Solectron - World Wide Materials System

Solectron

Supply Chain Management Best Practice

Background

Solectron was founded in 1977 as the as the “Solar Energy Company”, and originally produced solar energy products. Today it is a worldwide provider of electronics manufacturing services to original equipment manufacturers (OEM’s). The company provides customized, integrated manufacturing services that span all three stages of the product life cycle, including pre-manufacturing, manufacturing, and post-manufacturing (see Table 1). These servies are now integrated to the point where Solectron is now responsible for all supply chain processes associated with sourcing parts, building, and distribution of electronics and systems for almost every major OEM customer in the industry. A list of primary OEM customers is shown in Table 2, which spans the telecommunication, networking, computer systems, peripherals, semiconductors, consumer electronics, industrial equipment, medical electronics, avionics, and automotive electronics industries. These industries are in different stages of maturity, with network manufacturers fairly new, and computer systems fairly mature. The diversity of major customers in this list is testimony to their success.

In 1991, Solectron won the Malcolm Baldrige National Quality Award, reflecting the high level of performance achieved within this company. The company has also been honored with more than 100 recognition awards, 25 of which were received this year (see Table 3).

The financial growth of Solectron in recent years has been incredible by any standards (see Table 4). Most recently, Profit Before Taxes exceeded 6%, with gross margins increasing to 12%. Compounded annual sales growth rates have exceeded 60% over the last 5 years, and 66% over 18 years. Sales in 1996 exceeded $2.8 billion. The company employs more than 14,500 people worldwide.

The reason for this growth? A commitment to establishing long-term partnerships with customers by demonstrating consistent quality, responsiveness, continuous improvement, and technology leadership. In doing so, Solectron developed a new way of managing their customer base, through am evolving concept known as supply chain management.

Contract Manufacturing in the Supply Chain

The evolution of Solectron as a contract manufacturer represents a cutting edge strategy which has driven the company to continuously re-engineer their supply chain processes. The entrepreneurial nature of the company has led to an ever-increasing expansion into turnkey solutions, as OEM’s continued to simplify their supply chains and outsource “gray areas” not considered to be core competencies. These changes have occurred largely in response to the changing nature of the computer industry. The evolution of this strategy is shown in Figure 1, where the thickness of the lines between entities represents the strength of the relationship. In the 1970;s, suppliers shipped parts to OEM’s via truck to consigned operations,which assembled parts into products shipped to customers. This process was largely labor intensive. Some parts were also shipped to distributors for sales to customers. Suppliers’ primary strategy for success involved trying to get “designed in” to a particular OEM’s product through direct sales.

In the 1980’s, assemblies were shipped from suppliers to OEM turnkey operations, which were largely capital and process intensive. Solectron emerged as a printed circuit board assembler during this period, and began introducing leading edge surface mount technology. The company made a major transition in the early 1980’s to become a 100% turnkey contract manufacturer after producing Atari’s Chrismas overflow of video games. The company’s entrepreneurial spirit played a major role in this driving this transition. If a customer who was already doing business with Solectron decided to outsource a process previously not performed by Solectron, they almost always jumped at the chance. As a result, they began performing an increasing number of new manufacturing services for their customers. However, as a contract manufacturer, Solectron was responsible only for the quality of products produced internally, with minimal responsibility for supply base management. Because the OEM dictated which suppliers were to be used, the components were simply kitted and shipped to Solectron for assembly.

In the early 1990’s, OEM’s began offering systems and technological resources to endusers via distributors, often entailing full service support and partnerships with distributors. As this occurred, they began outsourcing manufacturing and supply chain management increasingly to Solectron, who now began establishing closer relationships with suppliers. OEM’s focused their core competencies on product design and marketing, and developing relationships with the emerging group of large scale re-sellers such as Comp USA and Best Buy. These important new channels offered electronics equipment directly to customers at low prices. Top management at Solectron realized that by establishing closer relationships with leading edge suppliers, they could offer OEM’s access to these preferred suppliers of computer components, instead of having to use the OEM’s designated suppliers which were not always leading edge. In so doing, they could maximize their OEM customer’s access to technological and performance capabilities, and create a significant marketing advantage. Increasing volumes with several major OEM’s meant increasing volumes purchased from suppliers, thereby allowing Solectron to negotiate preferential ramp-up, quality, technology, and pricing capabilities that could be passed on to OEM’s and which would otherwise be unavailable to them. Further, Solectron would ship the finished products directly to distribution points, and in some cases, re-sellers. This growth has been accompanied by major global expansion, involving the acquisition of some of their major partner’s facilities. Solectron has manufacturing sites in Milpitas, California, Penang Malaysia, Charlotte, North Carolina (formerly IBM), Bordeaux, France (formerly IBM), Tokyo, Japan, Everett Washington (formerly Hewlett Packard), Dunfermline, Scotland, Boeblingen Germany, Austin, Texas (formerly Texas Instruments), Johor, Malaysia, Suzhou, China.

