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Virtual PCB Manufacturing: A Virtual Advantage?
December 2, 2003 |Estimated reading time: 12 minutes
VIRTUAL PCB MANUFACTURING By Jason M Pai Yang An Electronics
ABSTRACT
With the advent of new technologies, the industrial landscape of the PCB topographic dynamics is in a state of constant change and consolidation. Therefore, traditional business strategies, where the assumption was the existence of a consistent and stable landscape, are obsolete in the current market environment. Those who adhere to that former frame of mind are the ones that will find themselves unable to change with the market because there are accelerating dynamic dimensional shifts into current business setting. The time-honored vertical integration cannot work well, because of this constant fluctuation. New business strategy must involve virtual integration to be ahead in today's PCB industry.
Virtual integration emphasizes on specialization of individual core competencies. Using efficient networking, companies can achieve scales much greater and in more effective manner. A business can streamline and develop their business focus while supplement their core competencies. With intimate cooperation between the partners, a virtual integrated system has worked successfully in other electronics industry, not too different from the PCB industry.
The Need for Virtual Integration
Recent economic turmoil has forced businesses to look at new financial realities that points towards a new direction in the printed circuit industry. This new topography requires a business to be adaptive to change in a market where it the product was once considered a commodity. One of the reasons for this shift in economic landscape is generated through the influx of new technology that may change the entire PCB industry, such as printable computers, OLED, and Electronic Ink. With new developments constantly changing the industry outlook, businesses that find themselves heavily rooted are the ones that will find it difficult to adapt to the changes. Therefore, in this current PCB setting, there is a need for virtual integration.
When capitalism was developing, the fathers of economic principles suggest that the best economic outcome is produced through internal efficiency. In other words, those that can establish a vertical monopoly or vertically orientated can dominate their commercial domains. Although it still holds true today, the environment was much different back then. Prior to the 20th century, most industrial landscape was static, meaning business principles and strategies that work today will work tomorrow. Perhaps a merger here and there may change the demand curve as it modifies the rules of its category, but in general, business environment was relatively placid. However, in the PCB industry, the speed of development of new technology, generated through greater involvement in this technology business and easier medium for knowledge sharing, is melting the rigid economic realm into a more dynamic and liquid state. Furthermore, more companies are looking for global solutions to reduce costs in their supply chains, changing the competitive atmosphere. Therefore, a new dimension must be considered in economic planning and strategies.
In the final flower tossing in weddings, it does not make sense to anchor oneself to a spot unless he/she knows where it is going to land. Or, unless one has a perfect forecast of the trajectory, or secretly made arrangements, it is best to remain mobile and adaptive. In business terms, being mobile and adaptive is to lessen solid capital investments such as machinery and maintain as much liquid assets available. Running a business, there are two ways to reduce costs or remain mobile, one via internal cost efficiency, while the other is through reduction of investment. Keeping ones business light in investment means that it can quickly adapt to changes while using the financial resources to concentrate on other value-adding aspects. Whereas investing heavily in machinery, it is difficult to move those assets when condition coerces change or replacement. Solid assets are slow to move because it takes time, planning and a second party that will accept the responsibility of the unwanted assets. Thus, in a dynamic and perhaps volatile industry, such as the PCB domain, it makes perfect sense to remain liquid.
To remain liquid implies not investing in new equipment and assets, so how is it possible to provide satisfactory products and services to one's customer? The only feasible solution practiced today is through outsourcing. To many business managers, the word outsourcing has a bitter ring to it, because it implies relatively higher costs. Most companies, today, outsource when capacity is over its limit; in order to satisfy their customer, they pay extra for outside help. This extra step is an extra cost, which to some managers is perceived avoidable perhaps with better planning.
Through network efficiency in a supply chain management system, a company can overcome the problem of adding extra cost to increase profit. One view that must be changed with respect to outsourced companies: the company must perceive other OEM/ODM as a partner rather than a simple supplier. Treating the partner as a supplier often leads to a well-defined boundary between companies. But to be horizontally efficient, it is necessary to break through those corporate boundaries and streamline production and value-added services though information sharing and intimate cooperation. Providing a singular seamless virtual entity to the customer, each individual organizational module can cover more area than their individual design with greater satisfaction from the customers. Furthermore, outsourcing all non-core competencies means that each organizational module can concentrate and emphasize their specialized industrial niche - producing better products and providing better services to the customer.
