Quanta’s Leap

The contract manufacturers that move to China aren't simply cutting costs and raising productivity. They're moving up the value chain -- and forever changing the way that big brands run their businesses.

This evolution has changed forever the way big brands run their businesses. Now, few of these brands are making their own designs and minding their own supply chains. “In fact, they don’t even need to see the products before they reach the customers,” says Tim Li, CFO of Quanta. “They just take care of their marketing, their brands, and their cash.” The following charts the evolution of the business system.

Build-to-Forecast. In this traditional, still most widely used outsourcing model, the PC vendor sends orders to the Taiwanese manufacturers based on their own one-month forecasts. The manufacturers build the bare bones of the computers and ship them to the vendor’s factory where the products are configured. The finished products are then distributed to retailers. As such, the vendor alone keeps the entire inventory risk.

Build-to-Order. This is the model pioneered by Dell. Dell would give a batch order to Taiwan based roughly on firm orders from its own clients. The manufacturers would then build the computers as whole units and ship the batch to Dell, which, in turn, sends the computers to its retailers. Here, the inventory risk is narrower because of the firm orders. Still, Dell would take some inventory risk based on its forecasts. “The risk is narrower, but it still doesn’t have a good flexibility because you still have to batch-produce,” says Li.

Configure-to-Order. This is Dell’s current business model. Here, end-users, including individuals, send online orders to Dell, which then pools them together and sends a batch order to Taiwan (Dell accounts for about half of Compal’s and Quanta’s notebook revenues). The manufacturers then send the basic computers to Dell’s plants, where Dell itself does the individual configuration, such as processor speeds, storage preferences and hard disk sizes. The risk here is less, since Dell only sends batch orders and gets its own supplies, once it has accumulated firm orders.

Build-to-Configuration. This is the contract manufacturers’ most advanced service, and one which clients such as IBM and Hewlett-Packard are now taking advantage of. End users send online orders to the vendors, who, after credit approval, automatically forward the information to Taiwan via electronic data interchange. This process takes less than an hour. The IDMs then build the computers as specified by the end-users and then ship the whole package—manuals and all—straight to their doorsteps.

The last model is as close as the brands can get to outsourcing inventory, and solves both questions of how much inventory to keep to avoid losses, and how much to keep in case orders rise. “If you keep just a little inventory, you won’t be able to satisfy customers who can’t wait,” says Li, “so you need someone to take care of all these issue for you.” —A.D.R.

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