MMI July 2004
Vol. 14, No. 7: July 2004
Table of Contents — Headlines
Flextronics Sews Up History-Making Program from Nortel
Flextronics and Nortel Networks have reached a much-anticipated agreement by which Nortel will divest system integration activities for all of its optical and wireless businesses and most of its enterprise business to Flextronics. The provider expects this deal to generate annual sales of about $2.5 billion. Measured by dollar value, this is the largest program award in the history of the EMS industry.
Under this agreement, Flextronics will acquire substantially all of Nortel’s remaining manufacturing operations. Flextronics will take over final assembly, testing and repair operations in Nortel’s Systems Houses in Calgary and Montreal, Canada, and Campinas, Brazil, along with management of the supply chain, related suppliers and third-party logistics. In Europe, Flextronics has made an offer to purchase similar Nortel operations in Systems Houses in Monkstown, Northern Ireland, and Chateaudun, France, subject to consultation with employee representatives, as required by law.
These locations were previously identified in a January 2004 announcement that the two companies were in talks (Jan., p. 5). As discussions progressed, changes in the deal were made. They include adding optical design to the scope of services that Flextronics will provide. Through an optical design services agreement, Flextronics will acquire certain design assets in Ottawa, Canada, and Monkstown related to hardware and embedded software design and associated product verification for certain established optical products. Flextronics will gain a group of engineers with expertise in end-to-end, carrier-grade optical network products that include Edge, Core Switching and Transport Line products.
“This is important to us because design is a cornerstone of Flextronics’ strategy as we work to further evolve our complete product development supply chain solutions. We want to be an end-to-end solution for our customers where we design, build, ship and service all the products we provide. By acquiring substantial design capabilities from Nortel, we are significantly accelerating our strategy in the telecom and datacom market segments,” said Michael Marks, Flextronics’ CEO, during a late June conference call to discuss this deal. During the call, he placed even more importance on these capabilities than on the size of the deal.
According to Nortel, these design assets are being coupled with the manufacturing operations that are being divested so as to enable faster product cost reduction and improved time-to-market for new features of established optical products. This move, in turn, will enable Nortel to focus on next-generation optical architectures, products and solutions areas where Nortel believes it can gain the most competitive advantage.
Of the three large-scale outsourcing programs in which Flextronics has been involved, the Nortel program is the first where Flextronics is providing significant design capabilities. As part of the deal, the two companies will enter into a three-year supply agreement for design services and a four-year supply agreement for manufacturing services.
In addition to manufacturing operations and design assets, Flextronics will acquire Nortel’s global repair services. The deal essentially excludes Nortel’s wireline business.
Because of the complexities of this deal, both parties feel a staged transfer of business is necessary. The transfer to Flextronics is expected to begin in November 2004 and will take about six months to complete. Manufacturing activities in Montreal and the optical design activities in Ottawa and Monkstown are expected to be in Flextronics’ possession in Q4. The balance of the transaction is slated to close in the first half of 2005.
The parties expect that about 2500 Nortel employees will transfer to Flextronics. Of those, about 900 are located in Montreal, 650 are in Calgary, 100 are in Ottawa, and 30 are in Campinas. Under the terms proposed in Europe, about 440 employees in Monkstown, including about 55 designers, would join Flextronics, as would some 330 people in France.
For the Nortel assets, Flextronics will make a series of cash payments totaling about $675 to $725 million over five quarters starting in Q4. The total estimated price consists of about $415 to $465 million for inventory, $60 million for fixed assets, and $200 million for intangible assets relating to, among other things, the design and engineering transfer.
To help fund these payments, the deal is expected to generate cash inflows not only from profits, but also from inventory reduction. “We are acquiring inventory that turns approximately five times, and we think we can improve this, which would result in more than $100 million in cash generated,” said Marks.
