Asus Supply chain strategies and Issues

“ASUSTEK “ASUSTEK SUPPLY SUPPLY CHAIN”

Done by: Anson Wong Wen Wen Loong (3979106) Pratchaya (3979015) Ie.ignatius Eric Cahya Saputra (3979155) Igor Kim (3988971) Lau Khee Yuan (3994715)

MGMT-309 MGMT-309 SUPPLY SUPPLY CHAIN STRATEGIES STRATEGIES Lecture: Dr. Matthew Pepper  Tutor: John Heng

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Executive Summary

Based on the report, it shows the supply chain of AsusTek AsusTek Computer Inc. and its current issues. Our  team also focuses on a specific product called “Eee Tablet”, it is one of ASUS’ main stream products. We also break down Eee Tablet’s component into various parts (only the main component that functions the tablet).

Components: •

Motherboard

•

Monitor (LCD)

•

Battery

•

Processor 

*The above components are vital to the function of the tablet

We also did a research of ASUS market segment and the findings are featured in the report. This report also featured some current issues that we feel is a problem to ASUS and its supply chain. Because of the recent market downfall and shortages, ASUS is facing with various difficulties to counteract their problems.

Current Issues: •

Motherboard Motherboard : Copper price hike

•

Monitor (LCD) : Inability to ramp up production/ production/ Rare earth shortage

•

Processor : Intel processor shortage

•

Battery : Sony battery recall

These current issues are supported with various recommendations and also future strategy implied to sustain ASUS long-term business in the IT (information technology) market and become a market leader.

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1.0 Introduction: Introduction: ASUSTEK 

ASUSTEK (commonly referred to as ASUS) is a Taiwan-based computer and peripheral equipment manufacturer specializing in computers, communications and consumer electronics (ASUSTEK, 2012a).

ASUS products are (but not limited to) laptops, personal computers, motherboards as well as tablet PCs.

In 2000 a decision was made to spin off ASUS' motherboard manufacturing division, that new company, called Pegatron International, also acquired another division of ASUS that manufactures non-PC related products, called Unihan. (Pegatron Corp, n.d.)

1.1 Selected Product

Our selected product is ASUS' Eee Transformer tablet. This tablet is the first in its line and has an optional keyboard accessory that differentiates itself from other tablets. The keyboard accessory adds additional battery life in addition to providing a full QWERTY keyboard as well as USB ports, turns it into a notebook. (ASUSTEK, 2012b).

1.2 Major Competitors

In the tablet market, ASUS would have to compete with other tablet manufacturers on bothe features and price. According to tablet PC review, some of ASUS' competitors for the Eee Transformer include the Apple Ipad, Samsung Galaxy Tab, Tab, Amazon's Kindle and the HTC Flyer.

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1.3 Market Positioning:

Based on the research done by Smith (2011). We have come up with a positioning map, as shown below:

From this map, it can be seen that ASUS is in a very advantageous situation as its products are  perceived to be both relatively cheap and of good quality compared to many of its competitors.

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1.4 Market Environment

1.4.1 Increased demand for tablets and smartphones The demand for personal communication devices is driven by the growing necessity for the consumers and businesses to stay connected (DataMonitor, 2011). ASUS aims to hit two million units shipped for 2011 (DataMonitor, 2011). Furthermore, the company has presence in the smartphone segment. Therefore, ASUS may increase its opportunity by segmenting into this two future products (DataMonitor, 2011). Not only does this increase market share but also increase profit and also the brand positioning (DataMonitor, 2011).

1.4.2 Focus on cloud computing ASUS is making a move into cloud computing services, as part of its growth strategy (DataMonitor, 2011). The company plans to introduce a series of cloud computing related services and products with the quality of portability, easy to use, connection, and service in depth reinforced in order to provide the more comprehensive products and solutions (DataMonitor, 2011). Therefore, by focusing on cloud computing market and by focusing on the product development to suit the requirements of the market will enable ASUS to capture market share in this fast growth segment (DataMonitor, 2011).

