Pinpoint Production

..in's manufacturing strategy p.44 • Trends in MPUs and MCUs p.50

Electro i www.my-esm.com

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DECEMBER 2004

Supply&R/lanufacturing FOR

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VOLUME 1 • NO. 9

World Peace Group's global distribution ambitions ^ page 38

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X Brian Pokorny, G a r m i n 's director of operatio refers to the company's manufacturing as "strategic insourcing."

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DDDDDD Garmin has made it big in GPS, in part by building its own products. If "insourcing" works for Garmin, maybe it could work for your company.

BY ARIK HESSELDAHL he global-positioning system hardware business is much like any other consumer electronics sector. Crowded, fiercely competitive and highly price-sensitive, it sees new competitors popping up continually, ready to challenge the old guard. What's more, very little about -the core technology is proprietary. Signals from the 27 U.S. Department of Defense satellites are free and available to anyone. From that standpoint, GPS receivers should be a commodity product like AM/FM radios. And the leading companies should follow conventional wisdom and outsource everything to achieve the lowest possible cost. And yet they're not commodity products. And no, the No. 1 company in the business does not believe in extreme outsourcing. Rather, top-ranked Garmin International Inc. regards its ability to bring its own manufacturing and engineering resources to bear on the production process as a strategic advantage, violating nearly every seemingly obvious rule in the book of cost control. Just ask Min Kao, co-founder and CEO of Garmin, and he'll tell you how owning the manufacturing plants has helped Garmin capture a commanding market share in nearly every GPS product segment. The strategy has paid off with a gross margin above 50 percent and growing, Kao said. Garmin makes GPS receivers that tell motorists, civil aviation pilots, hikers and boaters, where they are, and how far they are from where they're going. Last year, Garmin sold more than 2 million units, up half a million

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DDDDDD from 2002. Likewise, its revenue in 2003 was up 23 percent over 2002 while profits grew 25 percent. Ron Stearns, an analyst with Frost & Sullivan, pegged the North American market for GPS products at $315 billion in 2003, and predicts it will more than triple to $9.5 billion by 2010. Splitting the GPS equipment business into segments helps to demonstrate Garmin's dominant position. In the recreational handheld business—those GPS receivers aimed at hikers and hunters— Garmin enjoys a 70 percent market share, said analyst Peter Friedland of Fulcrum Global Partners. Garmin also holds a 60 percent share in aftermarket automotive receivers, where it competes with Magellan, a unit of French Aerospace giant Thales, Netherlands-based Tom-Tom and Cobra Electronics of Chicago. In the marine business— GPS receivers used by boaters—it competes with Lowrance Electronics (Tulsa, Okla.) and New Zealand's Navman. Garmin's share for the sector hovers between 30 and 40 percent, said Fulcrum's Friedland. But Garmin truly shines in civil aviation, where the "Garmin stack"— a combination of GPS navigation and communications equipment—is the gold standard among pilots and plane manufacturers. Its market share there is about 90 percent, with Honeywell its only real competitor, Friedland reckons. Garmin's latest aviation product, the G1000, combines location, navigation, communication and identification data into large flat-panel displays. Unique strategy While most of its competitors have their products built by contract manufacturers, Garmin is notable for vertically integrated manufacturing. No manufacturing is outsourced. Its main competitor, Magellan, outsources manufacturing to Kinpo Electronics Inc., a contract manufacturer in Taiwan.

Garmin International Inc. Headquarters: Olathe, Kan. lumber of employees as of Dee. 31,2003:2,021

2903 Revenue: $573 million 2003 Net income: $178.6 million Units sold in 2003:2.07 million Manufacturing locations: Olathe: 240,000 square feet for aviation products with construction nearing completion on a 575,000square-foot expansion. Shijr, Taiwan: 249,326 square feet Garmin occupies 218,662 square feet and leases the rest to third parties. Gardner, Kan.: 25,034-square-foot aircraft hangar at New Century Airport for development, testing and certification of aviation products. Salem, Ore.: 52,000 square feet and a 6,000-square-foot aircraft hangar on 15 acres. A 15,000square-foot expansion of this hangar is under construction. Romsey, England: 28,358 square feet. Tempe, Ariz., and Wichita, Kan.: A combined 3,233 square feet. SOURCE: COMPANY REPORTS

"People often ask [Garmin] when they're going to outsource," said John Braatz, an analyst with Kansas City Capital. "But at the end of the day, the company doesn't have the volume per SKU [stockkeeping unit] that other companies that typically use a contract manufacturer have." Fulcrum's Friedland said Garmin's high margins and cash holdings give it the ability to pour large amounts of cash into research and development, which helps it develop innovative new products. R&D expenditures in 2003 were $43.7 million, or about 7 percent of sales. By contrast, rival Lowrance spent only $5.2 million, or less than 5 percent of sales on R&D.