Flextronics expects that the Nortel program will be neutral to earnings in the last two quarters of its fiscal year ending March 2005, accretive by about 10 cents per diluted share in fiscal 2006, and accretive by about 15 cents in fiscal 2007. Marks told analysts that Flextronics expects the Nortel business to produce an operating profit of about 5% in line with the company’s model for this type of business.
An analyst asked, “If you add in boards and enclosures and logistics and all those other higher margin services, it would seem like you’d have more than that.” Marks responded, “I think that we’re just being conservative, and we should be because there are a lot of things we don’t know about this business….But assuming everything goes according to plan, we’d expect it to be better than that.”
Initially, Flextronics won’t be able to capitalize on such vertically integrated capabilities, which allow it to capture profit margin on internally sourced items. That’s because the Nortel program will start with Flextronics providing only system integration on the manufacturing side. But over time, Flextronics expects to supply the program with the company’s vertical capabilities in PCB fabrication, PCB assembly and enclosures, along with logistics and repair services. As manager of the supply chain for the program, Flextronics “will be able to determine when such activities get transferred into Flextronics, of course honoring any existing commitments Nortel has made to its existing supply chain,” said Marks. Flextronics expects well over a billion dollars worth of procurement to be switched from external to internal sources. But this shift to internal sourcing will have no revenue impact since Flextronics will start out buying such services from outside suppliers.
The company foresees other benefits from the program as well. Adding Nortel’s infrastructure products will help Flextronics create a better balance between high-volume consumer products, typically with seasonal demand patterns, and lower-volume, higher value-add products such as Nortel’s. Flextronics expects telecom infrastructure products to exceed $5 billion in fiscal 2006 sales and represent one fourth of its business then. What’s more, the provider is projecting that total revenues will top $20 billion in fiscal 2006.
According to Marks, Flextronics’ offering, which includes industrial parks on four continents and the aforementioned vertical integration, enabled it to win this deal. The company spent over a year working to put the transaction together. The process not only involved many hours of showing Flextronics’ capabilities to Nortel people around the world, but also included value engineering exercises and logistics modeling.
“There really were no competition involved in this project. And it’s because there’s no competition that can offer this range of capabilities,” said Marks.
Flextronics believes that the Nortel program will be followed by other deals of its type. “If you look at the rest of the telecom industry, for all intents and purposes this is the first time anyone is really outsourcing this level of capability. But we think this is the start of a trend because we’ve been talking to other companies,” he said.
“Some may not do it for years. Some may never do it. But there are clearly going to be other companies that are going to want us to do exactly what we’re doing for Nortel,” Marks added during the late June call.
About three weeks later, Marks told analysts, “We are already in preliminary discussions with a number of other companies as a direct result of the Nortel announcement. This is just what we expected.”
ETP Forecast Combines EMS and ODM
It is becoming abundantly clear that outsourcing and EMS are no longer synonymous . The rapid growth of the ODM business in recent years has given ODMs a far-from-trivial slice of the outsourcing pie (see also May, p. 1). A new market report reflects this trend.
For the first time, Electronic Trend Publications, or ETP (San Jose, CA), has issued a forecast that covers the entire manufacturing market for outsourcing. ETP’s new report, The Worldwide Electronics Manufacturing Market, First Edition, presents estimates and analyses that encompass not only traditional EMS providers, but also ODMs. ETP predicts that the combined outsourcing market will reach $156.9 billion this year, reflecting growth of 12.5% from last year’s market of $139.5 billion (table).
According to the ETP study, the EMS+ODM business will enjoy steady, though not spectacular, growth from 2003 to 2008. In 2008, this outsourcing business will hit $244.0 billion, equating to a five-year CAGR of 11.8%. ETP’s projected growth rates year-to-year vary from 11.2% to 12.5% over the forecast period (table). Although ETP expects that traditional contract manufacturing will remain the dominant form of outsourced production over the next five years, the firm believes ODMs will enjoy higher growth rates than EMS providers will.
