à one man's view: how mexico can compete with china
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A Competitive Supply Chain Strategy for Mexico
Contents
• Who is SalesLink?• How Industry Trends Drive A Competitive Strategy for
Mexico• Comparative Business Models:
– China Build to Stock– Mexico Configure to Order
• Supply Chain Concepts for Reducing Total Cost and Improving Cash Flow
• High Tech Industry Comparisons• Conclusion
Who Are We?
• SalesLink is a $434 million company (2003 sales)with a work force of 1800 employees worldwide.
• SalesLink has been a division of CMGI for 15 years.The company has been in business for 28 years.
• Headquartered in Boston.
• Network of 14 facilities in North America, Europe, and Asia.
1976 1996 1997 1998 1999 2000 2001 2002
Acquire
d Pac
ificL
ink,
ente
r SCM
busi
ness
Acquire
d InSolu
tions
Acquire
d On-D
eman
d
Solutio
ns, e
-fulfi
llmen
t
Opened
Guad
alaj
ara
Mem
phis D
istri
bution C
ente
r
Acquire
d iLogis
tix1989
Acqui
red
by C
MG
IFounded:
Literature Distribution
History and Growth Track
2003
0
100
200
300
400
500
600
700
800
900
1000
2004E 2005B
Acquire
d Modus
Med
ia
Opened
Hungar
y, N
YC and
Hillsb
oro
A Commitment to SCM
• $237 million cash and stock acquisition of Modus Media (August 2004)
• $42 million cash acquisition of iLogistix (July, 2002) immediately accretive
• $40 million in supply chain acquisitions 1997 - 1999
• $25M capex on IT
World-Class Global Footprint
Charlestown, MA
Memphis, TN
Guadalajara, Mexico
Santa Clara, CA
Chicago, IL
Newark, CA
San Diego, CA
Fountain, CO
Indianapolis, IN
Miami, FL
Penang, Malaysia
Taipei, Taiwan
Singapore
Tilburg, The Netherlands
Dublin, Ireland
Lindon, UT
Raleigh, NC
Austin, TX
Nashville, TN
Guadalajara, MexicoMonterrey, Mexico
Salt Lake City, UT
Chicago, IL
Waltham, MA HQ
Millington, TN
Tokyo, Japan
Seoul, Korea
Penang, Malaysia
Taipei, TaiwanShenzhen, China
Singapore
Shanghai, China
Futian, China
KunShan, ChinaSongJiang, China
Budapest, Hungary
Apeldoorn, The Netherlands
Orléans, FranceKildare, Ireland
Dublin, Ireland
Limerick, IrelandAngers, France
Cumbernauld, Scotland
Miscolc, Hungary
Suzhou, China
(As of August 2004)
Why SalesLink is Different from the Rest
• Sustained growth right through the recession
• Very solid financials
• Legitimate world class IT tools on a common platform as a strategic differentiator
• Mobile flexibility allows us keep pace with our customers– Not tied to long term brick and mortar
• Problem solving approach creates business models designed to meet tomorrow’s challenges
• Best performance in our industry backed by our customer ratings
Service OfferingAn Optimized Bridge Between Manufacturing & Customer
> Sourcing & Procurement
> Manufacturing Support Services
> Closest-to-Customer Configuration
> Optimized IT Visibility
> Optimized Cash Velocity
> Optimized Final Assembly
> Full-Cycle Logistics
> Optimization Consulting
> Order Management
What Value does SalesLink provide to its Customers?
