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Strategies for the 21st Century: Computers/IT

December 30, 1999

12 Min Read
Strategies for the 21st Century:  Computers/IT

Reducing manufacturing costs and enhancing the global supply chain are the two items at the top of the wish list of most computer and business equipment OEMs in the new millennium. And they expect their mold and molded parts suppliers to help those wishes come true.

Molders will continue to feel the margin squeeze and a greater demand for more contract manufacturing services. Moldmakers will also feel pressure to be more price competitive as OEM purchasers look to global suppliers. But what other expectations do OEMs have of their suppliers?

OEMs today want it all: low prices, excellent quality, and short lead times. And they expect their molders and moldmakers to deliver on all three requirements if they want to maintain their supplier status.

Lower Costs to Manufacture
Xerox Corp., Rochester, NY, is enhancing its supplier standards on one hand, while on the other reducing its vendor list and using more Asian sources. Strategic sourcing is critical to Xerox’s success in a global market.

However, Richard Miller, commodity team manager for Xerox Global Purchasing, says that where to source molds and molded parts is tied closely to where Xerox manufactures its products and the types of parts used in those products.

Miller says that deciding where to source parts depends on under-standing the total acquisition costs involved. For example, some large parts that can’t be nested for cost-effective shipping might need to be sourced closer to the manufacturing location. Conversely, large assemblies that contain many parts might be more cost-effective from a total acquisition standpoint if built offshore.

At Hewlett-Packard (H-P), the driver is a different species. Rich Colbert, senior materials engineer for H-P’s Business LaserJet division in Boise, ID, says that where a project is sourced is driven by volume. Low volumes, 20,000 to 30,000 parts per month or less, have a better chance of being sourced in the U.S. “If it’s greater than that, we’ll have dual sourcing in the U.S. and [offshore],” he says. “However, shipping and additional tooling then becomes more of an issue with lowest total cost of the program being the driver.”

He would prefer to have suppliers close to H-P manufacturing locations in Virginia, San Jose, South America, Europe, and China, but such a scenario is a luxury, not a reality. Again, lowest total program cost is the driver. However, he doesn’t exclude molders or other suppliers just because they’re in the Midwest or the Southwest. “You look at the type of product you’re shipping,” Colbert says. “Is it air vs. dense pack? We’re looking at the total cost FOB for our top level build and the lowest cost to their dock.”

Thinking Globally
Miller doesn’t count out U.S. molders and moldmakers, but he does urge global thinking if they expect to remain in Xerox’s stable of suppliers.

“I think there’s a lot of opportunity for North American suppliers,” he notes, “but if you marry your strategy globally, you have a better chance of competing globally.”

Xerox feels compelled to source offshore because the company’s competitors manufacture in Asia, notes Miller. Asia, he says, is an enabler, and U.S. suppliers have to meet global benchmark prices. “If a supplier can’t look at solutions from a global perspective, he has a big problem.”

Steve Limperis, global resins manager for Xerox, agrees. He says that Xerox wants full service suppliers globally. This doesn’t necessarily mean that every molder or moldmaker will have a plant in Asia, or even be fully vertically integrated. However, “they must be able to manage the program and at the best cost,” he says.

“The supplier of the future is a global supplier today,” says Miller, “and we consider the global supplier to be our ideal—one that offers local design and prototype capability, offshore manufacturing capability once we reach production stage, or has a lot of critical value-added input.”

Dan Girouard, tooling engineer for Dell Computer Corp., concurs. “As you play in a global marketplace your suppliers must be global as well,” he says. “Global positioning definitely has advantages, and we encourage that among our suppliers, but it’s not fair to say we expect our suppliers to be everywhere we are. Going global can stretch out [a molder] in terms of people and financial resources.”

However, Girouard says this preference doesn’t apply to Dell’s moldmakers. “We go to where they are and as long as they perform to all of our standards in delivery, price, and quality, the geographic location isn’t as important,” he explains.

Contract Manufacturing
Several years ago many large OEMs in the computer and business equipment industry decided to take one step back and turn over the actual manufacturing to contract manufacturers. Some large custom molding companies with the resources to do so took on this challenge not only to mold parts, but also to provide subassemblies or completed products. However, that movement doesn’t look like it’s catching on as expected.