The ETP report shreds the once-popular myth that the penetration of outsourcing is below 20% of the available assembly universe. Based on ETP data, the penetration rate in 2003 was 21.5%, rising to 27.9% in 2008 (table). If this data is on the mark, then the outsourcing business still has plenty of room to grow before it saturates the available universe.
These penetration rates are derived from an available assembly market, which stood at $648.2 billion in 2003. ETP is projecting that this market will go to $875.4 million in 2008, for a CAGR of 6.2% (table). So the forecasted CAGR of the outsourcing business 11.8% is nearly twice that of the assembly universe. Interestingly, ETP is calling for a 2.3% decline in the assembly universe for 2005, following estimated growth of 10.8% in 2004.
ETP finds, not surprisingly, that Asia will take a larger and larger share of the outsourcing market. Last year, Asia absorbed more than a 20% increase in manufacturing revenue, as OEMs shifted more production to the region, in particular China. As a result, Asia accounted for 38% of the outsourcing market in 2003, according to ETP. In 2008, the Asian share will reach a dominant 61% of the market, the report predicts. Over the forecast period, North America will see its share decline from 31% to 19%, while Europe will face a decrease from 24% to 15%. The rest of the world accounted for 7% of the market in 2003 and will end up at 5% in 2008.
When it comes to outsourcing market segments, the report forecasts a 2008 mix not much different from what ETP estimates for 2003. The computer segment will increase its market share somewhat from 40% to 44% over the forecast period, while the communications piece will shrink slightly from 28% in 2003 to 27% in 2008. Together, these segments will retain their majority hold on the ODM+EMS market with a combined share projected at 71% in 2008.
Despite the efforts of EMS providers to diversify further into other markets, the report foresees no significant changes in the shares of these markets. For example, the largest of these, the consumer segment, will not gain any share, remaining at 10% in 2008. The industrial sector will see its slice of the market decrease from 7% in 2003 to 6% in 2008, while the medical segment’s share will stay at 6%.
The report also gives large EMS providers a performance rating based on weighted financial metrics including net income, net income growth, five-year EPS growth, inventory turns and debt ratio. In 2003, Nam Tai Electronics (Hong Kong) achieved the highest rating, followed by Foxconn (Tu-Cheng, Taiwan).
Risk Assessment Looms Larger
Outsourcing and risk go hand in hand. When an OEM depends on a supply chain to furnish it with product, the OEM must accept the risks that the chain presents. Risk assessment can be a pursuit of pure hypotheticals that may seem acceptable when compared with the monetary benefits of outsourcing. Acceptable, that is, until something goes wrong. If a problem disrupts the supply chain, the effects on the OEM can be serious or even disastrous. None of this is news to OEM managers. But a study by researchers at Michigan State University finds that lean supply chains are becoming less able to absorb shocks or stoppages. Not only that, supply chains face new risks as they have grown increasingly dependent on sourcing to China.
OEMs with product coming out of China can’t be too happy about the summer shortage in China’s electricity supply. As reported by the Asian news service DigiTimes, concerns are growing that electricity shortages could affect smaller Chinese companies that supply materials to major manufacturers in China. Yet OEMs who outsource to China may not have full visibility of those who supply their EMS providers and ODMs.
“When they [OEMs] go to these very low-cost Asian locations like China, they actually have less exposure into the underlying supply chain,” said Charlie Barnhart, senior consultant at Technology Forecasters, or TFI (Alameda, CA). As a example, he cited a case where an OEM had thought that a plastic part for a new product was coming from a certain supplier in China. When the OEM’s product went into production, the part was sourced from a lower cost supplier in China. “I’ve seen their shop. It is literally a garage shop operation,” said Barnhart. He remarked that this supplier would never pass the OEM’s survey.
According to Barnhart, the top three risks in outsourcing to Asia are IP theft, political instability and logistics. Risk assessment is one of the areas that Barnhart covers in the Global Pricing Model Workshop that he presents through TFI. The workshop is intended to give OEMs a better understanding of the costs that go into EMS contracts as well as total cost of ownership.