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Covering the globe Garmin's manufacturing strategy is truly global. Its consumer-oriented products like the Streetpilot 2620 dashboard receiver for cars and the Etrex line of handheld receivers for hikers are assembled at a 249,000square-foot facility in Shijr, Taiwan. By the end of last year, Garmin employed 975 people at this facility. Garmin's avionics gear, used in the cockpits of private planes, is manufactured at a 240,000-squarefoot facility employing 997 and sitting on a 4l-acre site in Olathe, Kan., a suburb of Kansas City. The company is adding more than 500,000 square feet of capacity at this site. Avionics products made in the United States have an easier time getting certified by the Federal Aviation Administration, Garmin executives said. Other facilities include a 25,000square-foot aircraft hangar in Gardner, Kan., situated on a 148,000square-foot site used to develop and test avionics products. Another part of the avionics business is housed at a 52,000-square-foot facility plus a 6,000-square-foot aircraft hangar area in Salem, Ore. The company operates a 28,000-square-foot distribution warehouse in Romsey, England. The split between facilities in Taiwan and the United States presents some logistics and planning challenges, not the least of which is communication. CEO Kao, himself a native of Taiwan, spends much of his mornings in Kansas these days answering e-mail from managers in Taiwan. "Our Taiwan facility has its own complement of talented engineers, purchasing and materials staff that are capable of partnering with their colleagues in the U.S. to work toward the same goal," he said. But owning a manufacturing plant, regardless of location, has one significant advantage: You never have to compete for attention. "The benefit of having our own factory is that it is accountable to no one else but Garmin, and has the company's

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Whence it came

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hough for many of its customers Garmin International Inc. is a relatively new name, its roots in the aviation and navigation electronics business run deep. Its origin goes back to a dinner that founders Gary Burrell, now retired, and Min Kao, now CEO, had one night in 1989. At the time, Burrell had just left a job as vice president of engineering at King Radio, the legendary manufacturer of aviation radios. Launched by Ed King Jr. in an Olathe, Kan., farmhouse in 1957, King Radio grew rapidly and, by 1969, had landed a major contract to supply radios for the Boeing 747. Burrell joined King Radio in 1963 and, aside from a brief stint at Lowrance Electronics, had spent his entire professional life there. Burrell lured Kao to King Radio in 1983 from defense contractor Magnavox, where Kao had been developing military navigation systems using a then-new system of satellites alternately known as Navstar and the Global Positioning System. But by 1989, King Radio was going through wrenching changes. Its founder had sold the company in 1984 to Bendix Aerospace, a unit of what was then Allied Corp. Allied later merged with Signal Corp., becoming AlliedSignal. Both Burrell and Kao had seen the huge potential of GPS systems—indeed, Kao led the team that developed the first GPS receiver certified by the Federal Avi-

best interests at heart," Kao said. Benefits of insourcing And therein lies Garmin's secret: The very idea of outsourcing is anathema for Garmin. Indeed, director of operations Brian Pokorny likes to call the company's manufacturing policy "strategic insourcing." "If you're not willing to invest in the factory and the technologies that are required to keep your facilities

ation Administration for use in planes— but management at AlliedSignal showed little real interest in the nascent technology. Burrell and Kao left within months of each other in 1989. Over dinner, Burrell revealed that he was considering devoting himself to the ministry of his local church. But Kao asked a question that would set them both on the course to building a global company. "I asked if he had ever considered starting a business, and he said he would only do so with me." Kao, a native of Taiwan, had been hearing from old school friends back home that funding would be available if he wanted to start a company. Within weeks of their dinner, the partners were in Taipei, tapping into Kao's network. What they raised in Taiwan, combined with their own personal savings, amounted to $4 million—enough to set up the new company without having to rely on venture funding. They called the company ProNav, and the plan was to build GPS receivers first for the U.S. domestic marine market and then pursue the international market, with the general aviation markets to follow. The partners picked the right time. The GPS system was literally just getting off the ground. The explosion of the space shuttle ChallengerIn 1986 set its construction back by 24 months—the shuttle fleet had been envisioned as the launch vehicle of

up to date," Pokorny said, "then your factories finally start to degrade to the point where it is more efficient for contract manufacturers to build your product." "But when you hire a contract manufacturer you're dealing with another company that's out to make a profit," Pokorny said. "We think it's better to have whatever money might go to making their profit stay within Garmin."

