter lead times for its products than many other manufacturers.

AMR Research says the payoff for companies with high rates of "perfect orders"—those that are complete, in the right place, undamaged and on-time—can be substantial. AMR recently ranked the world’s top supply chains (see "Top 10 Supply Chains," this page). Companies that ranked high—such as Dell, Nokia and Procter & Gamble—carry less inventory, have shorter cash-to-cash cycle times and are more profitable. A 3 percent improvement in perfect order fulfillment translates to a 1 percent increase in profits, AMR says, while a 10 percent increase means an additional 50 cents in earnings per share. (Qualcomm, with revenue of $4.9 billion in 2004, is too small to make it onto AMR’s list, but the company qualifies as a top supply chain because of its ability to effectively collaborate with handset makers and cell phone service providers, says Kevin O’Marah, a supply chain analyst at AMR.)

 

 

 

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