How do you assign a value to risk? Risk can be expressed as a continuum of values from best to worst case scenario, and Barnhart believes OEMs should pick a number along that curve. Based on information collected from many people, Barnhart uses a risk value of around 2 to 3% of total cost.
To protect against threats to increasingly vulnerable supply chains, three Michigan State researchers are advocating Business Continuity Planning (BCP). In a white paper entitled, “Effective Practices for Business Continuity Planning in Purchasing and Supply Management,” the researchers describe the four key elements of BCP: awareness, prevention, remediation, and knowledge management. They conclude that BCP should be viewed as part of the strategic sourcing process rather than as a separate planning activity. The study is available at www.bus.msu.edu/msc/research.html.
For clients wanting to mitigate supply chain risk, Barnhart offers the following advice. Avoid sequential serial solutions, which result in long pipelines that are more vulnerable to disruption.
Sanmina-SCI To Acquire Asian Fabricator
Also expands in Hungary, but starts new round of restructuring
Sanmina-SCI (San Jose, CA) aims to extend its PCB fabrication offering to China by acquiring Pentex-Schwei-zer Circuits, a PCB fabricator with operations in Wuxi, China, and Singapore. The EMS provider is also expanding its Hungarian operations, but still finds the need to start another phase of restructuring.
The purchase price is about $78.8 million for Pentex-Schweizer shares and options. Closing is expected in the December quarter. The transaction is subject to several conditions, including approval by Pentex-Schweizer shareholders and court approval under Singapore law.
Pentex-Schweizer operations in Wuxi, China, and Singapore comprise 470,000 ft2 of manufacturing space. The Chinese operation can be expanded by 450,000 ft2. According to Sanmina-SCI, these two operations will complement its high-end PCB facility in Malaysia.
“Adding printed circuit board fabrication capabilities in China has been part of our strategy for several years…in part due to our Chinese customer base requirements and in part due to the need for the ability to effectively compete in the low- to middle-end space for PCBs,” said Randy Furr, president and COO of Sanmina-SCI, during a July conference call with analysts.
The company also intends to use Pentex-Schweizer to supply PCBs for internal use. Sanmina-SCI expects that the acquisition will allow it to increase the internally sourced share of its total PCB requirements. According to Furr, Sanmina-SCI believes that within a year that share will mover closer to two-thirds compared with the current level of about one-third.
In addition, the parties have entered into a transition manufacturing agreement whereby Pentex-Schweizer will provide PCB fabrication services to Sanmina-SCI prior to closing. Under this agreement, the two companies will also undertake transition manufacturing activities.
Pentex-Schweizer is shipping today at an annual rate of about (US)$65 million. For the half year ended December 2003, the company earned an operating profit of S$758,000 on sales of S$54.8 million. Sanmina-SCI expects the acquisition to be about a half cent accretive for fiscal 2005.
Sanmina-SCI is also expanding its operations in Hungary. The provider plans to move the personal and business computing work done at its site in Tatabánya to a new site in Székesfehérvár at the beginning of August. The new site will allow the company to take on more of that business from both existing customers and new customers. About three years ago, Sanmina-SCI started building computers in Hungary for HP and IBM, two major customers in its personal and business computing segment. This move to the new site will also free up space at the old site, which serves customers such as Nokia and Ericsson.
Although Sanmina-SCI is adding a site in Hungary and acquiring a PCB fabricator in Asia, it is facing utilization rates of around 40% to 42% in high-cost areas. “Clearly, we have too much capacity in these areas, and we need to take some out,” said Furr. In contrast, capacity utilization in low-cost areas is running around 65%.
The company plans to remove capacity from its North American and Western European operations in a new round of restructuring, which will incur charges of about $100 million over the next four or five quarters. Sanmina-SCI attributed this decision to developments since October 2002 when it announced a second phase of restructuring. These developments include weaker than expected recovery in medium-volume, high-mix products and operations in Hungary, Mexico and China running more efficiently than forecast.
