Monday morning April 8, HTC released Q1 profit numbers that were startlingly low. After announcing that they would be Is HTC Imploding?forced to delay the launch of the HTC One, the company’s flagship smartphone, most analysts were prepared for problems. But not of this magnitude. Delaying the One’s launch by just one month has caused a 98% drop in HTC’s profits.
The story behind HTC’s record low Q1 earnings offers a lesson in supply chain optimization. The cause of the One’s delayed launch was cited a component shortage and an inside source revealed that the company’s suppliers no longer viewed HTC as a tier-one customer. What could have caused this corporate giant to fall from tier-one ranks? Improperly aggregated supply channels.
Overly Diverse Supply Chains Are Costly
Late last year evidence was presented showing that HTC was diversifying its channels of supply, attempting to be less reliant on any single OEM. This move was in suit with Apple’s decision to remove Samsung components from the iPhone and was likely an attempt to avoid sharing profits with competitors. However, the move to diversify supply channels can have unintended consequences and it seems that HTC is now experiencing some of them.
Simple economics shows that heavily diversifying a supply chain will increase costs. Increasing the number of suppliers you utilize for any single component decreases your order sizes. Unless your production volumes are increasing radically, you will be forced to reduce your order quantities to each specific supplier.
Decreasing your order sizes is a decrease in demand for your suppliers. Larger order sizes allow suppliers to scale their operations and produce your components at a lower cost. Decreasing order sizes makes their own operations less efficient and is likely to increase the costs that they pass on to you.
Suppliers will serve their most important customers first. In the case of HTC, over diversifying their channels of supply likely caused component manufacturers to realize that serving other customers with larger order sizes was more profitable and efficient. HTC may have forgotten that value stream decisions carry consequences upstream as much as downstream.
Aggregate for Advantage
Taking the opposite tack of HTC and aggregating your supply channels rather than diversifying them can have some significant advantages.
While supply and demand might be working against you when diversifying your supply channels, aggregating suppliers allows the mechanics of economics to work in your favor. By reducing the number of suppliers that you utilize, you can increase the size of your purchase orders. Larger orders means greater manufacturing efficiency and reduced costs being passed down the value stream.
Larger purchase orders can also help assure your suppliers of their own importance to your operations and improve relationships. By diversifying your suppliers you do mitigate some risks, but you also show a level of distrust. Conversely, a little loyalty goes a long way and giving your suppliers a reason to believe they will have your business for a long time may help you hold onto your tier-one status.
Diversifying supply channels can have mixed effects. As with most things, there is a golden mean to be found in application. However, in the case of HTC, the implementation of more suppliers in late 2012 has clearly been a costly choice. Posting profits of under $3MM has left analysts wondering if the company will ever truly recover, even as the One finally launches in the next several weeks.
Value stream structuring choices will be some of the most important your company makes. Appropriately aggregate your channels of supply and you’ll find yourself with a lean supply chain reliably delivering components at the lowest possible cost.
Video – Reducing Supply Chain Cost
We are curating a conversation about reducing supply chain cost at costflexrisk.com. We interviewed Mike Mason, CEO of Weathermatic, Inc., about setting cost cutting priorities, and how he got there. Click the image below and you will be taken to costflexrisk.com to watch the video:
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