Covid Economics: 3 Ways OEMs Can Reduce Margin Erosion
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At a recent Cognitive Sourcing Summit, hosted by LevaData, EBN sat down with Kevin Purser, head of global supply chain sourcing & procurement at Fitbit to find out about the company’s supply chain strategy. Purser joined the company in 2015, having worked in senior supply chain positions at several global electronics manufacturers including VeriFone and Cisco. He leads a 33-person sourcing team.
Fitbit, a manufacturer of personal health and fitness products, has set an audacious goal: To make everyone in the world healthier. To that end, the company has a product portfolio that has evolved and changed quickly — a reality that means the supply chain has had to evolve along with it.
Fitbit products are sold at 55,000 stores in 65 countries. The company has over 200 SKUs. The company’s supply chain is immense, global, and diverse. In fact, it has more than 200 suppliers on its roster, and 70% of the products it buys are multi-sourced. It works with five manufacturing sites to build its health trackers.
Fitbit is like many other large consumer electronics OEMs, working in a market that changes quickly, and that is known for slim margins and demanding customers. The question is, then, how is this organization flourishing? In 2017, Fitbit hit $1.6 billion in revenue and has a history of consistent growth since 2011. The supply chain has a lot to do with that success.
The secret sauce of the company, according to Purser, is a combination of good practices, good people, and the right technologies to support sourcing decisions. For the last several years, the company has been moving toward evolving its digital sourcing strategy, while ensuring that it uses the information it collects to make real business decisions.
EBN: What are the biggest supply chain challenges that Fitbit is facing as a maker of consumer electronics products?
Purser: Our biggest challenge is just sheer scale. I’m not talking about component shortages, but rather can we get enough materials and build product fast enough to fill the shelves. When I joined Fitbit in 2015, it was six months from when I started to when we were finally in stock. We couldn’t make the devices fast enough. Our devices have a 12- to 18-month product life cycle. To further complicate things we weren’t doing end of life on any products.
That dynamic is one that is going away. On long in the tooth products, I worked with the lifecycle planning team to understand the potential revenue of these products. We had to look at what they are driving for the company from a revenue standpoint as well as understand what maintaining them might be costing us from an opportunity standpoint. Then we had to really drive our plans based on that. With the products team, we compared the other product offerings in the lineup, considering what attributes were driving customer expectations. It’s a higher-level conversation.
From a developmental standpoint, we’ve started to focus on identifying our sweet spot for devices and application characteristics. Now, as new and competent competition comes into the market, the stakes are higher than ever before.
Supply chain is a big piece of the strategy for Fitbit. We think about products from a technology perspective and how would we source them. We think about that starting at the design phase. Should we buy this, make it or develop it jointly? Should we co-develop it in a heavy model or light model? The amount of effort put in by the partner. We have those conversations from the start of a product design. Those [questions] are starting to drive how we design, build and fulfill those products.
EBN: Can you share a little bit about Fitbit’s strategic multi-sourcing strategy?
Purser: I came to Fitbit from a different industry but still I was working in high-tech point of sale (POS). In my experience, I kept running into points of stoppages because we had one source and that source was a problem. It’s that fundamental. Then you start to realize the additional benefits of a multi-sourcing strategy, creating competition in both price and innovation. You’ll create upside opportunities. It’s imperative that you have a capacity flex of 30 percent and you can’t have that without multiple sources. The continuity of supply piece has been key for us.
I started talking about a multi-sourcing strategy to engineering on the day I walked in the door. It’s tough to begin with that. We wrestled with it because it takes resources to multi-source things, but we have seen strategic and tactical benefits. Now, it’s not just about our own organization; it’s about keeping product on the shelves for our customers. It has changed our relationships with our suppliers a lot. I try to be open and honest with our partners in pointing out that they don’t want to be, potentially, the single point of failure. That’s the kind of failure that makes it into the media. Sometimes, at the volume we operate, they really don’t want to be the single source. The other benefit is that someday those suppliers might want some help and they won’t be penalized because there is no one to step up.
When I first came to the company, 15 percent or 20 percent of our parts were multi-sourced and two years later we are at 57 percent. Now, we are over 70 percent. There are parts that are designed as a sole source. Sometimes we are not at the point in the technology curve where we could have multiple sources.
EBN: Tell us a little about your journey into cognitive sourcing. What goals did you have for the technology you chose?
I’ll talk a little bit about how the software industry has changed over the last ten years. Ten years ago, we were all trying to cram everything into our enterprise resource management (ERP) system. The ERP guys were trying to make a be-all and end-all product. We were building our own. Then in 2000 to 2010, it all converged on ERP. It became clear that it is impossible to satisfy even 30 or 40 percent of the market with the be-all and end-all product.