A PCB fabrication plant in Wilmington, MA, may be one of the first casualties of the new restructuring effort. Two newspapers in the US Northeast are reporting that Sanmina-SCI will close the Massachusetts PCB plant with the loss of 490 jobs.
For the quarter ended June 26, Sanmina-SCI reported sales of $3.07 billion, up 7% from the prior quarter and 16% from the year-earlier quarter. Pro forma net income came to $34.4 million, or $0.07 pro forma diluted EPS. A year ago, those pro forma results were $6.4 million and $0.01. The pro forma numbers exclude restructuring, integration, impairment, other infrequent or unusual items and non-cash interest and amortization expense.
ProxyMed to Sell EMS Business
ProxyMed (Atlanta, GA), a provider of healthcare transaction services, has signed a definitive agreement to sell the assets of its contract manufacturing business, known as Key Electronics (New Albany, IN), to a ProxyMed executive. This EMS business operates under ProxyMed’s Lab Services Division. The move will allow ProxyMed to focus exclusively on its healthcare-related businesses.
Since 1996, Key Electronics has provided PCB assembly services for ProxyMed’s Lab Services Division. Recent years have seen growth in non-healthcare-related EMS, providing ProxyMed with a strategic reason to sell.
The buyer, A. Thomas Hardy, will pay cash for all of Key Electronics’ net assets, estimated at between $4 and $5 million. The annual revenue of the EMS business is about $10 million, and its annual contribution to EBITDA before corporate overhead is budgeted at less than $200,000. Key Electronics employs about 80 people.
Hardy has served as president of ProxyMed’s Lab Services Division, which includes both lab communications device and contract manufacturing businesses. Formerly known as Key Communications Service, the lab division was acquired by ProxyMed at the end of 1998. Hardy was a co-owner of Key Communications before it was bought.
Key Electronics will continue to supply components for the ProxyMed division’s lab communications devices. Both Key Electronics and the ProxyMed division are expected to remain in the same facility, which totals about 40,000 ft2 in New Albany. Key Electronics is looking for a larger facility to house both operations in the vicinity of the current South Indiana location.
CEI Investing in Vertical Integration and China
Singapore-listed CEI Contract Manufacturing Limited (Singapore) has entered into an agreement to pay S$300,000 for a 23% interest in Santec Corporation Pte Ltd, the holding company for a Shanghai, China-based provider of tool and die fabrication and metal stamping. This provider, Santec Precision (Shanghai) Co., Ltd, supports customers in the telecom and automobile industries. It started operations in 2002.
“This investment is in line with our strategy to provide a wider range of services beyond PCB assembly to our customers. This relationship with Santec Shanghai also gives us a presence in China, in addition to our operations in Singapore, Batam and Vietnam,” stated CEI’s executive chairman, Tien Sing Cheong.
In addition, CEI is buying out its joint venture partner in Tangera Pte Ltd, a company formed to hold property occupied by CEI. The provider will pay S$1.3 million for Tangera shares held by ST Electronics Systems Assembly Pte Limited, a dormant subsidiary of Singapore Technologies Pte Ltd. The latter is a substantial shareholder of CEI.
Medical CM Buys Medtronic Facilities
TriVirix International (Durham, NC), a medical device contract manufacturer, has purchased Medtronic facilities in Copenhagen, Denmark, and Salt Lake City, UT. The medical CM has bought manufacturing and product support functions of Medtronic’s Urology, Gastroenterology and Neurology Diagnostic Businesses. Under this deal, TriVirix will provide product development and manufacturing services to Medtronic. “TriVirix’s business model is to grow through a combination of strategic and organic transactions,” stated Kathy Blum, TriVirix’s interim CEO. “This, our fourth strategic transaction, is a strong endorsement of our performance against this model.”