choice for GPS satellites—and so the satellites had to be redesigned to work with a Delta II rocket. The first such launch took place in February 1989, and the first of what would become a constellation of 27 satellites was declared operational two months later. Burrell and Kao hired a dozen engineers and settled into offices in nearby Lenexa, Kan. ProNav's first product was the GPS 100, a dashboard-mounted GPS receiver aimed at the marine market that sold for about $2,500. It was a hit at the International Marine Technology Exhibition in Chicago, garnering dozens of press mentions. Before long, the company had back orders for 5,000 units. It was a gutsy move for a startup that had no manufacturing capacity of which to speak. After the trade show, Kao set off for Taipei, where the company had rented a small manufacturing space. Only 50 units were made the first month and another 150 the second. The company remained ProNav until 1991, when a competitor using the name NavPro took it to court. Garmin is a combination of the two founders' first names. "At first, our distributors panicked when they heard about the name change," Kao said. "They asked if we had gone bankrupt or been acquired. There were all kinds of questions. We had to reassure them." That's not a problem Garmin faces today. — Arik Hesseldahl

Displays are a good example of Garmin's strategic-insourcing philosophy. Garmin buys displays, then modifies them to meet the specific needs of its various products. But Garmin had had trouble finding displays that met its exacting standards. "In the early days we used to buy finished display modules," Pokorny said. "But we decided to take that technology in-house." Taiwan is now Garmin's center for display enhancement.

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Action items A review of your manufacturing strategy should be a regular item in your company's annual business evaluation process. Here are some key questions to ask: Does strategic insourclng make sense? Could your company save money by manufacturing certain products or components in-house rather than outsource production to contract manufacturers? Do your engineers see the assembly lines often enough? Would your company benefit from improving the formal relationship between engineering and manufacturing? When production problems arise that require the input of engineering, is there a process in place that makes that happen quickly with your contract manufacturers? How responsive are your EMS providers? Does the contractor respond quickly when you need to make a sudden demand-driven production change? Are you properly equipped and prepared to respond to unanticipated demand changes with your own resources? Can you save money through product redesign? Component capabilities can change over time, making it possible to eliminate parts over the life of the product, saving on the component count and on the bill of materials. Are you reviewing designs regularly with this process in mind? Are your contract manufacturers responsive to your plans for product redesign? How long has it been since your last MRP software update? Are disparate manufacturing sites able to respond quickly to production changes? If not, ensuring that everyone involved is getting the same information in real-time, using powerful new MRP tools, might make a difference.

But to keep costs under control, Garmin builds many products using modular designs. "We try to reuse designs throughout our produa lines as much as possible," Pokorny said. This helps with forecasting, should demand for finished products shift unexpectedly. "It's a lot easier to change a production schedule when you're using a supply of common parts [at your own plants.] When you use a contract manufacturer, that change becomes more difficult," Pokorny said. Design-manufacturing connection

Within that practice of modular designs lie chances to reduce costs. Pokorny said Garmin would often redesign a product over its lifetime to

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save on component cost and count. "Most people won't notice a difference, but the GPS 12 has been redesigned six or seven times," he said, referring to an older but stillpopular handheld GPS receiver. "We're constantly re-evaluating processors and other products that we use, and we're quick to redesign to reduce cost." And that redesign and other production changes tend to happen easily at Garmin because manufacturing and engineering all work together at the same facilities. "If we have yield problems with one of the units, our manufacturing people have only to walk 20 feet, and they can talk to an engineer," Pokorny said. "If there is a problem on the

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line, you might run into an engineer in the hallway. They're there in minutes. That's not something you get with an outside supplier." When Garmin launches a new consumer product, engineers from its Olathe plant typically go to Taiwan and spend two weeks overseeing a pilot run of the product. Garmin finds this close interaction between engineering and manufacturing goes a long way toward cutting the length of time between a product's design and its deployment. On its manufacturing lines, Garmin follows a continuous-flow methodology. Employees are crosstrained to perform several production jobs as needed. "If we get an order for 500 GPS 12s, which is one of our oldest products, an outsourced manufacturer would laugh and say come back when you get an order for 10,000," said Garmin spokesman Pete Brumbaugh. "But we can build that. You're always in that battle of profit and efficiency. The contract manufacturers say they want to have a certain lot size and can't just build 50 or 100 units. In our environment we can build that lot." Pokorny just saw Garmin through a migration from its old manufacturing resource-planning system—it had used business planning and control systems (BPCS) from SSA Global since 1995—to a new installation of Oracle's E-Business Suite that went live this year. "We had BPCS in Olathe and in Taiwan, but our operation in the U.K. was on Sage, and none of those systems talked to each other," Pokorny said. "Now when we make a change in Olathe, they see it in Taiwan the next day." "It's really about efficiency," Pokorny said. • Arik Hesseldahl is a senior editor at Forbes.com. He can be reached at [email protected].