Increased revenue due to improved product availability
Reduced total cost of ownership
Increased asset utilization
Accelerated time to market
Increased cash velocity; shortened cash conversion cycle (CCC)
Industry Trends and Drivers
Supply Chain DriversSupply Chain Drivers
Time-to-Market Time-to-Market
Flexibility/AgilityFlexibility/Agility
Total Cost and Cash Management
Total Cost and Cash Management
DemandDemand
Shortened life cycles; demanding more…now
Shortened life cycles; demanding more…now
Desire for highly customized products and services
Desire for highly customized products and services
Price is largely market-drivenPrice is largely market-driven
SupplySupply
Frequent New Product Introductions
Frequent New Product Introductions
Product ProliferationProduct Proliferation
Low Cost of Global ManufacturingLow Cost of Global Manufacturing
A Competitive Strategy for Mexico
Supply Chain DriversSupply Chain Drivers
Time-to-Market Time-to-Market
Flexibility/AgilityFlexibility/Agility
Total Cost and Cash Management
Total Cost and Cash Management
Mexico AdvantagesMexico Advantages
• Geographic Position
• Skilled, lower cost of labor than U.S. market
• Competitive logistics cost
• Reliable infrastructure
• Geographic Position
• Skilled, lower cost of labor than U.S. market
• Competitive logistics cost
• Reliable infrastructure
Supply Chain Strategy:Postponement
Supply Chain Strategy:Postponement
Postponement Capabilities and Benefits
Supply Chain Drivers
Time-to-Market
Flexibility/Agility
Total Cost and Cash Management
Mexico Advantages
• Geographic Position
• Skilled, lower cost of labor than U.S. market
• Competitive logistics cost
• Reliable infrastructure
Supply Chain Strategy:Postponement
Capability/Benefit
• Configure-Closest to-Customer
• Configure-to-Order• Customization
• Lower Total Cost• Improved Cash Conversion
Supply Chain Models: Comparing China to Mexico
Manufacture ConfigureDistribute/
ReturnEnd-User
Relationship
Scenario 1
Build-to-Stock CHINA CHINA CUSTOMER CUSTOMER
Scenario 2
Configure-to-Order CHINA MEXICO MEXICO/NA CUSTOMER
Total Cost Management
• Sourcing/procurement• Transportation (Inbound/Outbound)• Manufacturing• Configuration• Rework/Reconfigure• Storage• Returns• Product support
• Inventory investment• Discount/loss of value with excess & obsolescence• Cost of capital/opportunity cost
Cash Conversion Cycle
Cash
Inventory
A/PA/R
Days Sales Outstanding (Receivables Turnover) =
(Receivables $)/(Annualized Revenue $) * 365
Days Payables Outstanding(Payables Turnover) =
(Payables $)/(Annualized Mat’l Cost $) * 365
Days of Supply Inventory (Inventory Turnover) =
(Inventory $)/(Annualized COGS $) * 365
(DSO) (DSI) (DPO)+ -
Customer
Build to Stock in ChinaBuild to Stock in China
Manufacture Platform
&
Component Configuration
Core Hardware Supplier
Component Supplier
DC
Reconfigure
Customer
Manufacture Platform
&
Component Configuration
Core Hardware Supplier
Component Supplier
DC
Collect and Ship to Asia
China China U.S. U.S.
Customer Choice Drives SKU Proliferation
Product A
Component 2 – 8 SKUs
A-1
A-2
A-3
Product B
B-1
B-2
B-3
Product C
C-1
C-2
C-3
D-1
D-2
D-3
Core – 9 SKUs
E-6
E-7
E-8
E-5
Sub-Group 2
E-2
E-3
E-4
E-1
Sub-Group 1
Component 1 – 6 SKUs
Example
D-6
D-4
D-5
Higher Inbound Freight Cost
Monthly Inbound Shipments
Total Units
Shipments 8 14 10 15 7 13 14 12 4 12 10 8Max 3,712 1,934 2,718 2,060 9,354 6,782 3,846 14,733 3,550 12,273 5,352 2,353Min 118 216 470 135 422 62 185 275 760 275 68 157Average 1,290 682 1,052 1,027 2,422 1,629 1,103 2,220 1,852 2,453 1,509 910
Inbound Logistics Air Sea
Cost, $ 70% 30%
Volume 30% 70%
Loading Efficiency 80% 50%
Packaging Design - Fresh Air
50% 50%
10,318 9,548 10,52315,402 16,953
21,17215,438
26,643
7,407
29,439
15,0937,281
Jan
1Feb
2Mar
3Apr
4May
5June
6July
7Aug
8Sep
9Oct
10Nov
11Dec
12
Price Variance% Volume by Supplier
Missed Sourcing Savings
$7.50
$5.14
$1.10
$9.00
$7.95
$2.10
$8.40
$6.99
$2.10
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Component A Component B Component C
(20%)
(55%)
(90%)
Supply Base
Total Number Component Suppliers; Fragmented
14
% Volume of Largest Supplier 22%
Price and quality variance
Poor metrics of Supplier Relationship Mgmt
Supply-Demand Mismatch
Avg. Inv.
Avg. Demand
Excessive Finished Goods Inventory Levels
Repair/Returns Center
Component Supplier
Manufacture
Platform
Adding Value in Mexico (CTO)Adding Value in Mexico (CTO)
Core Hardware Supplier
Customer
Diagnose and Repair, Ship to Asia as needed
Component Configuration –to-
Order
Component Supplier
Manufacture
Platform
Core Hardware Supplier
Customer
China China Mexico U.S.