This deal is also the company’s second acquisition of a Medtronic facility. In 2002, TriVirix acquired a components plant in Milaca, MN, from Medtronic. Also in that year, the medical CM purchased a PCB assembly operation in Belfast, Northern Ireland, from Fujitsu Telecommunications. More recently in December 2004, TriVirix bought the assets of UMM Electronics (Indianapolis, IN), which specialized in the design and development of medical products.
Another deal done…Publicly-held Nortech Systems (Wayzata, MN) has acquired the assets of Zachariah and Lundbergh (Marco Island, FL), a manufacturer of camera power supplies and cable assemblies used in machine vision systems for the industrial, medical/scientific and security markets. Terms were not disclosed. The deal was made to diversify the product offering and customer base for Nortech’s Intercon 1 division, which also serves the machine vision market. Intercon 1 offers cable assemblies, high-flex bulk cable, and a select number of camera power supplies to that market.
Back to TOC
New programs…Wherify Wireless (Redwood Shores, CA), a developer of wireless location products and services, has selected Flextronics (Singapore) to develop and manufacture Wherify’s CDMA GPS Locator Phone….Celestica (Toronto, Canada) will serve as EMS provider for fuel cell products of ReliOn (Spokane, WA)….In the June quarter, Plexus (Neenah, WI) won seven major manufacturing programs from OEMs that include Juniper Networks, Plexus’ largest customer; Siemens and Dräger, existing medical clients; Gerber, a new medical customer; and AMX and GE, current industrial customers. These new manufacturing programs combined with some smaller wins will produce an estimated $85 to $100 million in aggregate sales. On the engineering side, Plexus landed over 20 new projects with customers such as St. Jude Medical, Radiant Medical, Respironics, Texas Instruments and Itron….Under a new volume supply agreement with Opnext (Eatontown, NJ), Fabrinet (Pathum-thani, Thailand) will manufacture the majority of Opnext’s 2.5 and 10 Gbit/sec optical transceivers for ultra long-haul SONET/SDH and WDM applications. Opnext, a supplier of optical components, was spun out of Hitachi, which has majority ownership in the company….Sonitrol (Alexandria, VA), a commercial security provider in North America, has chosen CTS Interconnect Systems, the EMS business unit of CTS Corp. (Elkhart, IN), to provide complete product build and direct ship distribution for Sonitrol’s security equipment. This is the first complete outsourcing and distribution program that the CTS unit has been awarded. The contract stems from the March divestiture of Sonitrol from Tyco….OTC-listed LMIC (Beltsville, MD) has received a $17.0-million contract from TNCI UK, Ltd., a subsidiary of TNX Television Holdings (Philadelphia, PA). LMIC will serve as the exclusive manufacturer of about 1100 television systems for TNCI’s TV channel developed for commuter trains in the UK. The contract consists of about $15 million in manufacturing services, $1.8 million of maintenance services, and $250,000 in engineering services. This agreement follows a 2003 contract that TNCI awarded LMIC to design and manufacture the first 164 TV systems….EMS provider Servatron (Spokane, WA) will build Wi-Fi base stations for Vivato (San Francisco, CA)….Millar Instruments (Houston, TX) has selected TriVirix to provide PCB assembly, box build, and test services for Millar’s pressure catheters and control units.
ODM offering…EAZIX, the design service and ODM arm of EMS provider IMI (Laguna, the Philippines), has launched a GPS receiver module that can be embedded into products such as PDAs, cell phones and telematics devices to enable location-based services.