More recently, it’s devolved back into best-of-breed products because connectivity has evolved to the point where you can connect things readily, especially with cloud-based solutions. Easy APIs make technology integrations simpler, where you don’t have to do the whole conversion. With LevaData, I decided we wouldn’t go down the integration path. Instead, we would dump data into a standalone software-as-a-service solution. That was an eye opener for me five years ago. I’m not convinced we need a two-way connection information flow. The connection technology, though, is what drove our initiative.
Often, organizations are trapped in their own little enterprise, but we have data outside the company that is available. When you start looking from the outside in, you start to find huge benefits. You can get multiple data sources. At my previous company, we justified the LevaData solution purely on increased efficiency. Everything else was free: consolidation of supply base, cost savings, etc. As a company, we are reducing complexity, and going toward a platform technology. What drove productivity for us in the beginning was leveraging LevaData’s cost platform. We have a cost engine that gives us predictable costs. We go back afterwards and check whether we hit our predictions and why or why not.
EBN: What have the results of the initiative been in terms of business benefits?
Purser: Let’s look back at the last eight years. It really has been about connection technology, which has nothing to do with the supply chain, but it has yielded results for the supply chain. I don’t spend time in our SAP system. We sign off on all data in the smart RFQ after bringing in data from suppliers and that provides a roll-up for a standard cost process. Our cost and bill of materials resides in LevaData, which allows us to drive our focus and effort in the high-spend products. I’ve also driven a focus on the reality that the product cost is only part of the cost. We have to drive product margin. Now, everyone on the team is concerned about product margin.
EBN: How is Fitbit identifying and addressing commodity pricing and tariff risks within the supply chain?
Purser: We think a lot about shortages, tariffs and other limitations. I get some of the biggest compliments from peers on our ‘do-to-say ratio.’ I don’t know what happens but somehow, we work things so that we don’t shutdown a production line. I do that by finding the areas that aren’t in trouble and optimizing and maximizing cost savings opportunities to increase the supplier’s business with us and increase spend with them up to the limits we set.
The saving grace with multilayer ceramic capacitors (MLCCs) and the ongoing challenges this year in the memory space with NAND flash and custom memories was being able to leverage against my quarterly target, and the supplier delivering one and a half times the amount I needed because some other customer needs less. We’ve had plenty of increases on MLCCs, but I don’t care about lead times because we plan ahead. Our suppliers will tell us the truth. They will tell me not to design something in and they’ll tell me why. We have a dialogue. When it came to the MLCC space, we went through rapid onboarding and additional supplier qualification. I went from two suppliers on a part to five. We have a tiger team in engineering. The team paper-qualified some suppliers and did thorough qualifications on others. Redesign is a dicey thing for us because by the time we design and test, we are at the end of the life of the product, so it was easy to say it won’t scratch the itch.
In terms of tariffs, you have to do multiple scenario planning since we don’t know what the answer will be. A 10-percent tariff is possible, so we look at what it means if that happens. We started looking at different scenarios such as cost sharing across the value chain and so on. We had to get a lot more creative in our efforts when the potential tariff went from 10 percent to 25 percent. We are already on that list. It’s been all hands on deck as we meet to consider the problem and the opportunity. We have to look at how we limit our exposure in relevant products coming out of China. We had to look at other options. Really, it’s only a concern if the product is for U.S. consumption, and our business has been geographically diversifying over the last few years.
EBN: There’s a huge gap between talent and demand in supply chain and procurement. How is your organization leveraging technology to address those challenges?
Purser: We are cool, and we are in the city. People know us. I like a mesh of experienced subject matter experts of been there, done that professionals; young, hungry talent that wants to learn and technology savvy people. They don’t know what to be afraid of yet. When you balance it, you have innovators who know what you should do.
I’m also bringing in more educated engineers into the sourcing team. It is important to have credibility in the sourcing area. Technical credibility is awesome. I have it from being in the business, but these hires have come out of school with engineering degrees and MBAs and did that for a while before they decided they wanted to go into sourcing. Last year, I pulled in three engineers, two with no sourcing experience.
EBN: What differentiates Fitbit’s supply chain approach from other OEMs? (or to put it another way, what makes Fitbit special?)
Purser: It’s the desire to collaborate and partner hand in hand with engineering. It gives us continuity of message in the supply chain. I’m not too worried when engineers meet with a supplier on their own.
The article originally published at sister publication EBN.
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