1.4.3 Push into the Chinese and Brazilian market to drive growth With the growth increasing in the Chinese and Brazilian market, ASUS has focused primarily into the Chinese market but also making a move in the Brazilian market. Datamonintor, 2011 states that this will allow ASUS to engage and tap into the growth offered by these economies. According to industry estimates, PC shipments in China totalled 16.8 million units in the first quarter of 2011, pushing the country past the US to become the world's largest PC market (DataMonitor, 2011).

In addition to China, the company has been pushing into the Brazilian markets (DataMonitor, 2011). As part of the strategy, ASUS’ management has been studying the Brazilian markets to exploit opportunities offered by the country (DataMonitor, 2011).

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1.4.4 PC markets in advanced economies continued to shrink  The current market has shrink due to economic downfall and mostly 1st world country such as Japan, America and Singapore suffering from economic downturn. Therefore, PC markets continue to shrink and growing at a t a slow rate. According to (DA ( DAT TAMONITOR) sales of PCs in the second quarter of 2011 grew by just 2.6% worldwide year-on-year as the growth was dragged down by the declines in developed countries. In the US and Europe the market shrank   by 4.2%.

1.4.5 Intense competition ASUS also face with high intense competition from IT hardware and also mobile devices companies such as APPLE, Blackberry (Playbook) and Samsung (Galaxy Pad). ASUS, from PC expands its business to non-PC equipment manufacturing operation is suffering high intense competition (DataMonitor, 2011).

According to DataMonitor (2011), The company's larger competitors include Dell, HewlettPackard, Acer and Toshiba, among others. In addition, many of the company's partners, including original design manufacturers, often market their products under their own brand names.

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2.0 The Components 2.1 The Motherboard Motherboard

The motherboard is the underlying circuit board of a computer or electronic device (Kayne, 2003). PC Review (2005) mentions that the motherboard is considered the most basic element of any electronic device as all peripherals are to be plugged into them, providing a hub for  them to interact with each other. The motherboard's job is to relay information such as data and processing instructions between all those peripherals. The 2 main components used to make a motherboard are copper and gold. Copper is used to line the printed circuit board (PCB), which is basically a motherboard without any components or soldering (PC Stats, n.d.), making it a copper clad-laminate. Copper comes from Australia, where it is mined by the BHP Billion company (BHP Billiton, 2012).

The World Gold Council (2012) notes that gold has the multiple advantages of being an excellent conductor of electricity as well as being corrosion resistant and very light. This makes it ideal for circuitry. One of the world's biggest suppliers of gold is PT Aneka Tambang, which extracts gold from the West Java region in Indonesia (PT ANTAM, ANTAM, 2012).

2.1.1 Current Issue: Copper Price Hike

The price of copper, which is also one of the main components in motherboards, has  been rising throughout the year. Hubbard (2012) notes that the price of copper has risen almost 13% in 2012 alone. Lee and Hwang (2012) further explains that this price hike has directly resulted in the price of copper-clad laminates, a main component in the production of  motherboards, and therefore indirectly, the production costs of those motherboards.

2.1.2 Recommendation: Usage of Futures Contracts

One solution that is readily available and widely used on the market now is to utilize futures contracts. According to Investopedia (2012), a futures contract is a system where a  buyer of a good (usually a commodity like copper) purchases a contract with a seller which stipulates that the seller must sell a certain amount of goods to a buyer at a certain date at a certain price. This helps to maintain stability in supply pricing as now the price of that good is 'locked' (Investopedia, 2012). ASUS should therefore ensure its suppliers purchase such contracts whenever appropriate and also to assist in managing them when needed. It should be noted that while those contracts may safeguard ASUS against rising prices, the situation can always turn the other way and result in ASUS paying above the market rate if market prices 7

have fallen below the agreed-upon-price on the contract's stipulated delivery date.

2.2 The Processor

Panther Products (n.d.) states that the Central Processing Unit or CPU or processor is the 'brains' where data flows into and is analysed before an output (either in the form of  instructions to components/peripherals or data) is generated.

 Nystet (2007) notes that Intel is the main supplier of processors to ASUS. One of the products that utilize this processor is the ASUS Ee tablet.

Intel Corporation (2009), states that the main ingredient of a processor is silicon, which is  processed to electronics-grade before it is moulded into ingots. A supplier of those ingots is Shanghai Panmeng Electronic Materials Co, which is a leading manufacturer of silicon ingots and wafers. (Shanghai Panmeng Electronic Materials Co, n.d.).

