Technology and Organizational Factors in the Notebook Industry Supply Chain

CRITO Associates, Kennneth Kraemer and Jason Dedrick, along with William Foster and Zhang Cheng of Fudan University, China, recently coauthored a focus study titled “Technology and Organizational Factors in the Notebook Industry Supply Chain,” for the Personal Computing Industry Center (PCIC) at UC Irvine and the Center for Strategic Supply Research (CAPS) at Arizona State University. The study focuses on the PC notebook industry and provides insights into the relationship between digital supply chains and Chinese business models.

The notebook PC industry coordinates a complex, high-speed global supply chain with a production base mostly concentrated in the Shanghai area of China. The notebooks are being made for global flagship companies such as Dell, Hewlett Packard, and Apple by Original Design Manufacturers (ODMs). These Taiwanese owned and managed ODMs procure parts from a network of third and fourth-tier suppliers. Both the flagship companies and the ODMs are heavily invested in internal and inter-firm IT systems. However, the third and fourth-tier suppliers, mostly based in Greater China, have limited use of IT.

A unique aspect to conducting business in this region is the preferred use of “Guanxi” (guan-shi) over formal contracts and information and communication technologies (ICTs). “Guanxi” refers to personal relationships that are made and used within China to get things done. Third-tier suppliers are chosen for their ability to fulfill orders and their long-standing relationships with the CEOs of the ODMs. These personal networks are the basis for building business relationships and creating trust between parties, rather than legal documents and investment in information systems. Although there is limited investment in IT by third-tier suppliers, many can receive forecasts and orders from ODMs through use of a web interface and some are beginning to invest in limited ERP systems necessary to manage production at multiple sites in Taiwan and China. However, when it comes to their fourth-tier suppliers, they rely largely on face-to-face meetings, phone calls, and faxes to supply forecasts and orders.

The Taiwanese business network resembles a human neural network, matching supply and demand without keeping a lot of inventory in the system. However, there are current and potential problems facing the industry such as missed delivery dates, quality issues resulting in customer dissatisfaction, risk of ODM and supplier financial instability, disruption of the supply chain due to natural disasters, and lack of inventory. U.S. PC makers’ excessive concentration of their supply chains in Greater China is perhaps the greatest risk, given the continuing tension in the China-Taiwan relationship.

Many of these issues are out of the control of Western companies. However, the study advises U.S. managers how to minimize the potential impacts of their decisions on the Taiwanese business networks. For example, when designing their supply chains, managers are cautioned that attempting to fully digitize the supply chain down to the third and fourth tiers may add cost and dampen responsiveness. In addition, the report warns against practices such as bypassing the ODM to negotiate prices directly with the suppliers. This can undermine the relationships of the Taiwanese business networks that are an integral part of the supply chain’s success.

The entire study is available in English and Chinese.

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PCIC- The Personal Computing Industry Center (PCIC) is sponsored by the Alfred P. Sloan Foundation. PCIC is a key source of knowledge, objective data, and independent thought bringing together industry executives and researchers to discuss the rapidly changing PC industry. http://www.pcic.merage.uci.edu

CAPS – The Center for Strategic Supply Research contributes competitive advantage to organizations by delivering leading-edge research globally to support continuous change and breakthrough performance improvement in strategic sourcing and supply. http://www.capsresearch.org