Snip, Snip, Snip: Sony Cuts Supply Chain Costs

Posted by: Kenji Hall on May 21, 2009

Barely a month in his new post, Sony Executive Deputy President Yutaka Nakagawa is already earning his keep. Since April, it has been Nakagawa’s job to drastically overhaul the company’s supply chain for its digital cameras, videogame machines and liquid-crystal-display TVs. Chairman and CEO Howard Stringer put Nakagawa on the case when he unveiled his new reshuffled management team in February.

Today, Sony said it aims to halve the number of its parts and materials suppliers over the next two years, and cut purchasing costs by 20% this fiscal year. The tech giant has about 2,500 suppliers, but will reduce that number to 1,200 by March 2011, spokesman George Boyd said.

Sony officials informed companies along the supply chain earlier this week. The news is a mixed bag for suppliers: bad for those that get dropped, good for those that can expect to see a jump in orders.

By buying bigger volumes of parts from each supplier, Sony is betting it can lower its costs. Ultimately, that’s expected to shave 500 billion yen ($5.2 billion) off the 2.5 trillion yen ($26.3 billion) that Sony spent on parts in the fiscal year through March 31. The savings are in addition to the $3.1 billion Sony hopes to save by selling off factories and reducing other fixed costs.

Nakagawa has a reputation as a hard-nosed, by-the-numbers manager. After taking over the money-losing semiconductors division in late 2006, he immediately began pruning. One of his most surprising moves was to turn over production of the powerful multimedia Cell chip—found inside the PlayStation 3 videogame console—to Toshiba. He’s been known to fly coach and stay at modest hotels when on business trips.

That’s just the kind of determined cost-cutter that Sony needs now.

This year, the electronics unit is expected to post a second consecutive year of losses. The financial crisis has eviscerated global demand for consumer electronics and a strong yen has eroded profits earned overseas. Sony didn't say how the new measures would affect earnings. But if the cuts are deep enough, Sony may be able to restore its electronics business to profitability faster than previously expected--freeing up cash for Stringer to spend on innovative new products.

Tech companies generally like to have at least two suppliers for key components so there’s a reliable backup if demand suddenly spikes or defects turn up. Without knowing what Sony’s supply chain looks like, it’s hard to say if the company is finally taking long-overdue steps or potentially creating new problems for itself by hacking away too enthusiastically.

Sony's latest announcement brings to mind what Carlos Ghosn did shortly after arriving in Japan to run then-troubled car maker Nissan. Ghosn determined that he had to slash purchasing costs by 20%, reduce capacity by 30%, shut five plants, and eliminate 20,000 jobs through layoffs and attrition. He dismantled the massive keiretsu--a web of business alliances--in which stability meant more than optimizing profits. Then he took the savings and invested them into making better cars and spiffying up Nissan's brand image. That hasn't solved all of Nissan's problems, though.

Reader Comments

Sony Snipped

May 21, 2009 10:30 PM

Cheated customers snipped Sony as supplier of consumer products. That's the source of Sony's problem!

Peter Zim

May 30, 2009 11:09 AM

Sony like some other Japanese manufacturers such as Canon, Nikon, Honda are considered premium brands and can command higher retail prices for than other Japanese manufacturers, Korean brands such as Samsung and LG and Taiwan brands such as Acer. That is fine when the global economy is booming. However, in a recession when you can obtain equivalent or better specification products for 20 - 25% less then the premium brands suffer (see clothing, jewellery and watch sales). Also Japan having one of the highest GDP per capita is a relection of the higher salaries there and the unwritten "jobs for life" social contract.

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