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VOLUME 1 • NO. 4

Top 20 global semiconductor companies »use HHWfacturi

How Cellon's

Jason Sun is changing the

dynamics of the global design chain

Does outsourcing always make good strategic sense? Midtier OEMs Tektronix, Research In Motion and Symbol Technologies don't think so.

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5tion BYARIK HESSELDAHL

^ ^ k avid Ricardo in 1817 first put ^ A forth the idea that companies or I countries should specialize in I the production of goods for I which they have an advantage ^M over others. Indeed, the British ^m economist's law of comparative ^^m advantage is the chief way that is ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ used to explain the basic 1 ^ ^ ^ forces behind outsourcing, the hot topic that today dominates business news coverage and political rhetoric. Outsourcing of everything from software development to manufacturing is on the rise, according to a recent report from Gartner Group. The research outfit predicts that U.S. businesses will outsource a staggering $3 billion worth of business in 2004, more than double the $1.3 billion outsourced last year. Electronics companies understand the logic of outsourcing: huge savings on up-front capital expenditures and minimal long-term operational costs. For

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large OEMs—particularly in consumer electronics or the PC busi- Tektronix at a glance* ness, where production runs are Revenue: $790 million long, product life cycles short and Net profit: $25.3 million demand is fickle—handing manufacturing operations to a third par- Primary business: electronic test ty makes a great deal of sense. (For and measurement equipment a ranking of the top 50 electronics Global manufacturing footprint: manufacturing services providers 400,000 square feet in the industry, go to www.myesm.com/manufacturingchain.} Number of manufacturing jobs: 1,000 But for many midtier OEMs that do not have high-volume manu- Percentage of production facturing requirements, owning the outsourced: about 50 percent of production process has real strate- pc-board assembly—representing gic value. While ownership means a small fraction of total production. shouldering the expense and oper- •All figures are for 2003. ational complexity, it offers advantages in being able to quickly solve they're going to save you money is operational problems and respond if they have more purchasing powto bottlenecks as they appear. The er than you do, so they can get results, many say, can improve components cheaper than you quality, reduce the time it takes to can, or if they have a big labor get a product to market and deliv- force so they can absorb the peaks er significant cost savings. and valleys of the market," he said. In this article, Electronics Sup"But they have to make a profply & Manufacturing profiles three it and you are going to pay them a companies that have taken the in- premium for their profit. They are sourcing route and chosen to keep also still going to have inventory liabilities that they are going to charge you for, so hen you outsource, the only way that is not an advantage." they're going to save you money And here's another is if they have more purchasing thing you won't often hear from a U.S.-based compapower than you do." ny: Tektronix recently reDAVE CORESON, TEKTRONIX located 155 jobs out of the lion's share of their manufac- Japan and moved half of those jobs turing operations in-house: Tek- to China, but moved the other half tronix, Research In Motion and back to the United States. The cost Symbol Technologies. of producing products for Japan can be absorbed by facilities in Tektronix Inc. Beaverton, Ore., and Shanghai. Just ask Dave Coreson what he Coreson declined to get specific thinks of outsourcing and he'll tell about cost savings from the cut. you straight up: "My experience is "A lot of companies have many that it does not save you money." small manufacturing sites around As senior vice president of central the world, and what you'll find duroperations at Beaverton, Ore.- ing an economic downturn is that based Tektronix Inc., Coreson's they begin to close these plants," he opinion carries some weight. said. "I've never subscribed to that. "When you outsource to an- There is an advantage in having other company, the only way one or two large plants. You can

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absorb the changes that come with a downcycle." Tektronix has facilities around the world, with 75 percent to 80 percent of its manufacturing operations located in Beaverton. The remainder is split between factories in Shanghai and Berlin. Coreson said that more than a quarter of the products made in Shanghai are sold in China. Tektronix acquired the Berlin factory from Siemens in 1997 and manufactures protocol analysis products there. The company also has a 140,000-square-foot factory in Gotemba, Japan, that makes signal source and spectrum analyzer products. The Gotemba factory was acquired from Sony in 2002 after a joint venture between the two companies ended; it manufactures a small percentage of the total. Being a relatively low-volume manufacturer—it sells less than 1 million units each year—Tektronix has to keep a close eye on manufacturing quality. But it also turns over its inventory eight times a year, vs. an average of three to four times for its competitors, Coreson said. Tektronix's ability to manage both quality and inventory turns is the result of having direct control over its in-house manufacturing operation and processes developed with suppliers, said Coreson. Distributors, ahoy! Controlling quality and cost, Coreson said, starts with good procurement practices. For instance, Tektronix works with a handful of distributors in vendor-managed inventory programs. The distributors own the inventory they stock on Tektronix's premises and get paid when Tektronix uses the product. Supplies are delivered directly to the point on the production line where the parts are used, not to a stockroom. Suppliers invoice Tektronix 30

