Supply chain risk and the impact on drivers of value in the business


RR BWRachel Russell, Head of Client Service, writes on industry

A report this week from Gartner’s semiconductor research programme offered a fairly lacklustre picture of the industry. The analysts responsible for the report blame weakness in the global consumer electronics market for a decline in capital spending within the sector – from strong growth last year, to contraction this year and next. There is no arguing with the figures, but the notion of consumer electronics in decline does seem counterintuitive when we think about the growth of mobile in emerging markets, the rapid expansion of the global middle class, and the internet of things.

The discrepancy, of course, is because the research tracks spending on equipment and machinery, not production. A decline in capital spending does not necessarily equate to a drop in production, just to a possible decline in its rate of expansion. It also points to a possible drop in the ability of production to respond to changes in demand. That is a more interesting implication of this research.

For consumer electronics designers and manufacturers, the semiconductor business sits near the top of their supply chain. Even in a less than vigorous global market, successful consumer electronics companies are characterised by rapid innovation, intense competition, and a laser-like focus on R&D investment in the right areas. In all these aspects, they move and are required to move much faster than the capital investment cycle for semiconductor manufacturing.

A responsive R&D strategy, and an ability to respond quickly to innovative competitors requires a deeply integrated combination of market and financial analysis, and an in-depth understanding of the drivers of value in the business. However, insight into the market and the company’s own situation is not enough. Assuming that the company can respond to a certain change in the market, in a certain timeframe, and at a certain cost may make for a very neat strategic plan, but that plan is vulnerable if it does not take account of upstream factors.

A contraction in the manufacturing capacity near the top of the supply chain can make for unexpected rises in costs, as well as potential delays in securing supplies, should demand for a certain product change quickly. For example, a suddenly popular consumer product may require a certain chip, but an unexpected spike in demand for the raw components may result in an increase in its price, making it much harder to market the finished product in question. The company able to take account of this risk in its planning would be able to respond as soon as it appeared, to explore alternative arrangements, or even to change strategy completely.

Companies that achieve success in unpredictable and fast-moving markets do not often do so through good luck – rather, they are able to distinguish a strong opportunity from a marginal one, and invest accordingly. They can do so not just be looking at their own position and opportunities in the market, but by examining cost risks and opportunities across the whole supply chain, and analysing how external events impact on the drivers of value in their organisation.

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