“Dearly beloved, we are gathered here today to bury our lean outsourcing supply chain partners, drowned at sea …”
That’s a sobering thought. The breaking news as I went to dead-line was Flextronics’ acquisition of Solectron. On the surface, this seems like a good thing. Flextronics gets bigger, taps into more markets and customers, passes on lower costs … that sound you just heard was the needle screeching across the turntable of my mind.
Trying to achieve even lower costs spells almost certain death for Electronic Manufacturing Services (EMSs) as we know them. They are already at the limits of margin and profitability. There must be something else going on here.
Dig a bit deeper into this acquisition and it becomes apparent that the firm really pulling the levers creating the conditions is Cisco Systems. One company’s lean results can quickly turn into another’s inventory-filled shoes.
In the ocean, trying to swim
Cisco’s lean outsourcing initiative seems to make sense. Working with four EMS providers – Foxconn, Celestica, Jabil Circuit, and Solectron – the idea is to set up tight coordination and move major chunks of inventory from Cisco into the EMS firms over a two-year period.
Angel Mendez, Senior VP of worldwide manufacturing at Cisco Systems, was quoted in a March 2007 interview with EMSNow saying, “The long-term benefit of Cisco Lean to our contract manufacturers and suppliers is a decrease in the amount of inventory in the overall supply chain.”
But Adam Pick of iSuppli painted a different picture on May 3 in EMSNow, remarking that “While Solectron Corp. has increased its revenues for five consecutive quarters, the Milpitas-based EMS provider also has increased its inventory levels for the past five quarters. Since August 2005, Solectron’s inventory level has surged by 44 percent. To make things worse, it’s expected that Solectron could add an additional $250 to $300 million in inventory as Cisco Systems Inc. shifts stockpiles to the EMS provider in 2007 as part of its Lean initiative.”
Now, the motive behind the acquisition is clear. Solectron, drowning from the weight of inventory already in its system with more coming from Cisco, had little choice but to partner with someone like Flextronics just to survive.
I’m not suggesting this is Cisco’s fault. They’ve even admitted that during the transition period to Lean, inventory levels in the supply chain could actually increase until stabilization is reached. It looks like that was the case with Solectron.
Getting lean tough, staying lean tougher
The real issue may be shortcomings in Solectron’s inventory processes. Inventory is a funny thing. Too little, and you can’t build goods to meet demand, and have to deal with lead times and pricing that’s out of control. Too much, and you end up drowning in costs to maintain it.
You then have to resort to fast footwork to slough off inventory – fire sales for excess goods, moving inventory farther back into the supply chain with just-in-time practices and vendor-managed inventory strategies. These steps can make your balance sheet look better – for a while. But if your underlying process keeps building inventory, you’ve got a problem that just keeps putting the weight back on.
Cisco is trying to create the right model to permanently reduce inventory, creating better processes for real-time demand prediction and communication up and down the supply chain. But they can diet and toss off a lot of inventory very quickly, far too much to handle in some cases. It’s not the supply side of the equation that usually gets messed up – it’s the demand side, where things and costs pile up quickly.
And Cisco isn’t the only big company driving for this model, which doesn’t bode well for EMS firms that can’t handle the
processes needed.
Pushed to the edge
Solectron took a bold step to partner with Flextronics before slipping under the waves. Flextronics is big enough to take on some risk and survive. I’m wondering how many more EMS firms are out there, quietly but desperately treading cold water against the weight of inventory passed from their customers.
How are things at the EMS firms that supply you? This acquisition seems like it could be a tipping point for the EMS industry and the companies that depend on them. I’d like to hear your thoughts and ideas on this and other ongoing developments in embedded technology – e-mail me at ddingee@opensystems-publishing.com.
“Dearly beloved, we are gathered here today to bury our lean outsourcing supply chain partners, drowned at sea …”