New facilities…Hon Hai Precision Industry, better known by its Foxconn trade name, broke ground this month on a new R&D center for nanotechnology in Tucheng, Taiwan, which also serves as the company’s home base. Reportedly, the center will start with a staff of 1000 when the first stage of construction is finished in July 2005. Hon Hai will invest NT$12 billion in the center over the next three years, according to Asian news sources….Elcoteq Network (Espoo, Finland) has decided to build a new plant in St. Petersburg, Russia, with 14,700 m2 of space. Construction is slated to begin in Q4, and the plant is expected to be ready in the fall of 2005. Elcoteq will invest about 15 million euros for land and construction. When operating at capacity, the plant is expected to employ some 1500 people. “From 2005 onwards, we will need more production capacity for mobile phones and communications network equipment. This investment program will safeguard our service capability to European customers, and at the same time it will strengthen our position as the number-one communications technology electronics manufacturing services company in the fast growing Russian markets,” stated Jukka Jäämaa, executive VP at Elcoteq. Since 1997, Elcoteq has operated a plant in St. Petersburg; the plant’s work force currently totals 170….Due to customer demand, CTS Interconnect Systems, CTS’s EMS unit, has opened an 80,000-ft2 operation in Singapore, primarily for the storage market. The operation utilizes space within an existing CTS facility maintained for the company’s Components Group. By utilizing existing infrastructure, the new CTS operation was able to establish full production within four months. The new Singapore operation becomes CTS’s second EMS location in Asia; the first is in Tianjin, China.
Financial news…For the quarter ended June 30, Flextronics reported that sales rose 25% from a year earlier to $3.88 billion. Excluding restructuring and other charges, net income climbed 283% year-over-year to $78.3 million, or $0.14 per diluted share. GAAP net income for the quarter came to $74.3 million, up from a loss of $289.7 million in the year-ago quarter. Also, Flextronics has made a public offering of about 24 million shares of common stock, which will bring proceeds of about $300 million. The company intends to use the net proceeds to fund the further expansion of its business, including additional working capital and capital expenditures, to repay borrowings under its revolving credit facility, and for general purposes. Flextronics may also use the proceeds for strategic acquisitions or investments….Solectron (Milpitas, CA) has sold its 63% ownership in U.S. Robotics to the management of the company. Terms were not disclosed. This transaction is part of Solectron’s plan to sell non-core assets (December 2003, p. 5).…Cal-Comp Electronics (Bangkok, Thailand) has taken out an $80-million loan to increase capacity, as reported by DigiTimes….For the fiscal year ended April 30, 2004, SigmaTron International (Elk Grove Village, IL) reported sales of $100.5 million, down 5% from the prior year. Net income amounted to $5.4 million, compared with $5.7 million for fiscal 2003. …SMTEK International (Moorpark, CA) has obtained an increase in its credit facility to $15 million from $10 million. Terms of the amended facility also call for a lower interest rate structure and an extension of the maturity date by one year to 2007. The amendment also includes a new capital expenditure facility of $2.5 million for eligible equipment purchases….CirTran (Salt Lake City, UT) has secured $20 million in committed equity capital in the form of a Standby Equity Distribution Agreement with Cornell Capital Partners. Under a SEDA, the issuer retains control over the amount and the timing of each capital advance from Cornell.
