Supply Chain Management (SCM) as a Key Strategy to Induce Electronics FDI : Lessons from Malaysia

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Supply Chain Management (SCM) as a Key Strategy
to Induce Electronics FDI Lessons from Malaysia

• Vietnam Development Forum
• Junichi Mori
• Date Jun. 15 2004 1400 1600
• Venue VDF Mtg Room

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Agenda

• FDI trend in East Asia and relationship with SCM
• SCM and industrial agglomeration
• Development of SCM and obstacles in Malaysia
• Proposal for Vietnams SCM strategy

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What is SCM?

• SCM is a means to maximize customer satisfaction
  with minimum lead time and cost.
• The cost includes production cost, parts cost,
  and logistics cost.
• The improvement of information flow and
  localization of necessary parts is the key to
  achieve on-time delivery by minimum inventory.

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Previous Production Style with Excess Inventory
Push System without Information Flow
Dealer Retailer
Sales Company
Final Assembler
Parts Vendor
P/O
P/O
P/O
Ship
Ship
Ship
Inventory
Inventory
Inventory
No Customer Satisfaction
High Storage Cost
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From Push to Pull System Information Flow
is a key to minimize inventory
P/O Forecast
Parts Vendor
P/O Forecast
P/O Forecast
Dealer Retailer
Sales Company
Final Assembler
Update Order
Update Order
Update Order
Take
Take
Take
Inventory
Inventory
Inventory
Inventory
Customer Satisfaction by Low Cost Operation
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FDI Trend in East Asia and Relationship with SCM
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Thailand and Vietnam are Rising the Ranking as
China plus One Country
Resource Survey Report on Overseas Business
Operations by Japanese Manufacturing Companies
-Results of JBIC FY2003 Survey, JBICI Review No.
18 (Feb. 2004) p46
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Japanese MNCs have Good Prospect for Thailand and
Vietnam to Expand Investment
Resource Survey Report on Overseas Business
Operations by Japanese Manufacturing Companies
-Results of JBIC FY2003 Survey, JBICI Review No.
18 (Feb. 2004) p66
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Difference of Good Prospect in Thailand and
Vietnam Less concrete plan for Vietnam
Resource Survey Report on Overseas Business
Operations by Japanese Manufacturing Companies
-Results of JBIC FY2003 Survey, JBICI Review No.
18 (Feb. 2004) p47
10
Insufficient Local Parts Procurement interrupts
Concrete Investment Plan in Vietnam Development
of SCM is necessary
Resource Survey Report on Business Operations by
Japanese Manufacturing Companies in Asia
-Results of FY2003 Survey (JETRO, Feb. 2004) p59
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Summary FDI Trend in East Asia and Relationship
with SCM

• Japanese MNCs have prospects to expand or
  strengthen investment toward Vietnam and
  Thailand, as a candidate for China plus one.
• However, the expectation toward Vietnam is
  accompanied with less concrete plan than
  Thailand.
• The development of SCM, which enables final
  assemblers to procure necessary parts from
  domestic market, is a key to change uncertain
  expectation to practical investment plan.

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SCM and Industrial Agglomeration
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Industrial Agglomeration Accelerated by
Development of SCM
Stage 1
Stage 2
Stage 3
Stage 4
Assembly Only
Assembly and Parts
Local vendors produce parts at lower cost than
foreign vendors
Parts localization mainly by foreign vendors
Industrial Agglomeration
Smooth import of parts with low tariff
Assembly with import parts
Development of SCM
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Production Cost Lead Time Reduction by
Development of SCM
Stage 1
Stage 2.1
Stage 2.2
Stage 3
Assembly Only
Assembly and Parts
Assembly with import parts
Smooth import of parts with low tariff
Cost Lead Time
Parts localization mainly by foreign vendors
Local vendors produce parts at lower cost than
foreign vendors
Development of SCM
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SCM reduces Operation and Parts Cost by
Localization of Necessary Parts
Import tariff for parts
Price
Logistics Cost
Transportation Cost
Logistics Cost
Warehouse Cost
Manufacturing Cost
Price Reduction by shifting to local companies
Logistics Cost
Manufacturing Cost
Manufacturing Cost
Parts Cost
Logistics Cost
Parts Cost
Manufacturing Cost
Parts Cost
Parts Cost
Stage 2
Stage 3
Stage 4
Stage 1
Development of SCM
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Development of SCM requires Local Parts Vendor to
supply Necessary Parts at Competitive Price
Price
Lower Wage
Technology Transferred from foreign companies
Mobilizing domestic resource
Technology Innovation
Foreign Parts Vendor
Final Assemblers Demand
Local Parts Vendor
Stage 2
Stage 3
Stage 4
Stage 1
Development of SCM
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Summary SCM and Industrial Agglomeration

• Industrial agglomeration synchronizes with the
  development of SCM.
• SCM reduces production cost and lead time.
• Local parts vendors require to supply Necessary
  Parts at more competitive price than foreign
  vendors, for further development of SCM.
• Technology transfer from foreign companies to
  local parts vendors are required.

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Development of SCM and Obstacles in Malaysia
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Obstacles to SCM in Malaysia

• Logistics cost could not be reduced, due to SCM
  incompletion.
• SCM was not completed, because of continuous
  import of bulky parts. (e.g. cabinet, CD or MD
  mechanism, and picture tube)
• Operation cost and lead time could not be reduced
  in the end.
• As a result, Malaysia lost its competitive
  advantage.