Today, that vision is being pushed even further, with OEM’s focusing on simple product definition and marketing. Much of the design of printed circuit boards is outsourced by Soledtron to its newly acquired design houses. OEM’s can now approach companies like Solectron and state “Here is what I want my computer to look like, what I want it to do, and what I want it to cost - how it works is up to you!” This evolution has allowed Solectron to increase their leverage with preferred suppliers. Solectron can offer the supplier a greater chance of being “designed in” to the OEM’s product, without requiring a sales pitch on the part of the supplier. However, this means that suppliers must be able to offer “black box” designs which offer integrated solutions that can be integrated by Solectron designers.

To achieve this capability, Solectron has purchased two major design and prototype houses, Force Computers and Fine Pitch Technology, to enable them to meet these customer requirements. Further, they are seeking to ship products directly distributors and resellers, and push low end assembly to be performed at warehouses. In doing so, Solectron can effectively minimize the total cost of acquisition, which is a function of information, logistics capability, early design engagement, and supply base mangement. In this respect, their role will be much like that of a “bandleader”, who orchestrates the designs of multiple suppliers into new products required by major OEM’s, and fulfills orders through multiple distribution channels with minimal cycle times and inventory, in order to reduce total cost with a focus on delivering value in the market. Their core competence has thereby changed from a focus on manufacturing and logistics two years ago, (in a low margin business), to manufacturing, logistics, new product integration, and end customer value.

With this change has emerged a new set of challenges, regarding to manage their new role in this web of multi-relationships. It’s role in value creation has shifted dramatically, and the blurring of core competencies across customers and suppliers continues to take place. Solectron must now work closely with supplier engineers in their R&D facilities to ensure leading edge technology. This growth has not occurred without growing pains. Says one industry analyst: “When you grow as fast as Solectron through acquisition, there are major issues to address, such as integrating information systems, coordinating JIT deliveries, and other automated supply systems and maintaining high quality levels. The company’s chief financial officer admits that “We face the typical issues that any company encounters with the additional complexity of integrating several acquisitionsat the same time. Fine Pitch is very entrepreneurial. . . TI is more compatible with our existing business. . . and Force is much more engineering intensive than our core business. With each of these acquisitions we have to spend a lot of time looking for commonalities. On the IS front, we have a hodgepodge of systems that we have to link up. It’s not the most efficient approach but it’s a problem that has a technical solution. Regarding quality, that is more of a people-related issue” Each acquisition was made based on the following criteria:

• A chance to create new or expand existing customer and supplier relationships
• Adding unique capabilities to Solectron’s value chain, such as design for manufacturability or order fulfillment
• Crating a presence in a new attractive market
• Adding capable people to the company and integrating them into the core business
• Low labor cost

In conjunction with this evolution, Solectron has developed a Materials Vision that includes the following objectives:

• Create value via supply chain design and management
• Be the supplier of choice
• Be the customer of choice for suppliers
• Be the employer of choice for top materials professionals
• Develop processes that are consistent, repeatable, and scaleable

Organization

Solectron’s organization today is centered around two major functional processes which reflect its two major channels shown in Figure 1: Sourcing and Order Fulfillment. Each of these will be discussed in detail.

Sourcing

The sourcing function includes supply base management, controlling total cost, creating and exchanging longterm value, and creation of value partnerships with suppliers. The latter point emphasizes Solectron’s objective of becoming an agent for their preferred suppliers seeking to have them “designed in” to the next generation of products for OEM’s, in exchange for preferential pricing, technology, etc. The sourcing function has evolved over time, as shown in Figure 2. In the early 1980’s supply management between customers and suppliers were primarily transactional in nature. Over the 1990’s, customers developed strategic supply base management initiatives, focused on optimizing the supply base, measuring supplier performance, developing relationships with key suppliers, and improving quality and delivery performance. In the future, executives at Solectron believe that elements of both prior periods will be retained, but a new type of relationship with suppliers will need to evolve, focusing on total supply chain performance beyond customer - supplier linkages.

This evolution is driven by the nature of the computer industry. A supplier in this industry has several channels available to choose from in doing business with OEM’s, with their primary objective being to get their product into the OEM’s final product (see Figure 3). They can do so through a parts distributor, directly through the OEM’s purchasing function, or via competing contract manufacturers such as SCI, Solectron, D2D, Flextronics International, etc. The challenge to Solectron becomes how to ensure that their channel provides the lowest total cost of acquisition for both suppliers and customers, thereby creating the greatest value. The lowest total cost of acquisition is a function of improved access to information, logistics excellence, early design involvement, and responsiveness. The challenge becomes in replicating the capability shown in Figure 3 across multiple commodities and suppliers, in order to become the channel of choice for all major products provided by suppliers. (Solectron currently has 50 preferred suppliers). In the past, supplier quality was not as much an issue, since the choice of suppliers was dictated by OEM’s. Because Solectron must increasingly being challenged to work with suppliers directly, they have become more involved in quality audits and performance measurement. Quality has not been as much of an issue, since most suppliers that Solectron is engaged with today are global suppliers, and in this industry, quality is a pre-requisite for entry. OEM’s today require suppliers with global capabilities, since they must be able to ship to manufacturing locations all over the world. In some cases, Solectron has helped develop smaller regional suppliers into global suppliers (see Plant Tour section later in this case study).

