Partnership with Suppliers: the Intel Case

Last month, I had the opportunity to participate in the Mission Logistics in the USA and I got to know different operations, initiatives and good supply chain management practices. One practice that caught my attention was the differentiated relationship with some suppliers implemented by Intel, which it called Flex Mode.

For Intel, a successful supply chain is formed by good partnerships. Even if you can do something yourself, your chain will be better able to adapt quickly if it has established partnerships. And agility is one of the most important factors for the company, given that each new technology development cycle lasts from 1,5 to 2 years.

Intel's supply chain challenges are many: long supply lead times, short product lifecycles, and unpredictable demand. Because of these discrepancies between the speeds of supply and demand flows, planning the required resources accurately, years in advance of demand, is challenging.

When we make a demand forecast, the only certainty we have is that we will be wrong. We can err on the upside and actual demand is lower than the forecast. If we purchase from suppliers to cover this forecast, we run the risk of having too much product. The opposite is also possible, predicting less than the actual demand, and in this case, the order to the supplier is not enough and we will have lost sales. Figure 1 illustrates Intel's case and highlights the financial risks of each scenario.

Figures 1: Shortfall (underestimated forecast) and Excess (overestimated forecast) costs of the Intel Case

Source: Intel, 2019

To deal with this complex context, Intel implemented the Flex Mode initiative with its 13 suppliers of a strategic product. Flex Mode consists of placing a firm order with the supplier that covers Intel's forecast minimum demand and placing an option order to cover what is short of the forecast maximum demand. This option order is an extra production request that may or may not be purchased by Intel, depending on future demand. If demand doesn't happen, Intel pays a % of the product's price to the supplier and leaves the supplier free to sell the product to another customer. Figure 2 illustrates this initiative.

Figures 2: Illustration of Intel's Flex Mode acquisition method

Source: Intel, 2019

The benefits of this partnership are numerous for suppliers. It mitigates, for example, the bullwhip effect by reducing the uncertainties in the Supply Chain (the reduction in lead times enabled Intel's better forecasting accuracy). The collaboration also reduced waste by eliminating redundant steps or downtime between vendors and Intel.

For Intel, the most direct benefits of Flex Mode were cost savings of $125 million and helped capture $2,2 billion in increased revenue.

As I mentioned in my last post, collaboration is one of the ways to deal with the greatest complexity in the supply chain. Intel realized this years ago and has a series of initiatives in this regard, it is no wonder that it is a reference in various aspects of supply chain management such as security, agility, flexibility and automation.

Sources:

United States International Mission

Three ways to deal with increased supply chain complexity