2.2.1 Current Issue: Intel Processor Shortage

Asus has also complained about key suppliers being unable to meet demand. One of  which is Intel; which supplies processors to ASUS for use in their tablets. (Nystedt, 2007). However, Nystedt (2007) notes that this shortage is very likely due to a demand surge from the consumer end and not a supplier end problem; as seasonal demand as well as hype about Intel's new processor line has artificially inflated demand and experts are predicting that laptop sales industry wide will “hit a record high”.

2.2.2 Recommendation: Development of Alternative Suppliers

One problem with processors is that motherboards are usually specially made for  specific models of processors and cannot be made to take anything that is not supported. (Panther Products, n.d.). This makes the problem tricky if ASUS has already committed to using a certain motherboard and Intel cannot deliver the appropriate, accompanying processor  model.

One recommendation is that ASUS look towards alternatives, for example, they can offer another alternate model of the Eee Transformer that is using an AMD processor instead of Intel. This diversity may complicate the supply chain further as it increases the number of  stock keeping units; but diversifies risk as there is a reduced reliance on Intel. 8

2.3 LCD Touch Screen

The Liquid Crystal Display (LCD) touch screen on the Eee Transformer performs dual roles. It displays the “video and graphical information” generated by the Eee Transformer for the user to view (Fisher, n.d.), as well as allow the user to interact with the device through the touch screen.

A touch screen is simply a display screen that is sensitive to human touch and allows the user to interact with what is displayed on screen by touching it (Answers.com, n.d). This allows the user to input commands into the Eee Transformer without a traditional input device such as a keyboard.

The main components needed to make a touchscreen is Indium Tin Oxide (ITO) coated glass as well as the liquid crystal within the display. ITO glass is used over normal glass as it is the ITO coating that provides the electrical conductivity needed for touchscreens to detect human touch and transparency needed for the glass to remain transparent (Indium Corporation, n.d.). One such supplier  of ITO glass is i s Xinyan Technology Ltd (Xinyan Technology Technology Ltd, 2012).

Liquid crystals are simply crystals that change colour in response to exposing them to thermal, magnetic and electric fields, allowing them to display images (Pressure Chemical Company, 2012). One supplier of such screens is the Pressure Chemical Company (Pressure Chemical Company, 2012).

2.3.1Current Issue: Inability to Ramp Up Production

Certain supply shortages cannot be blamed on anything other than the markets itself. One example is the shortage of LCD screens due to a ramp down in glass production (Patrizo, 2009). This is due to manufacturers, who after believing that demand would be weak after the financial crisis in 2008, shutdown their factories and drastically cut production. (Patrizo, 2009). This was a sensible action at that time but were caught unawares when demand suddenly picked up, partially helped by retailers being able to successfully clear out their old stock. (Patrizo, 2009)

Unfortunately for the supply chain as a whole, reinstating production requires around 3 months (Partizo, 2009). This could result in even longer delays as the glass needs to make its way through the supply chain pipeline before it can be turned into LCD screens.

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2.3.2 Current Issue: Rare Earth Shortage

China has recently announced plans to cut exports by 30% (Zhang and Ding, 2010). This is especially important for technology companies as rare earths are an integral component in LCD screens (CEC Rare Earth Corp, 2011), and that China produces approximately 95% of  the world's supply of rare earths (Zhang and Ding, 2010). This tightening of supply would result in the prices of rare earths rising, and even then, countries would need to scramble to ensure they can get an adequate supply from other sources as they had been relying on cheap Chinese imports for many years (Zhang and Ding, 2012).

Geman (2010) states that however that this only limits exports from China and not domestic consumption. It is also hinted that this might be a ploy by China to ensure that industries are forced to  be located in China in order to ensure adequate supply. (Geman, 2010).

2.3.3 Recommendations Recommendations

Ramping down production is a useful strategy to save costs by shutting down facilities when demand is expected to be low. ASUS could negate this effect by keeping a close eye on consumer demand and keeping its suppliers upstream up to date as well as monitoring inventory levels so that once old stock is cleared, a plan to gradually ramp up production can  be put into place. This will hopefully keep production from stalling and shutting down so as when there is an upswing in the market, ASUS will be poised to react faster.