Solectron employs a set of materials measures that are consistent with the theme of supply chain excellence. The primary measures of supplier performance include:

• Reliability
• Fulfillment leadtime
• Mean time between failure (Quality)
• Commodity allocation
• Inventory risk reduction
• Lowest price

A major challenge in becoming the channel of choice for suppliers is that the strongest competitor for Solectron is the cadre of inhouse corporate procurement experts residing within the OEM’s. As the industry evolves, Solectron believes OEM’s will focus less on procurement, despite internal resistance to this change. Solectron has a history of being a low overhead organization, which has permitted them to carry out sourcing processes more efficiently than many of the larger OEM’s. Further, because they are purchasing multiple families of standard components across multiple customer relationships, their aggregate volumes purchased in many cases surpass the amounts purchased by any single OEM. Their position expressed to OEM’s is that “We have the infrastructure - your only concern should be that our expertise is best-in-class.:

Order Fulfillment

The order fulfillment function focuses on plant management, OEM relationships, distribution, configuration of products to customer orders, and tying in to OEM’s customer order systems to identify configurations, and post-manufacturing support.

Solectron utilizes a unique customer satisfaction index which reflects their emphasis on customer service. Customers are polled often on the level of quality, delivery, communication, and service being provided by Solectron, using a standard scoring system of A, B, C, etc. However, these scores are translated into numerical percentages used to evaluate personnel and business units. A score of B- becomes a 75%. A score of C is a zero. Finally, a score of D is translated to -100%!

A number of on-going challenges emerge in managing the order fulfillment process. Because contract manufacturing is such a new industry, Solectron has had to overcome the unconscious perception by major OEM customers that they are a “sweatshop stuffing parts”, not a high technology company. Second, the rapidly changing nature of the industry means that they must constant seek new and innovative ways of maintaining flexibility. A major initiative in this area is designing products and sourcing from suppliers using an approach which considers supply chain order fulfillment for products with extremely short product life cycles. Product life cycles tend to ramp up exceeding quickly at an exponential rate, but shrink to almost nothing overnight. Some of the major “design for supply chain” criteria which must be planned for in selecting suppliers to fulfill orders include the following:

• Increased flexibility
• Increased ramp-up capability
• 30% upside capacity capability for suppliers of major components
• Ability to forecast
• Ability to adopt processes to product specifications
• Two week delivery
• 50% ramp time to full production from prototype

These demanding criteria are necessary in order to respond to quickly changing product and customer requirements driven by some of the shortest product life cycles in the industry (in some cases, less than 3 months!) Because customer forecasting is unreliable and is unlikely to get better, quick response and flexibility is simply a way of life for the materials group. Moreover, anticipating customer demand and communicating that demand to their 50 preferred suppliers will become more important as OEMs adapt to using contract manufacturers as business partners. For instance, Solectron may request on Friday 50,000 units of Product A from a supplier for delivery on Monday, then call back on Monday, and not only ask them to re-take the 50,000 units, but delivery 25,000 units of Product B instead! This type of flexibility is rapidly becoming a requirement for doing business in this industry.

On the fulfillment end, Solectron is willing to be able to “shut down” production of a product assembly line for a customer overnight if necessary. Because they maintain low inventory in the pipeline, they reduce the cost to customers who do not have to worry about inventory obsolescence, supplier bidding, etc. This is a major benefit to customers.

Human Resources

The nature of their business has also led Solectron to seek talented people with the following important skill sets:

• Technological function experience
• Willingness to tolerate ambiguity
• Decisiveness
• Spoken communication
• Assertiveness
• Decision-making and problem-solving capabilities
• Commitment to tasks
• Good interaction skills

As the company continues to grow, buyers must now get involved upfront with engineers to offer competitive pricing or different supply base recommendations. Solectron is involved with products from cradle to grave. The company has also established customer supply chain management teams for major customers. The team works with the customer very early in the concurrent engineering stage to influence which supplies are to be used, since most cost occurs in design. The team works with the customer through the life of the product, focusing on reducing cost, creating upside flexibility, and managing risk for the customer’s bill of materials. The company also focuses on strategic materials on a global level, and has worldwide commodity teams with representatives of different locations to source and manage parts used by multiple Solectron sites. The teams meet monthlyh to handle negotiations and to meet with suppliers to discuss market changes and Solectron’s needs. Solectron also holds a twice-a-year worldwide materials council. At this council, people who run materials functions all over the world meet during a three-day session to review current positions and future directions.