Managing Freight to an Advantage
0102030405060708090
100
Index Cost
Scenario 1 Scenario 2
012345
Weeks
Ocean Air
In-Transit Time
Cost Comparison
Bulk Shipment
Cost SavingsSingle Source for Multiple Suppliers
Leveraging Commodity Spend
$7.50
$5.14
$1.10
$9.00
$7.95
$2.10
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Component 1 Component 2 Component 3
(20%)
(55%)
(90%)
Commodity Management
Component C1
Component C2
Component C3
Component B1
Delayed Ownership Improves Cash Position
Manufacture/Configure
Inbound Freight
StoreDistribute/
Return
Scenario 1
CORE HARDWARE
FOB Hong Kong
COMPONENT FOB Hong Kong
ManufactureInbound Freight
ConfigureDistribute/
Return
Scenario 2
CORE HARDWARE FOB NA
COMPONENT LOCAL
OEM control
Customer controlSupply Chain Integrator control
Reducing Inventory Without Compromising Service Levels
+0.5 Week
Avg. Inv.
Avg. Demand
+1 Week
Low Inv. Reduction High Inv. Reduction
Commonality Lowers Safety Stock
Scenario 1 BTS CORE COMPONENT
Scenario 2 CTO CORE COMPONENT
~10% - 50% Reduction
- + - +- +- +
+ + >
The Benefits of Postponement: Measurable Savings and Increased Service Levels
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
Sour
cing
Inbo
und F
reig
ht
Configu
re
Stor
age
Distrib
ute
Supp
ort
Tota
l $0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
Sour
cing
Inbo
und F
reig
ht
Configu
re
Stor
age
Distrib
ute
Supp
ort
Tota
l
$15.6 M $12.5 M
Scenario 1: Build-to-Stock Scenario 2: Configure-to-Order
Cash Conversion CycleCash
Inventory
A/PA/R
Days Sales Outstanding (Receivables Turnover) =
(Receivables $)/(Annualized Revenue $) * 365
Days Payables Outstanding(Payables Turnover) =
(Payables $)/(Annualized Mat’l Cost $) * 365
Days of Supply Inventory (Inventory Turnover) =
(Inventory $)/(Annualized COGS $) * 365
(DSO) (DSI) (DPO)+ -
Cash Requirements for China BTSCash Requirements for China BTS
Payables (DPO) = 30 Days
Inventory (DSI) = 55 Days
Receivables (DSO) = 30 Days
CCC=55 Days
Customer
Manufacture Platform
&
Component Configuration
Core Hardware Supplier
Component Supplier
DC
Reconfigure
Supplier Owned Company Owned Inventory
Payables (DPO) = 30 Days
Inventory (DSI) = 15 Days
Receivables (DSO) = 30 Days
CCC=15 Days
Customer
Manufacture Platform
&
Component Configuration
Core Hardware Supplier
Component Supplier
DC
Reconfigure
Cash Requirements for Mexico CTOCash Requirements for Mexico CTO
Time savings translates into a cash injection
Days Spend
-10 Days
-20 Days
-30 Days
-40 Days
-50 Days
$10M $0.27M $0.55M $0.82M $1.09M $1.37M
$20M $0.55M $1.09M $1.64M $2.19M $2.74M
$30M $0.82M $1.64M $2.47M $3.29M $4.11M
$40M $1.09M $2.19M $3.29M $4.38M $5.48M
$50M $1.37M $2.74M $4.11M $5.48M $6.85M
Company(June 2003)
Cash Conversion Cycle (Assuming
30 Days Payables)
Inventory Days of Supply
Net Profit
Margin
Hewlett-Packard 100 53 -1.6%
Dell Inc. 1 1 6.0%
IBM Corporation 118 25 6.6%
Apple 10 4 1.1%
Gateway -3 9 -7.1%
Sony 83 53 -0.1%
Sun Micro 83 33 -4.7%
Motorola 92 62 3.3%
Intel 117 111 8.7%
AMD 224 191 -9.1%
High Tech Industry Examples
Source: Benchmark Brief prepared by SCE Ltd.The SCOR Users Resource Center, 2003/2004
Conclusion/Summary
As China supply chains begin to mature we believe there is opportunity
for Mexico to recapture some of the business lost during the past few years using a postponement business model
strategy
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