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AIWA Malaysias Parts Logistics Flow before SCM
Implementation high cost operation with huge
storage space caused by import parts
Production Line (Long Line)
Store
Warehouse
Overseas Parts Vendors
Parts Vendors in Singapore
Domestic Parts Vendors
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Logistics Flow of full SCM implementationLocaliz
ation of Necessary Parts (Bulky and Specific
Parts)
Production Line (Cell Line)
Overseas Parts Supplier
Super Market
Parts Supplier in Singapore
Small parts (e.g. IC, Semi Conductor, etc.)
Domestic Parts Supplier (Foreign Company)
Common Parts
Domestic Parts Supplier (Malaysian Company)
All Bulky Parts (e.g. Cabinet, Mechanism, CRT,
etc.)
All Special Parts
JIT Delivery Bulky Parts 3 times / day
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SCM was incomplete, due to Continuous Import of
Bulky Parts Domestic Parts were not Competitive
Production Line (Cell Line)
Overseas Parts Vendors
Super Market
Warehouse
Parts Vendors in Singapore
Domestic Parts Vendors (Foreign Companies)
Domestic Parts Vendors (Malaysian Companies)
JIT Delivery Bulky Parts 3 times / day
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A Common Problem in Malaysia is Insufficient
Competitive Parts from Local Parts Vendors
Resource Survey Report on Business Operations by
Japanese Manufacturing Companies in Asia
-Results of FY2003 Survey (JETRO, Feb. 2004) p9
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Why are Local Parts Expensive? Manufacturing
cost is too high, due to unsuccessful technology
transfer
Cost Dependent on Technology Designing
Skill Production Engineering Skill Quality
Control
Price
Logistics Cost
Logistics Cost
Manufacturing Cost
Logistics Cost
Manufacturing Cost
Manufacturing Cost
Labor Cost
Labor Cost around 10 e.g. Malaysia China
1.31.0
Labor Cost
Labor Cost
Raw Material Cost
Raw Material Cost
Raw Material Cost
Raw Material 70
Mainly from Foreign Vendors Subsidiaries
Parts from China, Thailand, Indonesia
Domestically Produced Parts (Actual)
Domestically Produced Parts (Target)
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Unsuccessful Technology Transfer originated from
both Parts Vendors and Assemblers
Parts Vendors Side
Production Capacity of Local Parts Vendors
Technology of Local Parts Vendors
Incomplete
Parts Supplied by Local Vendors at competitive
price
Procurement Capacity to execute optimum parts
localization
Production Engineering Capacity to support
optimum parts localization
Research Development Function
Continuous Import of Bulky Parts Cabinet,
Picture Tube, Mechanism, etc.
Final Assembler s Side
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Summary Obstacles to SCM in Malaysia

• Malaysia is losing its competitive advantage, due
  to unsuccessful development of SCM.
• The development of SCM is interrupted, because of
  lack of domestic parts vendors capable to supply
  bulky and specific parts at competitive price.
• Sufficient numbers of capable domestic parts
  vendors have not emerged, due to absence of
  technology transfer from foreign to local parts
  vendors and inside of final assemblers.

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Proposal for Vietnams SCM Strategy
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Learning from Experiences of Malaysia SCM
DevelopmentSuccess to reach Stage 3, Failure to
climb to Stage 4
Low Import Tariff
Basic Infrastructure
Stage 2
Agglomeration of Final Assemblers
Smooth Process of Import Customs Procedure
Local Sub Contractors
Agglomeration of Final Assemblers
Stage 3
Parts Localization mainly by Foreign Vendors
Incentive for Investment
Stage 4
Technology Transfer from foreign to local parts
vendors
Parts Localization by Local Vendors
Technology Transfer inside of final assemblers
Bulky Parts Cabinet, Mechanism, Picture Tube,
etc.
Special Parts
Development of SCM
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Technology Transfer in both Parts Vendor and
Final Assemblers is necessary to complete SCM
e.g. Penang Skill Development Center
Intermediate to Connect foreign assemblers and
local parts vendors
Training and educating engineers
Technology Transfer from Foreign to Local Parts
Vendors
Spinning out from foreign vendors
SCM Completion
Spilling Over of Technology
Training and educating engineers
Partial R D Function
Technology Transfer inside Final Assemblers
Procurement Capacity to execute optimum parts
localization
Production Engineering Capacity to support
optimum parts localization
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Summary Proposal for Vietnams SCM Strategy

• Competitive Advantage will be strengthened by the
  development of SCM.
• The development of SCM requires local vendors to
  supply necessary parts (e.g. Bulky Parts) from
  domestic market.
• The growth of competitive local parts vendors
  depends on the success of technology transfer.
• The technology transfer will be achieved by the
  effort at both parts vendors and final assemblers.

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Prior Notice for Next Work Shop

• Necessity of Intermediate for Technology Transfer
• Cluster Innovation for Competitiveness

Context for firm strategy and rivalry
Factor (Input) Condition
Demand Conditions
Related and Supporting Industries
Resource Porter, M.E., On Competition, (HBS
Press 1998)
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Thank you for listening!