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


Flextronics: Staying Real in a Virtual World

Company-wide, Flextronics’ prowess in lean manufacturing is evidenced by its inventory turns. Flextronics’ inventory turns have been higher than those of all major competitors in electronics manufacturing since 2001, and the lead appears to be widening.

Vertical Revisionism
The next element in Mr. Marks’s strategy for Flextronics was vertical integration. In the 1990s, this was a radical departure for EMS companies. In that decade, electronics tech companies aggressively outsourced their production, seeking to buy best-of-breed components and services from a multitude of vendors. Mr. Marks foresaw that the complexity of outsourcing dozens, hundreds, or even thousands of different parts would force customers to seek simplification. Ultimately, he concluded, they would look beyond the best-of-breed model and seek a partner who could work with them one on one to reduce costs throughout their supply chain.

“We figured that if we could be a one-stop shop for the customer, it would be a win-win all around: We could reduce the customer’s costs and it would be less hassle for the customer, while at the same time we would make more margin because those activities were higher margin than just straight assembly,” Mr. Marks explains.

Flextronics’ expansion went both upstream and downstream from the core PCB business. It acquired Multek, a manufacturer of the boards on which printed circuit components are soldered, and also began making enclosures, the plastic or metal “boxes” that house printers, PCs, and cell phones. Thus, instead of merely making a PCB and shipping it elsewhere for final assembly, Flextronics could now put PCBs into its own enclosures and deliver a finished product to the customer. In 2001, Flextronics added its own logistics capability, anchored by a vast warehouse in Memphis, Tenn., purchased from Hewlett-Packard. From this hub, located close to the FedEx SuperHub, Flextronics is capable of delivering to thousands of locations throughout the Americas with less than 24 hours’ notice. Flextronics went on to build similar facilities in Europe and Asia.

Eugene McCabe, senior vice president of worldwide operations at Sun Microsystems, explains the attraction of Flextronics’ integrated model for tech companies. After moving aggressively in recent years to outsource 90 percent of its production, Sun is today a “virtual manufacturer,” taking orders from customers, configuring systems, and then handing the orders off to external manufacturing partners for production and shipping. “The only part of the order we touch directly is the information,” says Mr. McCabe.

Sun uses an assortment of suppliers, 26 in all. Flextronics is a major, but not the only, supplier doing final assembly of Sun systems. For Sun, the appeal of Flextronics is that its integration takes steps out of the manufacturing process. On average, components make up 94 percent of the costs of a part supplied to Sun by an EMS manufacturer. With direct labor accounting for just 6 percent of costs, there is limited potential for savings in the reduction of labor costs. On the other hand, EMS providers typically attach a 2 percent “acquisition charge” for materials they buy. Flextronics doesn’t charge that fee on materials that are made under its own corporate roof — an immediate savings for Sun.

“The fundamental way to bring costs down is to have fewer steps in your supply chain, and that’s what Flextronics is trying to do with vertical integration,” says Mr. McCabe.

Global Industrial Parks
In 1997, Flextronics introduced another major innovation to the EMS industry that was highly beneficial to its customers: global industrial parks. These megacampuses bring together a giant manufacturing facility and several critical suppliers in one place, often an obscure corner of the developing world. By co-locating supplier and manufacturing operations, Flextronics is able to reduce costs further, minimize transportation risks, and drive inventory levels still lower. “It’s not a new idea,” notes Mr. Marks. “At River Rouge, Henry Ford had 145,000 employees making everything he needed to build cars.”

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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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