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 / Winter 2004 / Issue 37(originally published by Booz & Company)


Flextronics: Staying Real in a Virtual World

Today, Flextronics seems well positioned to continue to grow as the tech sector recovers. In fact, Mr. Marks is once again pushing the strategic envelope by moving Flextronics into the business of designing his customers’ products as well as manufacturing them.

Lean Growth
The contract manufacturing industry (or EMS — for electronics manufacturing services — as this industry is often called) was born in the 1980s with the introduction of the printed circuit board (PCB). When PCBs became the basic building blocks of most electronic products, computer manufacturers fostered the creation of a new industry to solder or “stuff” circuit boards with components. The board stuffers spared the computer makers from multimillion-dollar investments in complex PCB machinery. Outsourcing circuit board stuffing also furthered the 1980s goal of computer giants like IBM and HP, which wanted to move away from low-skilled, worker-intensive activities and instead focus on product development.

Flextronics began as a board stuffer. After growing rapidly in the 1980s, the company foundered in the recession of the early 1990s. It had slimmed down to just three Asian factories when a buyout team led by Michael Marks purchased control in 1993.

Mr. Marks, a St. Louis–born Harvard MBA, had grown interested in manufacturing operations through his experience at a computer terminal company. In the late 1980s, he moved to Silicon Valley as vice president of operations for Electronic Arts, the computer game maker. He next went to Metcal, a maker of electronic components, where he was CEO when he put together the investor group that bought control of Flextronics. Mr. Marks’s plan was to improve the company’s operations, wait for the tech upturn, and sell the firm to a large contract manufacturer seeking operations in Asia.

When Mr. Marks took over as CEO of Flextronics in January 1994, revenue was running at $300 million a year. In 1996, the company won a bid to take over the manufacturing of Ericsson SpA’s telephone network equipment. As part of the deal, Flextronics also purchased Ericsson’s manufacturing facility in Karlskrona, Sweden. The business was worth some $400 million a year. Suddenly, Flextronics had doubled in size and become one of the world’s top five contract manufacturers. Growing the business now looked more attractive than selling it. All Mr. Marks needed was a growth strategy.

Mr. Marks’s focus on lean manufacturing was inspired by the philosophy of manufacturing initially developed by Toyota and other Japanese automotive companies. Lean manufacturing spread to the West in the 1980s and 1990s and was celebrated in such bestsellers as World Class Manufacturing: The Lessons of Simplicity Applied (Free Press, 1986), by Mr. Schonberger. Mr. Marks describes this book as one of the key inspirations of his career. (He keeps a stack of copies in his office to dole out to visitors.)

Whereas traditional manufacturing relies on high levels of raw materials and inventory as a form of insurance against mishaps, lean manufacturing is based on reducing all inventory levels as much as possible, forcing the entire supply chain to produce to order with minimal waste, minimal stock, and a right-the-first-time focus on quality. “It’s a very elegant system, because if you have a problem, everything stops,” says Mr. Marks. “It’s not a difficult concept to grasp — but it’s very difficult to execute well.”

Toyota’s success proved that the benefits of lean manufacturing could be enormous: It leads not only to lower costs and more efficient use of assets, but also to a more productive work force, because production workers must be motivated and committed to reach the right-the-first-time standards required. Flextronics’ vision of lean production can be seen at Althofen, a relatively small (700 employees) facility tucked away in a quiet village in the Austrian Alps. At Althofen, 12 assembly lines work around the clock stuffing 60 million components onto circuit boards each week for 400 different products as varied as car radios, cell phones, blood analyzers, and fertility testers. Workers manage their own production in teams of 15, meeting weekly to gauge the previous week’s results against approximately two dozen metrics for productivity, yield, waste, and quality. The meetings take place on the factory floor, not in a conference room, says production manager Michael Bergner, “because this company lives for production.” As an example of the efficiency this approach can generate, he notes that between 1999 and 2001, one production team reduced defects from 600 parts per million (ppm) to 30 ppm. Further reductions proved more difficult, but after the team created a special quality program, the rate fell further — to 5 ppm.

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  1. Lawrence M. Fisher, “From Vertical to Virtual: How Nortel’s Supplier Alliances Extend the Enterprise,” s+b, First Quarter 2001; Click here.
  2. Bill Jackson and Conrad Winkler, “Building the Advantaged Supply Network,” s+b, Fall 2004; Click here.
  3. Tim Laseter, “When Offshoring Isn’t a Sure Thing,” s+b, Fall 2004; Click here.
  4. Jeffrey M. O’Brien, “The Making of the Xbox,” Wired, November 2001
  5. Dave Nelson, Patricia E. Moody, and Jonathan Stegner, The Purchasing Machine: How the Top Ten Companies Use Best Practices to Manage Their Supply Chains (Free Press, 2001)
  6. Richard J. Schonberger, Let’s Fix It! Overcoming the Crisis in Manufacturing: How the World’s Leading Manufacturers Were Seduced by Prosperity and Lost Their Way (Free Press, 2001)
  7. Richard J. Schonberger, World Class Manufacturing: The Lessons of Simplicity Applied (Free Press, 1986)
  8. Richard J. Schonberger, World Class Manufacturing — The Next Decade: Building Power, Strength, and Value (Free Press, 1996)
  9. James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine That Changed the World: The Story of Lean Production (HarperCollins, 1991)
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