Strengthening the supply chain
A cooling economy, mounting inventories and increased competition are pushing traditional cable and telecommunications vendors to more prudent, cost-efficient supply chain management strategies and a more conservative approach to acquiring equity positions with key suppliers.
Strengthening the supply chain via equity partnerships with key manufacturing companies to ensure on-time and on-budget delivery of crucial products and materials remains an option for many cable vendors as they juggle their inventories to meet unexpected product demands.
Yet in today's slowing economy, the value of developing strong vendor relationships and streamlining the supply chain are more crucial than ever, as vendors search for ways to keep their customers satisfied and their key suppliers linked to the supply chain.
"When economic times slow down, we want to keep our vendors busy. We've got to make sure they survive. It's crucial to our business," says Ken Wildgoose, president and CEO of ATX Telecom Inc., a supplier to the cable and telecommunications industries.
Staying in business, he insists, means not only tightening and streamlining the supply chain, but in certain cases, taking an equity interest in a key vendor or buying it outright, which ATX did recently with its acquisition of Quality RF Services Inc., a classic example of the acquisition-as-needed strategy.
"We felt QRF was a good fit. They had a reputation of quality, brand name recognition, and the owners wanted to stay, and that was critical. We acquired B&L Connectors last year under the same circumstances," Wildgoose adds.
ATX's acquisition and equity strategy reflects the current mentality of a growing number of vendors and their suppliers: Be more cautious with acquisition strategies in periods of economic uncertainty.
"In economic downtimes, there could be good opportunities for future acquisitions. The product fit might not always work, but if the opportunity arises to purchase a company, that's a strategy, and we're not abandoning it," Wildgoose says.
An equity position with suppliers isn't a strategy of ATX, however. "We don't get into equity positions with our vendors. We won't go down that road. It takes you away from your core competencies," he maintains.
An aggressive acquisition policy can also throw suppliers and their customers off track, experts say. "Most companies are concerned about getting rid of their inventories, and there is a slowdown this quarter, so there's not a lot of companies looking to procure other companies in this economy. They're dealing more with bottom line items and layoffs," says Ron Michaels, vice president of cable and broadcast business for Anadigics Inc., a semiconductor manufacturer for the fiber, wireless and cable industries, which includes major players such as Motorola and Scientific-Atlanta.
Acquiring select vendors or taking equity positions in their companies can be a crap-shoot, Michaels admits, but he agrees that in select cases it could not only be a smart move, but unavoidable.
"We have to take a bigger risk with certain assembly houses, and at times, we must make an investment to be sure all the products are completed for inventory when the market picks up," he says.
In the meantime, the yellow light is blinking for the acquisition and equity strategies at many companies.
Ironically, the economic downturn is offering vendors an ancillary and unexpected opportunity. "Pricing agreements with vendors are based on certain quantities, and with the economic slowdown, prices are being re-negotiated. At this time, however, we don't have plans to acquire certain companies," says a spokesperson for C-COR.net, a supplier to the cable industry.
Nonetheless, there are certain markets where the company would consider acquisitions and equity partnerships. "Our acquisition strategy is based on company capabilities like billing and network management, fiber optical expansion and mobile field service automation. Those are the areas we look to acquire," the C-COR.net spokesperson notes.
The acquisition and equity position strategies for larger vendors such as Lucent Technologies and the requirements to keep its massive supply chain fluid differs from most other vendors. In a slower economy, those differences are magnified.
"Last year we made a strategic change in the entire supply chain at Lucent and folded manufacturers, buyers, planners and the supply chain management group into one organization. It will lead us to a few key suppliers and has allowed us to work together on the material flow and the different aspects of supplies. It's more efficient and focused," says Joe Carson, supplies management vice president for Lucent Technologies.
It's also leading the company to an acquisition and equity partner strategy, albeit a conservative one. Says Carson: "We have equity positions in some supply companies, but not as a rule. Equity positions give us leverage, but in other ways, it makes it harder to work with a variety of other suppliers because equity adds another layer of complexity. We must be careful."
The sputtering economy adds an element of concern as well. Admits Carson: "The economic downturn has absolutely affected us. It's just one more thing to work on with suppliers, so we want to be sure we deal with suppliers with respect and dignity. Those are tough choices in the short term, and we're learning through difficult times with communication strategies."
Lucent, which recently spun off its successful microelectronics group (now Agere Systems), created a special group charged with working exclusively on supply shortages. "We've set up a team of supplier relations management with daily interaction with suppliers. They even interact on joint processes and cost-efficiencies. Some suppliers are even telling us their costs to help overall cost-efficiencies. We're at that level," Carson concludes.
Getting to the level of equity partnerships and acquisitions, however, remains tricky, and most companies tread lightly around acquisitions in a parched capital market. "There's probably not a good reason for us to go out and buy one particular supplier. It's far more important to have a consistent supply, so most of our products are dual-sourced, especially now," says Dave Beck, director of purchasing for Anadigics.
Beck maintains there are six key elements to maintaining a quality supply chain and sources in a stumbling economy:
- Understanding your suppliers' supply chain
- Not relying on sole sources. Dual sourcing is critical
- Know your suppliers' manufacturing, production and engineering expertise
- Insist on more than one qualified factory location
- Being able to provide upfront data of what products will be available, and when
- Straightforward relationships with your suppliers. Be able to verify everything they tell you, and do the same for them.
Maintaining a flexible, consistent supply chain is the key, Beck insists. "There's a realization that you don't just secure a supplier, but a supply chain, and the market has changed to a lifecycle of products."
The market has also slowed for manufacturing and supplies, says Craig Russey, CEO and president of ViaSource, a construction and engineering consulting firm to the cable industry.
"We don't feel the pinch from the materials and equipment side like last year. There's almost an overcapacity. The 2001 buildout is projected to be smaller than 2000, and in 2002, it will be minuscule compared to last year," Russey says.
Consequently, acquisitions and equity interests are low on ViaSource's radar screen, but still visible. "There's always a point where they would make sense, but there are a lot of independent companies, and we're not a proponent of one-stop shopping. I can't imagine us buying a cable manufacturing or equipment company because the products we install are made by major manufacturing companies," Russey says.
What happens when those products aren't available, or when key suppliers can't produce the goods on-time is prompting an increased emphasis on contingency plans. Concludes Wildgoose: "When the supply chain is disrupted, we have to have someone else to get us the product. It's all about getting the product to the customer, and we have contingency plans to do that."
Contingency plans at a number of companies now include some sort of acquisition or equity strategy, though most are conservative and cautious. Yet the most important supply chain strategy, insists Michaels, is a strong vendor relationship.
"Those companies which see us through the worst of times, we keep during the best of times," he concludes.