Dell’s Girouard says that although there’s been a lot of experimentation with turnkey manufacturing, he doesn’t see the industry moving that way. “If it doesn’t work you could have a catastrophe on your hands,” he says. “It’s not worth the risk.”

The risk is that a contract manufacturer does not, inherently, have the customer’s best interests at heart. Dell does buy multicomponent subassemblies from molders, but not finished products because of the company’s build-to-order business model. Girouard believes in balancing the OEM’s risk with the capabilities of the molder so that the molder’s resources aren’t strained—all the while protecting the interests of the OEM.

“If we’re not in there on behalf of the OEM, who’s representing the OEM?” he asks. “[The molder’s] number one concern is his own company, not the customer. Yes, he’ll serve the customer to the best of his ability, but if you disengage and turn over the entire product to an integrated molder, the OEM doesn’t have its interests protected.”

At H-P Boise, says Colbert, “we still see our molder picture being fairly constant. We just looked at our commodity strategy for molding. We’ll have North American and European molders, but we may not be managing them directly,” he explains.

Contract manufacturers, companies like Flextronics and Solectron, that specialize in assembling all the components into the final product will be the direct contact. Each will be given a list of approved molded parts vendors to use in quoting. The contract manufacturer might have its own molding sources; however, “they’ll have to find someone equal to or better than our sources, or have some compelling reason to use them rather than ours,” explains Colbert.

Xerox’s Miller is emphatic that the Xerox goal is to optimize manufacturing via sourcing strategies consistent with its capabilities and where total acquisition costs make sense in the company’s manufacturing strategy.

“We’re trying to optimize our manufacturing and have capacity in Mexico, Brazil, China, Europe, and North America,” he says. “We need to optimize so some manufacturing will go to external suppliers and some will always be internal, where we believe we have a core competency.”

However, the number of molders supplying Xerox parts will be drastically reduced over the next two to three years from 120 to 20. That means greater volume for the molders chosen to supply the business equipment giant.

“We’re definitely going to downsize our vendor base,” states Miller. “We don’t have enough business to spread across this huge base we have today.” The goal, he says, is to “improve our business content with [a few selected molders] and improve their capabilities with us. The result will be a mix of what the best suppliers have to offer in Asia, North America, and Europe.”

H-P Boise’s Colbert says that adding contract manufacturers to the mix changes the dynamics. “We still have the same supplier base, but our contract manufacturers are new to our list, and if we do change our molder and moldmaker, it may be because of regional considerations for [the contract manufacturer].”

With this model, the role of companies like H-P changes as well. “We’re designers and consultants for our suppliers,” he says. “We supply specs, the test methods, and the marketing and forecasting. They supply the drawings, materials, and production processes, and hopefully we meet on good grounds.”

Colbert believes this new manufacturing model “is the tip of the iceberg” in what H-P will ask of its contract manufacturers. “I’m asking a contract manufacturer to do everything for me,” he explains. “Be vertically integrated, be fully staffed with program managers, tooling engineers, process engineers, packaging engineers—and by the way, the parts need to cost less. But that’s what we’re competing against.”

At Dell, the more fluid build-to-order model gives the company a different perspective on inventory. “Continuity of supply is critical, and we’re very sensitive to managing our own risk and how we manage the integrated services of our suppliers as we let higher levels of integration out to them,” says Girouard. “We’re sensitive to hiccups because if that chain breaks in any way, that’s the worst.”

Manufacturing Challenges
By far the biggest manufacturing challenges for the next decade are those issues that carried over from the 1990s. Price pressures from competition will continue to drive OEMs to seek suppliers that offer creative solutions to such manufacturing issues as reduced scrap, increased productivity, and greater overall manufacturing efficiencies.

“The pricing pressures downward affect everyone playing the game—the OEMs and their suppliers,” says Dell’s Girouard.

These OEMs want cooperative suppliers. Xerox’s Miller says the biggest challenge he faces is “convincing your supplier, both internal [employees] and external [suppliers], that global sourcing is a must for survival today.