As a single corporation, ASUS has very little say in the rare earth shortage. However, companies have banded together (which has been done in Germany) to pressure the Chinese government to reverse their decision (BBC, 2010). Another possible way out would be for  ASUS to monitor prospecting efforts worldwide and act quickly if alternative sources are found as prospecting is currently ongoing but will not yield results for some time (BBC, 2010).

2.4 Battery

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In order for all the electrical components in the Eee Transformer to run, a power source is required. This job is fulfilled by the battery. A battery is simply a device that fits into an electrical device and powers it with electricity (Macmillian, 2012). ASUS gets its batteries from the Dongguan Sophia Battery Technology Co. Ltd, which manufactures batteries for tablets (Dongguan Sophia Battery Technology Co. Ltd , 2012).

Siberberg (2006) states that a lithium battery mainly consists of both an anode and cathode (made of carbon) and a lithium salt solution. One such supplier of battery grade lithium salts is Sichuan Ni & Co Guorun New Materials Co Ltd (Sichuan Ni & Co Guorun New Materials Co Ltd, 2012), while carbon anodes are sourced from Guangzhou Maxwatt Industrial Co Ltd (Guangzhou Maxwatt Industrial Co., Ltd, 2012).

2.4.1 Potential Problem: Sony Battery Recall

A potential problem that can be faced by ASUS is the event that consumer goods need to be recalled as a result of safety concerns. Ogg (2008) states this is a problem faced by Sony in 2008 when they needed to recall over 100,000 notebook battery units being used by major  notebook brands such as HP, Dell and Toshiba over concerns that the battery packs could overheat and combust. Compounding the problem for Sony is that they had just ordered a recall just 2 years ago in 2006 (Ogg, 2008).

2.4.2 Recommendation: Design Reverse Logistics Processes In Advance

Dowlatshahi (2010), defines reverse logistics (RL) as the process in which “a manufacturing entity systematically takes back previously shipped products from the end user”. This is critically important as Setz (2004, cited in Dowlatshahi, 2010) notes that companies are increasingly expected to take responsibility for their products for the duration of its their respective life cycles. The main motivation to have a RL management plan already in place is to ensure that the cost if conducting it is minimized. This is especially so for defective goods as the cost of   bringing them back to the source usually outweigh the value of them being returned there. It is therefore hoped that the cost of conducting an RL exercise could be lowered to the point where the value of the returned good is more than the cost to return it. Since the cost of a reworked good is generally cheaper then a virgin one (Lund, 1984 cited in Dowlatshahi, 2010) designing an effective and efficient RL system can result in a significant cost savings and competitive edge for a company (Gooley, 1998 cited in Dowlatshahi, 2010) 11

3.0 ASUS Current Issues

ASUS is in a highly globalized industry with a fast rate of change and finicky customers. As such it faces many supply chain issues, most of which it has little to no direct influence or control over.

3.1 Issue: Increasing Manufact Manufacturing uring Labour Costs

Much of the world's manufacturing of computer components takes place in China. In recent years, wages for factory workers has been steadily increasing, to an average of about 13% per annum. (Lee and Hwang, 2012). This has the effect of forcing component manufacturers to eventually be forced to raise the price of components such as motherboards for the short term. (Lee and Hwang, 2012). In the long run, component manufacturers may consider leaving China for other lower cost areas, an occurrence that might happen as early as 2012. (Chen and Tsai, 2012). This transitional  period might affect supply as facilities and equipment would have to be relocated and a new workforce trained and it might be some time before production levels can return to normal.

3.1.1 Recommendation: Consider Relocation/Switching Suppliers

Devonshire-Ellis (2011), agrees with Lee and Hwang (2012) and Chen and Tsai (2012) on the point that wages in China are progressively getting higher, noting that wages in China are now the third highest amongst developing countries in Asia and that might spark off an 'exodus' of manufacturers from China.

ASUS can help contract manufacturers who are in this bind; mainly by assisting them in relocating to a lower cost country by the means of either direct investment or partnerships in emerging countries such as Vietnam (Devonshire-Elllis, 2011) or by holding off orders and  planning production schedules to accommodate suppliers while they are in the process of  moving and cannot fulfil contacted deliverables. This will hopefully allow contract manufacturers the time and peace of mind to set up as well as reduce disruption to ASUS' supply chain.