Dell provides a successful "fabless" model of a virtually integrated system with their own twist in the supply chain formulation with the addition of value-added services to compliment their core competencies. With the addition of modern networking technology, such as the Dell's internet-based ordering system, virtual integration provides a flexible platform for separate business entities to work seamlessly as one. In an industry where a realization and implementation of a novel technology can alter the course of the industry, the virtual strategy offers lower capital investment and reduces over-structuring. Virtual integration harnesses economic benefits of these three different business advantages:
- adaptability that is necessary especially in a dynamic industry
- benefits from the focus and specialization of virtual factories
- contribution to competitive advantages of a tightly coordinated supply network
The foundation of an effective business plan is to understand the customer, no matter the emphasis. Perhaps reviewing their business strategies and importing them into PCB industrial setting can strengthen the PCB industry.
DELL BUILDS SERVICE NOT COMPUTERS
Developing a successful business plan requires a solid understanding of the needs to make a customer successful, because their success translates into a healthy customer base. Dell provides this service by adding value to the customers in their products with an effective and efficient supply chain system. Working intimately with the customers allows them to improve the value of the products dramatically. Dell designed a unique customer relationship development programs called the Platinum Council. Basically, it is a discussion group with their significant customers to communicate, review and update requests. Accordingly, they can align future impact strategies from a customer's perspective. Next, Dell organizes their customers and treats them according to their needs. For instance, institutional buyers often require large quantities of computers and need them networked. Dell would utilize a specialize department to modify those products to fit the networking demands. Similarly, other departments, focused to satisfy the basics of that market segment, handle smaller consumers. With a finer definition of each customer segment, Dell is able to forecast and coordinate the information to the suppliers and supplier's supplier to lessen the overall costs.
Through virtual integration, they are able to better focus on the customer's need to make them successful while they are able to develop knowledge to satisfy future needs. With a well-maintained information system, they can work with the customer to target their needs, and sometimes know more about their needs than the customers themselves, with help of systems such as Customer Relationship Management (CRM).
Prior to the advent of the modern communication systems, companies have a solid barrier between company walls and definitions of the tasks of the companies were clearly defined. Gaps were reserved between these barriers as a protection mechanism between the partners. Consequently, customers are penalized with constrained consumer service. With virtual integration as implemented by Dell, these boundaries are eliminated because the partnerships are virtually stitched together with networked systems that will handle and route all incoming customer traffic. Furthermore, customer convenience is achieved as a single seamless entity is recognized. Cross-functional teams are formed to bridge the gap between companies and even linking different divisions of the company, leading to a fluid business operation. Blurring out the traditional boundaries and roles in the system, the entire network can work faster and more efficiently. For instance, Dell's partners would provide engineers based in their company's to help solve problems during design and implementation. Overall system efficiency and customer satisfaction is achieved because of this intimate cooperation.
It is the intimate networking and sharing of knowledge that provides a solid foundation for the lucrative partnerships. Dell shares the information with their suppliers and distributors so that they are well prepared when large orders are placed, and they have time to react. Not only is this information communicated to the suppliers, but also the distributors are well informed when orders are placed. With this complex information systems between the companies can further keep low overheads and allocate resources properly. This persistent communication between the parties allows their distributors or suppliers to forecast accurately, which also makes them successful. Thus, under virtual integration, the success of the companies involved reflects on the success of the entire group.
VIRTUAL ADVANTAGE
Modular architecture allows the company to avoid major investment, such as a new plant or equipment cost just to produce component of the product. Furthermore, it permits a larger business scope otherwise overwhelming for a single organization to handle. Especially, in a high-tech industry, technology landscape fluctuation is immediate and often. For instance, Dell will remain financially healthy if a component or a product falls out of popular demand in PC systems. The adaptive potential of horizontally orientated organization ensures its survivability in this dynamic-nature economic reality.