People on the move…SMTC (Toronto, Canada) has appointed Jane Todd as CFO and senior VP of finance. Her former positions include VP and CFO of Agility Recovery Solutions and VP of finance with Dell’s Canadian subsidiary. The previous CFO resigned in August 2003, and the company had relied on a series of two interim CFOs….Sypris Electronics (Tampa, FL), an EMS provider with an emphasis on defense and aerospace, and a sister company, Sypris Data Systems, have announced a joint aerospace and defense board of advisers. Made up of both in-house and outside personnel, the board will provide guidance in product development and customer needs as well as introductions at government agencies and major prime contractors. Three board members come from the outside. Chuck Thomas is a retired Army major general and VP with BAE Systems, Analytical Solutions. Tom Newberry, a retired Army colonel, serves as COO of 3D Research Corp. Rasler Smith, Ph.D, a senior scientist at New Mexico State University, is an expert in electronic warfare….Kwok Li, chairman of LMIC (Beltsville, MD), has assumed the role of CEO. He has succeeded Luis Negrete, who will remain president of the company and add the title of COO. Negrete will maintain primary responsibility for LMIC’s manufacturing operations, while Li will focus on business development and company strategy. Also, LMIC has named Payesh Jhaveri as CFO. He has replaced Roger Cavanaugh who left the company to pursue other interests. Jhaveri comes from Solectron, where he served as controller for Iphotonics, an optical unit of Solectron….Three-Five Systems (Tempe, AZ) has released a succession plan for its board. David Malmberg will continue as chairman through January 2005, when he will relinquish his post to Henry Hirvela. TFS has appointed Hirvela, a current director, to the newly created position of vice chairman. He is president of Phoenix Management Partners (Phoenix, AZ), a consulting and investment firm….Endicott Interconnect Technologies (Endicott, NY), a supplier of chip packaging, PCBs, electronic assemblies, electromechanical equipment and technical services, has created separate business units aligned with its major product lines. One of those units, Complex Electronic Assembly, competes in the EMS world. Wade Phelan was recently named the unit’s GM.…CirTran has promoted Trevor Saliba to executive VP, worldwide business development, responsible for company sales, marketing, strategic and business development, investor relations and acquisitions. In addition, CirTran has appointed Charles Ho as president of its new wholly-owned subsidiary, CirTran-Asia, which is targeting the high-volume Asian manufacturing market. Ho has served for many years as chairman of Meicer Semiconductor, a semiconductor manufacturer in China. For the Asia subsidiary, CirTran recently signed an exclusive manufacturing agreement with three manufacturing and marketing companies….Able Electronics (Hayward, CA) has promoted George Laurie to VP of manufacturing.
The Lean Journey
Once in a while, MMI publishes something that we would rather have back. Such was the case with the April lead story, “Lean Manufacturing Takes Hold.” From this article, a reader might have thought that lean manufacturing is just beginning in the EMS industry. Of course, this is not the case. Lean manufacturing techniques in one form or another were used in the industry during part of the 1990s. A more appropriate headline would have been something like “Lean Manufacturing Moves to the Next Phase.” Although the headline missed its mark, the essential point of the article did not. Lean initiatives can lead to big strides in operating performance.
If the industry has known about lean techniques for a long time, what is so important about the current wave of lean initiatives? Sure, lean basics such as pull-based production, continuous flow, short set-up times, and WIP reduction are now widely adopted in the EMS industry. What is new is that EMS providers are now applying lean techniques systematically, not just within their plants but throughout their supply chains.
For OEM customers, lean manufacturing is music to their ears. With lean providers supplying them product on demand, they can act like super-efficient Dell. If a lean system is working as advertised, then there should be less inventory exposure in the chain. That means less inventory risk for OEMs concerned about avoiding the inventory glut of 2001 and 2002.
But to reduce inventory risk, a lean system must operate with shortened lead times for materials. A provider can have the most efficient lean system in the world within the four walls of a plant, but demand swings can result in excess inventory if components are bought too far in advance. Lately, component lead times in general have been moving out in response to improving demand. That spells trouble for a company trying to implement a lean system within its supply base. Since wafer starts cannot be ramped up and down on short notice, someone must hold component inventory for a lean system to work. In the current climate, however, suppliers have less incentive to comply with the needs of a lean system.
The providers most able to surmount this obstacle may well be smaller players with a few facilities at most and a supply base primarily made up of distributors. Distributors are equipped to maintain component buffers that a lean manufacturer can draw upon on short notice. Smaller players can also focus their lean efforts on a few plants, while large providers must contend with many sites. In the world of lean manufacturing, bigger is not necessarily better.
The April lead story identified three large providers with lean initiatives underway. But smaller players have also adopted lean manufacturing, and this writer recently happened upon three examples MEC, Micro Dynamics, and the Morton Division of Preco Electronics.
Lean practitioners will often say that lean is a journey, not a destination. That journey has now reached the next stage the supply base.