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days after being informed their components have been used. "We used to have individual procurement people writing individual contracts with suppliers, but you end up just being an expediter of materials and not managing price at all," Coreson said. "Good procurement officers understand their commodity—they understand it from raw material to the pricing worldwide, they understand what the competition is doing and paying." That's why Tektronix does not negotiate on price for most of the commodity parts it uses. It simply states the prices it's willing to pay based on data about production costs and the supplier's margins. "Our people sit down with a supplier and say, 'I'm going to pay

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you $1.98 for this part and I know what your profit margins are,' " Coreson said. "That's totally different from a lot of companies that still negotiate on price." Of course, owning your own manufacturing operations means investing in productivity-enhancing technology. For example, as products move through Tektronix's manufacturing system, radio-frequency identification chips are attached to each product containing the custom instructions for assembly based on what the customer has ordered. "All the information on that chip allows us to build the product and put the right accessories in the

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box and update our bill of materials as the product moves down the line. Some people do that once a month. We do it on a real-time basis," said Coreson. To control labor costs and provide flexibility, Tektronix uses

"G

ood procurement officers understand their commodity—they understand it from raw material to the pricing worldwide." DAVE CORESON, TEKTRONIX

a contingent labor force that accounts for what Coreson describes as a small percentage of the overall manufacturing work force. These workers come to Tektronix under a yearly contract with a temporary agency.

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Tektronix does not have a totally pure-play in-house manufacturing strategy. The company does outsource a portion of its circuitboard manufacturing operations, in part, said Coreson, to hedge against cyclical downturns. "Our customers don't care who stuffs the circuit board," he said. "We want to put our capital in the places that add value to our products." That portion of board assembly that is outsourced functions as a safety valve, he said, adding, "During a downcycle, you don't have to downsize in order to cut down on labor costs; you just have to turn off your [outsourced] volume. It's like an insurance premium you pay to make sure you have a bearable cost." And when business begins to turn up and lead times for parts start to lengthen, as they are doing now, Coreson said, Tektronix works with its suppliers to get out in front of potential shortages before they happen. Coreson meets weekly with his purchasing people. During the meetings, they review the supply chain supplier by supplier and commodity by commodity, based on the leverage that each commodity has on the particular product line. If there is a problem, Tektronix can communicate quickly and proactively with its suppliers, rather than wait until they get hit with a shortage. "When shortages and allocation conditions do hit," said Coreson, "Tektronix's low-volume needs are an advantage. We can usually get the supplier to get us the few parts we need to continue production. We don't need millions; we need a few thousand." More often than not when companies outsource their manufacturing, it can compound existing problems, Coreson said. While cost

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savings may show up in projections, they often don't take into account other problems not apparent from a balance sheet, such as supply chain concerns, workmanship flaws and other factors not easy to forecast, he said. "You don't want to outsource your problems. They will come back to bite you," Coreson said. Research In Motion Ltd.

If it sometimes seems that outsourcing has become one of the fundamental tenets of the consumer electronics business, then no one seems to have told Mike Lazaridis, co-CEO at Research In Motion. RIM is the $594 million company behind the popular Blackberry wireless-communications device found on the belts of more than a million busy people. All Blackberrys are built at the company's own manufacturing facilities, which cover 40 acres in Waterloo, Ontario. For Lazaridis, it's a matter of having his employees close to their work. "The fact that the manufacturing plant is within walking distance of the RF [radio-frequency] engi-

Research In Motion at a glance Revenue (fiscal year ended Feb. 28,2004): $594.6 million Net profit: $51.8 million Primary business: communications equipment (Blackberry) Global 2003 manufacturing footprint: 122,000 square feet Number of manufacturing jobs (2003): 500 Percentage of production outsourced in 2003: None

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"We get our suppliers involved early on in the design process. The more information you give your suppliers the more they will be there for you when you need them." Mike Lazaridis, co-CEO, RIM

neering and mechanical support operations and that they're all within walking distance of the technical support building means that problems get solved within hours," he said. "But, in general, I would say that means there are more things to worry about." So around its manufacturing operations RIM has put in place several initiatives and operations to catch problems early and solve them before they become unmanageable. For one, RIM has adopted a 3-D concurrent engineering operational model in which the manufacturing, engineering and supply chain elements synchronize their efforts to plan and build a product on budget and on time. The three-dimensional model builds on the 2-D model pioneered by Japanese companies in which the product design and the manufacturing processes to make them are developed at the same time. Under the 3-D model, suppliers and

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"The internal manufacturing gives us a true understanding of where the costs are embedded within the product design." Tom Collins, vice president of worldwide supply chain operations, Symbol

supply chain partners are also brought into that process. "Historically, people have designed a product and then thrown it over to manufacturing," Lazaridis said. "We get our suppliers involved in the design process early on." "The more information you give your suppliers, the more they will be there for you when you need them," he added. "Too many people think that they are too open with their suppliers and that those suppliers will turn around and abuse that information. But I think it's completely the opposite." The 3-D model allows suppliers to know what is on RIM's product road map, so they can more easily volunteer information about the technology road map for their own components.