Dell's partnerships are stitched together to maintain a flexible business plan. Therefore, when a partner performs below company's expectation, such as increasing delays in delivery or decreasing quality in PCB boards, Dell can as easily destroy their relationship just as they developed it. With other possible choices of suppliers or distributors, they can easily choose the next best candidate who can perform better to provide quality products to their customers. Unlike the traditional method, where the company tries to manufacture the product from the beginning to the end, Dell does not have to invest in the large overhead cost to develop the products when their strategy accomplishes the same tasks through seamless-stitched alliances. Also, modularization encourages component-wise efficiency, leading to better features in products, such as the products cooperation with Dell and Sony. Their partnership provides the customers with top-quality TFT-LCDs in each PC system. Furthermore, horizontal integration eliminates the investment into research and development of new monitors in a computer system. Therefore, they can concentrate their company resources toward the service of the customers and help suit the customer's needs.
PRACTICAL DISADVANTAGES
As the network of the virtual architecture expands, the information sharing becomes an exponentially complicated problem. In an effective supply chain system, the information is shared to the extent that the company can absorb and adapt to it. However, when the network of suppliers or distributors grows large, finding information from the supplier's supplier or customer's customer may not be possible because of the vast amount of data that must be digested. Although more information is usually preferable, excessive information is useless and only drains company resources. Therefore, managing the knowledge accounting is necessary depending on the network position and the infrastructure capabilities. Dell lessens the effect of this potential pitfall with a tight control of their network. Moreover, they simplified their networking systems by installing only the necessary transmission links, thereby streamlining information to the recipient that needs the information.
DEVELOPING COMPETITIVE ADVANTAGE
In the IT industry, outsourcing's rapid increase in popularity especially in the late 1990s, has brought in wide spectrum of outsourcing relationships. Companies as 3Com, Cisco, Ericsson and Alcatel are examples of subcontract deals leading to a "fabless" architecture. While most outsourcing strategies are decentralized between the entities inside the network, Dell's and other successful model is derived from an intimately coordinated supply network. They closely work with their partners-suppliers in order to provide the better product to their customers, while reducing costs. Furthermore, with the production outsourced to competent suppliers, they concentrate their resource on customer service.
In the PCB industry, it is common practice to be on the receiving end of the outsourcing relationship. In other words, most PCB suppliers play the contract-manufacturing role in the IT industry. Although this association is traditionally practiced, in a global supply chain environment, PCB shops in the developed world, such as the ones in US, Japan, Europe, and also evident in Taiwan, are fighting an uphill battle to those low-cost manufacturers in Asia and East European location.
CONCLUSION
Information exchange in the electronics supply chain is not the driver of supply network success, but only a mere tool. It is the concentration towards service and the divestment in none-core competencies that forms concrete business architecture. Also, this network-based production model facilitates vertical specialization, leading to better modular products. Furthermore, using efficient networking, companies can achieve scales much greater and in more effective manner. With intimate cooperation between the partners, a virtual integrated system has worked successfully in other electronics industry, not too different from the PCB industry. The examples in this papers show that this emphasis in the business model lead to companies with adaptive capabilities, such as Dell. This need for adaptability is necessary in a dynamic topography as one in the PCB realm, thus traditional linear idealism must be replaced. Those who adhere to that former frame of mind are the ones that will find themselves unable to adapt with the accelerating dynamics of modern business. The traditional vertical mentality cannot work well, because of this constant fluctuation. New business strategies should involve virtual integration to be ahead in today's PCB industry.
ACKNOWLEDGEMENTS
Special thanks to Larry Tsai and John Pai for the help in development of ideas and suggestions for this paper.
REFERENCE
Magretta, Apr. 1998: The Power of Virtual Integration: An Interview with Dell Computer's Michael Dell, Harvard Business Review, Apr 1998.
Ernst, D. and O'Conner D. 1992: Competing in the Electronic Industry: The Experience of Newly Industrialized Economies. Paris: OECD.
Borrus, M. 2000: The resurgence of U.S. electronics. Asian production networks and the rise of Wintelism. In: Borrus, M, Ernst, D. and Haggard, S., (eds.) International Production Networks in Asia. Rivalry or Riches? Pp. 57-79. London: Routledge.
ABOUT THE AUTHOR
Jason M Pai is an engineer in the Research and Development department at Yang An Electronics, in Taoyuan, Taiwan. He has done extensive research in supply chain management, management of technology and information systems during in his studies for his MS in Industrial Engineering at Arizona State University. For comments or suggestions, he can be reached at paijam@yangan.com.tw.