If this is not possible, ASUS can consider switching to suppliers who have already relocated.

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3.2 Unexpected Consumer Demand

ASUS has also shown that consumer demand for electronic goods is also relatively unpredictable. One case study is the ASUS Eee Pad Transformer, which has been facing shortages since its launch. (Pop, 2011). Scott (2011) reiterates a claim from ASUS' spokesperson David Chang that ASUS had simply not expected the demand for the Transformer to be so high. However, Pop (2011), states that while the Transformer did sell out on launch day, many retailers did not even receive stock of the Transformer, with actual shipments falling drastically short of target (10,000 actually shipped versus an intended 300,000) ; and claims that component shortages were the cause.

3.2.1 Recommendation: Vendor Managed Inventory Systems

Vendor Managed Inventory (VMI) Systems is a concept where a company's supplier  takes over the main inventory decisions of the company (Waller, Johnson and Davis, 1999). In other words, the supplier now is in charge of monitoring the company's inventory levels and making decisions with regards to when to replenish and how much to replenish (Waller, Johnson and Davis, 1999).

ASUS can utilize this concept by offering to monitor the inventory of its retailers and distributors. The main benefit is that by monitoring the actual sales data, ASUS can pre empt supply shortages as demand information is easily attainable in a format (Point of sales data or  online orders) that is easy to analyse. This will hopefully increase collaboration between ASUS and their downstream network as well as provide valuable data that can assist in accurate and effective inventory planning (Indian Institute of Materials Management, n.d)

3.3 Seeking of sub-par products products

Finnegan (2011) notes that in the wake of the supply disruptions, component manufactures have been resorting to underhand means in order to ensure that they can meet contracted demand. One such method is for them to source for components from other suppliers that they would “rarely cooperate with under normal circumstances”. (Finnegan, 2011). Those suppliers might not have been able to meet initial quality standards or did not meet the cut for other reasons when suppliers were  being selected. Due to circumstances however, there is a strong risk that manufacturers might be forced to resort to them nonetheless. This could possibly result in components of sub par quality entering the supply chain. (Finnegan, 2011).

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3.3.1 Recommendation: Stringent Quality Checks

There is very little way for ASUS to control who its suppliers get their raw material from. However, what ASUS can do in order to ensure supply is to ensure that any inbound components are tested rigorously to ensure that they meet ASUS' quality standards. Another  thing ASUS can do would be to maintain open communication channels with its contract manufacturers. This would ensure that in the event of any issues and disruptions, they will feel comfortable coming to ASUS with their problems and a solution can be worked out jointly, therefore avoiding the need to compromise quality when shortages arise.

4.0 Impact of Issues on the Consumer C onsumer

The impact of such world events on the consumer may not be felt initially as firms are carrying an estimated 1 month of operating inventory in their supply chain pipeline (Finnegan, 2011), either as safety stock, work in progress in its various stages or in- transit inventory. However, once those are used up, the impact is likely to be severe.

The main impact on consumers very likely to be cost of those goods as companies will have to eventually pass on those price increases to the consumer. For example, Lee and Hwang (2012) notes that the price of motherboards has been strongly expected to rise by 10% in the 1 st quarter of 2012 in response to the increasing labour and copper costs and the prices of HDDs have been found by Solomon (2011) to have shot up by as much as 150%. ASUS has already shown that it is not new to  price hikes, having raised prices in 2009 in response to volatile market conditions, and might need to do so again. (Hendry, (Hendry, 2009).

Another way that consumers may be impacted would be that even with the price hikes, there is still likely to be shortages of finished goods such as tablets as the quantity demanded simply cannot be fulfilled. This has already happened with the Ee Pad Transformer and is entirely possible that it could  be extended to other product lines should the current climate continue.