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"When suppliers know what's coming, they can tell you that you'll be better off using some new part that will be available when you're ready to start building it. We wouldn't have that kind of interaction if our suppliers weren't involved as partners in the design process." Lazaridis said that constantly watching for problems also helps catch them early. The company uses its own forensics lab to keep tabs on the quality of components and materials, and sometimes the results can be surprising. RIM once had a situation where a supplier inadvertently introduced yield problems into the manufacturing process of the communications equipment vendor. Lazaridis said RIM helped track the problem to a plating change made by the supplier's subcontractor. "Our forensics analysis found that a new plating process had changed the ratio of materials, and when we informed the supplier, they didn't even know about it," Lazaridis said. "When they realized that we were right, they had to go back and retune their processes. It solved our problem, but it was also a case where we were able to help the supplier." Symbol Technologies Inc. While some companies are outsourcing absolutists, Symbol holds firm to the middle ground. Unlike Tektronix, the $1.5 billion manufacturer of mobile and wireless-computing devices, based in Holtsville, N.Y., has adopted a hybrid manufacturing model. It owns and operates half of its manufacturing capacity and outsources the other half to contract manufacturers. The system works like this: Symbol starts manufacturing all new

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products internally, perfecting the processes needed to get the job done. As the product reaches life cycle maturity and newer products are being developed, it will get outsourced to a partner company. "The internal manufacturing gives us a true understanding of where the costs are embedded within the product design," said Tom Collins, Symbol's vice president of worldwide supply chain operations. In the area of design, Symbol tries not to make the same mistakes it has observed elsewhere. "We really get upstream with the engineering group and learn from our previous designs and take costs out through the design process," Collins said. "Sure, you get improved yield and throughput as a result and that does get you incremental benefit," he added. "But the real savings is in the design stage up front. Learning from your current designs, improving on them and taking those costs out downstream are absolutely critical." In one recent case, Symbol was developing a targeted variant of an existing product line that required some engineering changes to its design. "We had a [manufac-

Symbol at a glance* Revenue: $1.5 billion Net profit: $675 million Primary business: mobile and wireless-computing devices Global manufacturing footprint: 200,000 square feet Number of manufacturing jobs: 900 Percentage of production outsourced: between 25 and 60 percent, depending on the product •All figures are for 2003.

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ction items As electronics OEM managers, here are some questions you should ask as you evaluate your outsourcing strategies. What are the benefits? If you outsource manufacturing, consider whether there are benefits to switching to an in-house model. First, are there cost and time-to-market benefits to owning your own manufacturing capacity? And, over the long term, do they outweigh the up-front costs of making a change?

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What about acquisitions? Acquisitions can be a viable alternative to building manufacturing facilities, especially as many companies are giving up their own plants as they outsource. Could your company scoop up a bargain if you transfer manufacturing in-house? How capable are your In-house supply chain workers? Can your company negotiate procurement contracts with component suppliers that compare favorably with those that an outsource partner would negotiate? Do you have sufficient leverage to renegotiate current terms in your favor, and do you have the necessary skills in-house to handle these often-delicate transactions? How flexible Is your EMS partner? Is your outsourcing partner responsive to your needs when it comes to making changes in manufacturing processes? Are there portions of your product line that would be better manufactured in-house, and will the EMS provider agree or insist you first fulfill long-term contractual agreements? How efficient Is your current system? Before you embrace in-house manufacturing, review all the various components of the current system and ask what criteria you are using to select your outsourcing partners. What processes are in place to review the quality of their work and gauge both their supply chain prowess and their ability to Improve processes? Can you duplicate these in-house? Can you calculate the total cost of outsourcing vs. manufacturing In-house? Do you clearly understand the costs you are incurring and the potential savings associated with both scenarios? What are the dangers Inherent In each option? How much do supply chain partners, including EMS providers and component suppliers, know about your product and process road map? Could disclosing this information affect your competitiveness? Do you have an effective supply chain and design chain system? How closely do your external partners work with your product design team? Are there formal systems In place to ensure they are closely connected? Do you have a crisis response strategy? How prepared is your company for any unexpected supply chain disruptions as well as component shortages? Would this system be hurt by a decision to outsource pro-duction?

turing] partner who could scale their operation quickly and had the right supply chain contacts lined up," Collins said. "This partner took over and scaled quite well." The same partner, Collins said, had done some engineering work for Symbol before and had the capability to handle the design changes to the product as well as the manufacturing requirements. The key to successful outsourcing, according to Collins, is to consider the partner an extension of the internal operation. "A lot of companies make mistakes in going out and employing the flavor of the day. What we have tried to do is narrow it down to a couple of [outsourcing partners] who we have worked side by side with and really developed with them." And just as with an in-house operation, Symbol monitors its partners' operations closely, including quarterly performance. "We have a close understanding of how they're improving their processes and how that is going to reflect on our products," Collins said. [In June, Symbol settled a securities investigation into the activities of some former executives and agreed to pay a total of $138 million to various parties, including the Securities and Exchange Commission. "Symbol has worked tirelessly during the past two years to resolve problems created by the company's former management," said William Nuti, the company's president and chief executive officer, in a statement.] • Arik Hesseldahl is a senior editor at Forbes.com. He can be reached at [email protected].

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