“A lot of people just don’t want to talk about it,” Miller adds. “Optimizing the mix is what will work best for both domestic and offshore suppliers.”

Lexmark looks for flexibilityLexmark International Inc. is a relatively young, rising star in the world of business equipment manufacturing. The company was transformed from a designer and molder of components for IBM to a manufacturer when the giant corporation spun Lexmark off several years ago. Lexmark is now a leading name in the printer world, taking on the likes of industry stalwarts Hewlett-Packard and Xerox.

Though Lexmark has a long history in manufacturing, the company outsources most of its requirements and today sells more than one million printers a year around the world. Greg Survant, vp and general manager of strategic development and manufacturing for the company’s Business Printer Div., says that because the company sells its products globally—in 160 countries—it also needs global suppliers.

The company has four primary manufacturing regions: the U.S., Slovakia, Brazil, and Australia. Calling Lexmark the “Dell of the printer business” because of its build-to-order business model, Survant explains that manufacturing flexibility and on-time delivery is critical to the company’s continued success.

“We have an average of 400 different versions of our laser printers, and currently we have 800 versions,” says Survant. “With all this variety it’s a complex business.”

Because Lexmark doesn’t build all its products to stock, the company is continually trying to improve inventory turns and delivery. “There’s a huge amount of pressure on us and therefore a huge amount of pressure on our suppliers,” Survant adds.

For example, a customer can place an order and receive product within five days anywhere in the world. A combination of mass customization and build-to-stock parts allows this rapid production. This type of mass customization has to be done fast and with minimal inventory.

Additionally, the company turns over its laser printer line every six months to one year, and averages three new versions per week, peaking at about 10 versions per week when a new line is introduced. That adds even more complexity to the mix. And, Survant adds, they couldn’t do it without their suppliers.

“We’re fortunate to have suppliers that work well with us to meet these demands,” Survant says.

Flexibility is Key
The real issues that Lexmark faces aren’t much different from other manufacturers: cost, volume, and delivery. However, with Lexmark, delivery is the greatest challenge for both it and its molders. “We need fast changeover so that we can build any model [of printer] any day, in any quantity with no notice,” explains Survant. “In turn, we ask our suppliers to produce components on 24-hour notice.

Either they have an infinite amount of inventory or they must be fast [in mold changeovers].”

Survant prefers the latter.

As a molder, Lexmark used to hold a lot of finished goods inventory, in essence “stealing our capacity by molding things we thought our customers would order,” says Survant. He wants molders to learn from Lexmark’s experience and improve flexibility. The result is a smaller finished goods inventory and better delivery. However, adds Survant, “I’m afraid there are not a lot of molders who could do this quick changeover.”

He cites an example of one of Lexmark’s molders who does mold changeovers in 17 minutes and is shooting to reduce that to 12 minutes. He visited another molder hopeful of getting Lexmark work, who guessed his mold changeover time was four hours.

Survant says he is surprised at the reaction of molders who resist implementing this type of flexibility.

World Class
Lexmark requires its suppliers to be world class. At first there was some confusion as to how the molders could achieve that status. “We used to demand certain cycles and price, then finally realized one day it isn’t fair to ask them to be world class without giving them the tools they need to help them,” says Survant. “We’ll be here to help them get there, but if they don’t there’s someone else who will.”

Developing current suppliers rather than going to new suppliers and starting over is optimum for Lexmark. However, says Survant, “It’s amazing how many [suppliers] didn’t want to become world class even when we offered to help them. Many were reluctant to share cost data. I was shocked to see how few suppliers wanted to take us up on helping them.”

Being Global
Global supply is a big issue for Lexmark. As with the flexibility issue, Survant says that “some suppliers consciously choose not to go global, and some do,” which forces the company to rethink who its suppliers are. “You cannot be competitive manufacturing in the U.S. for a global OEM,” says Survant. “When you get into supply chain issues, you can’t mold everything in one country, whether that’s in China or the U.S.”

Lexmark has found that it’s optimum to manufacture in each of the major world regions. “We can’t have parts on the water,” Survant explains. “That’s why we have the four primary regions, and suppliers have to do the same thing.

“Molders can choose not to be global, but it will get harder, not easier, for them to serve global customers.”

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