Contract manufacturers focus on logistics value adds
David Hannon, News and Transportation Editor -- Purchasing, 2/19/2004 2:00:00 AM
The electronics manufacturing services (EMS) industry has rapidly expanded its list of value-added services for OEM customers in recent years, progressing well beyond the manufacturing traditionally associated with EMS providers. Logistics organizations at EMS firms are getting into the act, offering a variety of outbound shipping options to inventory-averse OEMs looking to get high-tech product to customers as quickly as possible.
The level of focus given to outbound logistics offerings has progressed so far that most EMS firms have organizations dedicated to marketing and managing outbound, customer-facing functions while the inbound supply moves along per usual. Jim Molzon, vice president of global logistics at EMS firm Solectron (Milpitas, Calif.) says the inbound logistics at a contract manufacturer may look very similar to that of a typical OEM, with materials from many suppliers coming into manufacturing sites around the globe.
"But where it differs from an OEM model is the fulfillment piece on the outbound side," Molzon says, adding that the fulfillment function is getting more complicated, ranging from shipping product to OEM manufacturing facilities in various regions or even direct to OEM customers.
"Our industry has really pushed the globalization of manufacturing. As we broaden our footprint in some of these low-cost regions such as Asia, Europe and Mexico, moving product into and out of those locations is an increasing challenge for our logistics operation. Moving product from a manufacturing site in rural China to an end customer in New York brings about customs issues, multiple modes and carriers involved, timelines to track, and security concerns."
Molzon says with expanded logistics capabilities, EMS firms can now manufacture an OEM's product and then link it into the logistics offerings so there are fewer touch points and ultimately, less inventory in the OEM's system, which is the real value add.
Focusing efforts
Sanmina-SCI Corp. (San Jose, Calif.) continued to expand its outbound logistics services until it decided to split its logistics organization into two divisions—one to focus solely on internal logistics concerns (logistics services) and one to work with its OEM customers on providing value-added outbound services (logistics operations). Today, a single vice president of logistics oversees both groups to facilitate collaboration when sensible, but the two organizations function separately for the most part.
"About a year and a half ago our external logistics requirements started taking off," says Adolfo Anzaldua, director of logistics operations for Sanmina. "We decided to break our logistics organization apart and create a dedicated group to providing the services our customers require, including direct order fulfillment, repair operations, reverse logistics, inventory hub management, and second stage manufacturing."
Anzaldua says as the EMS/OEM outsourcing progression went from manufacturing to procurement and planning to full supply chain management and outsourcing, many 3PL partners were not able to fully service the OEMs—and the EMS firms were quick to pick up on the services 3PLs could not handle.
The 3PL role
But there are still times when a 3PL plays an important role. For example, when one of Sanmina's major customers, IBM, asked the contract manufacturer to bring on fulfillment services in the Middle Eastern country of Dubai, Sanmina teamed up with UPS Supply Chain Solutions to provide order fulfillment, logistics, and distribution for IBM's options and visual products.
"Our relationship with UPS started on the inbound side and we had worked with the Supply Chain Solutions group on a network optimization project," says Anzaldua. "When the time came for us to move into some regions and locations where Sanmina was not present and UPS was, it made sense to leverage UPS to give more solutions to our customer. We are open and comfortable with partnerships and outsourcing. That is why we exist as an industry so we should be willing to do that ourselves. As the outsourcing trend continues, customers are getting more comfortable with letting go of these functions. Some customers are outsourcing their entire staffs and IT capabilities and packages to EMS companies."
But not all EMS firms rely on third-party providers to improve their logistics offerings. Tom Wright, president of logistics at Singapore-based Flextronics, says his firm doesn't use 3PLs because the company made a decision that logistics will be a core competency.
"We just don't believe that outsourcing logistics will make our supply chain offering as legitimate as if we were to have direct management control over that operation," Wright says.
Simplify, don't outsource, might be the model for Flextronics, which has more than 7,000 people performing logistics activities at 18 facilities around the world, with one or two core locations in each geography. Wright says during the high-tech boom in the past five to seven years, too many high-tech companies let their distribution and logistics operations become overly complicated. He says too many OEMs try to use "big software packages as magic bullets" to fix or improve their supply chains. Instead, Flextronics works with its OEM customers to structurally or systematically simplify the supply chain processes by removing nodes and consolidating functions or activities.
"We believe that having that direct management control is going to be better for our customers in the longterm," says Wright.
Another EMS firm that has focused its efforts on outbound offerings to OEM customers is Toronto-based Celestica. Brian Lau, product line director for logistics at Celestica, says historically one organization handled all logistics at his firm until OEM customers started making more specific demands from Celestica on outbound shipments.
"OEMs used to just tell us to build the product and have it on the dock and they would send their trucks to pick it up," Lau says. "They were taking product to their distribution center and then sending it to a 3PL for distribution to a customer in most cases. But in the past few years, some OEMs started asking us to do a little configuration on the product so it could be shipped direct to the end customer and they would not have to even touch the product. And it just grew from there to where it is now a big part of what we do."
Today, Celestica's outbound logistics business is a mix of direct ship to customer and shipping to the OEM. Lau says as the manufacturing side of the EMS business and its pricing has been commoditized, firms are forced to look into areas like logistics for additional value adds, and technology has been a key driver in that jump. Ten years ago there was still a lot of spreadsheet work and faxing to confirm purchase orders. Technology developed into the advanced planning tools that came to manufacturing a few years ago and now EDI and XML communication streamline the process even further.
Celestica uses 3PL partners where it makes sense, mostly on the inbound side. Lau thinks the jury is still out on what the perfect distribution partner is—a 3PL or EMS player.
Flexibility as a value add
The unique demands and expanded logistics offerings at EMS firms require a new breed of logistician in these firms, especially in the customer-facing roles. Molzon says this new logistician often has a background in other areas of business and moves into a customer-facing logistics role. Molzon says in the past few years, logistics has become a desirable area to work and has attracted some promising candidates for these jobs.
There are two parts to the logistics team at Solectron: the customer-facing part of the organization and the execution team for logistics. The execution team is a group of longtime experienced logistics professionals, while the customer-facing team, which is more involved in fulfillment, is made up of business professionals with logistics experience.
At Flextronics, some of the key logistics personnel have come from OEMs, a transition Wright says may or may not be smooth, depending on the OEM of origin. The more forward-thinking the OEM is in its approach to supply chain design, the smoother the transition will be for the logistics professional into an EMS, which is typically more aggressive on decision-making, according to Wright.
"We see a nice balance between the young fresh aggressive approach in the EMS world and the OEM expectations in terms of quality and performance and customer satisfaction," says Wright, who spent 12 years operating logistics at high-tech distributor Ingram Micro before coming to Flextronics.
Celestica has three teams in its outbound logistics: technical sales team, strategic solutions group and a business development team. The backgrounds in those divisions vary, depending on responsibility, but few have what would be considered a traditional logistics background.
"I think the OEMs value someone who is not pure sales or pure logistics," says Lau. "There are a lot of experienced logisticians out there, but OEMs value someone who can look at the whole supply chain and not just worry about compliance or freight and see the whole picture."
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