Lastly, even if production targets can be met, there is still a chance, however small, that the quality of  goods might be compromised (with or without ASUS' knowledge) as first-tier and above suppliers might resort to substandard quality of work just to meet deliverable targets. This will directly impact the consumer in the form of lower lifespan of products, increased number of warranty claims and as a result, loss of brand reputation for ASUS, even if it is not ASUS' fault. 14

4.1 Impact of Recommendations Recommendations on the Consumer

A large portion of our recommendations are to assist ASUS in ensuring supply side stability and to minimize the impact of any industry problems to the consumer. These can be categorized into the following:

4.1.1 Reduced Costs Many of our recommendations above deal directly with cost management and reduction of manufacturing and procurement costs across the supply chain. Tools and  programs such as futures contracts and assisting suppliers to move out of China to lower cost areas benefit ASUS as they are better able to protect themselves against supply side cost increases. If needed, these costs savings can be utilized by ASUS to gain a competitive advantage over their industry competitors with regards to pricing.

4.1.2 Better Service and Quality VMI systems will help ASUS to track the demand patterns of their products. This will result in ASUS having a better understanding of the downstream side of their supply chain. On the upstream side of things, putting into place a forward thinking forecasting system will help suppliers plan their own production as ASUS will have let them know of the anticipated demand way in advance, allowing them more leeway to respond. This simultaneous balancing of both upstream and downstream concerns will benefit the consumer as risk of stockouts are reduced.

It is through stringent monitoring of its supply chain, from small issues such as “Who do our suppliers buy from?” and larger ones such as global issues such as the costs of copper  and rare earths that will allow ASUS to better understand the market and therefore be better   poised to deliver what the customers want, when they want it.

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5.0 Future Strategy

It is not good enough to just solve your own issues, one should look forward to the future to see what can be further improved and do so without being forced by circumstances. Below we shall look at 2 strategies that we feel will help ASUS meet the challenges in the market in the years ahead.

5.1 Milk Run

One of the main problems with running lean and Just in Time (JIT) systems is that a manufacturer would only want small amounts of raw materials at any point of time. This leads to higher transportation costs in the form of frequent deliveries in exchange for lower carrying costs (Brar and Saini, 2011). In order to counteract this, Toyota Automobile employs what it calls a Milk Run System (Brar and Saini, 2011). The Milk Run system is simply a system where the buyer of a good dispatches a truck to collect materials from its various suppliers in a specified time period in a specific route in a specific order. (Brar and Saini, 2011)

ASUS can deploy this system as being an electronics manufacturing company, it is likely to locate its facilities in areas where there are manufacturing hubs or industrial areas, therefore ensuring proximity to certain suppliers.

As a result of deploying this system, Brar and Saini (2011) promise that the main  benefit will be an increased level of agility and lower costs as only 1 delivery vehicle would  be required in comparison to multiple vehicles from multiple suppliers delivering to ASUS. This is confirmed by Xu (2003, cited in Brar and Saini, 2011), who states that after  implementing this Milk Run system, GM Shanghai was able to achieve a 30% reduction in inventory, saving 10 thousand square meters of storage space in the process. In addition, GM shanghai reduced the number of trips by 20%. In total, GM Shanghai shaved off 30% of their  total integrated logistics costs. 5.2 Consolidating the Supply Chain

Another strategy that ASUS could use is to consolidate certain aspects of their supply chain, most notably to smaller suppliers in an effort to cut costs. This is being done in the aerospace industry as Boeing and Airbus (2 of the world's biggest place manufacturers) are considering forcing some of their smaller suppliers to merge with each other (Mustoe, 2010). In other  words making smaller suppliers merge into a single company that is better suited to handle risk and better funded (Mustoe, 2010).

ASUS could also do this to their suppliers, merging smaller component suppliers with 16

sub assembly manufacturers. This will not only simplify the supply chain, but also spread fix costs, consolidate facilities and lower costs without compromising quality (Mustoe, 2010).

6.0 Conclusion

The technology industry is a very fast moving one, as such a very high level of agility is required in order to both satisfy customer demand as well as balance supply side issues. In many of our  recommendations, we called upon ASUS to be more proactive in managing their supply chain. This could result in higher costs as people would need to be hired in order to do so. However the trade off  is that ASUS will in turn have a better, more cost effective and more robust supply chain for the future.

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7.0 References

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Zhang, Q. and Ding, Q.F. 2010. China to reduce rare earth export quotas. China Daily. Daily. [online]. Available at: . Accessed 10 March 2012

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APPENDIX 1

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