The electronics industry downturn has been tough on electronics manufacturing services (EMS) providers. EMS providers are getting fewer orders from their OEM (original equipment manufacturer) customers and their revenue will likely be flat for the year.

However, Solectron, the largest EMS provider with $18.6 billion in sales for 2001, is using the downturn as a time to get its purchasing house in order so it can better serve customers and ride the next upturn.

The leading contract manufacturer (CM) has implemented a number of strategic purchasing and supplier management initiatives designed to improve relationships with suppliers and guarantee Solectron has access to the parts it needs to build products when the economy turns and demand increases.

"We view the downturn as kind of a break in terms of getting our act together," says Kevin Burns, executive vice president and chief materials officer. "We grew so fast and did so many acquisitions, opening facilities in Guadalajara, Romania and China. Trying to build consistency in our processes is not easy. How do we put in the right core processes for all our facilities?" Those processes include forecasting, placing orders and measuring supplier performance among others.

To put in those processes, strategic purchasing was restructured becoming more centralized. "Strategic sourcing now is much more driven at a global and regional level," says Burns. "All the people who have supply base management titles no longer report to the sites. They report to the global supply organization. There are some buyers who are regionally deployed and some are globally deployed. Regional guys do more interface between the procurement teams and sites," he says.

A centralized operation makes sense when you consider how much Solectron buys annually. Its total spend in 2001 was $14.3 billion, or about 76% of its sales. That includes about $1.6 billion for printed circuit boards (PCBs), $1.7 billion for application specific integrated circuits ( ASIC s) and over $2 billion for capacitors, resistors and other passives devices.

Solectron has also solicited the input from its suppliers as it restructures its processes and its procurement practices. It conducted a supplier survey in which it asked 168 suppliers how it could become a better customer. It also formed a supplier council comprised of 12 of its major suppliers to keep it apprised of any problems or issues in doing business with Solectron.

Part of its restructuring is greater use of commodity teams to manage strategic parts and materials. In the past, Solectron's purchasing was decentralized and customer centric, says Burns.

"We have historically bought based on a project basis and a commodity basis. Buyers were aligned to projects," he says. A group of buyers would purchase all the parts necessary to build the system for the customer.

"The challenge is if you have 30 customers at a site and every customer requires capacitors, you have 30 buyers calling a capacitor supplier," says Burns. "That is complicated for suppliers. It is a customer and Solectron factory-oriented model. We have gone to a commodity approach where a commodity buy does business with the supplier and the number of people that the supplier has to interface with is radically reduced," he says.

"I don't have project buyers. Now I have passives and memory buyers and PCB buyers at site. It is now easier to have them aligned with our strategy for the commodity they are buying and they have input in supplier performance," says Burns. They also have counterparts on a regional and global basis.

Solectron's new centralized purchasing is fully deployed in North America, says John Caltabiano, director of global procurement. "We already have 10,000 of our parts on common [procurement] in North America which is about a third of all our parts. The goal is to get that percentage up to 80% of total part numbers," he says. "We are moving away from site centric procurement to supplier centric where suppliers will get one forecast consolidated." The parts are distributed to the different sites on an as needed basis.

The commodity team approach is designed to help Solectron be a better customer as well as improve management of suppliers and help Solectron leverage its buying power.

Solectron has had commodity teams for a while, but the role of the team was different. "We had commodity teams four years ago, but they were guys who did corporate contracts," says Caltabiano. "They leveraged aggregated demand and got the best price. They were strictly corporate guys. They bought from whom they wanted," he says.

However, today the commodity teams are extended to the site purchasing level. A site may have one individual who sits on multiple teams. "The teams are coordinated by the worldwide team leader who not only has functional responsibility for the strategies, but also functional responsibility for the performance of the supply chain in that commodity worldwide," he says. Performance criteria include cost reduction terms and conditions, leadtime performance, supply assurance and vendor managed inventory (VMI).

There are 13 teams for materials such as passives, memory ICs and printed circuit boards, among others. "Teams develop the strategy and are responsible for getting all the regions and sites to agree to it," says Caltabiano. "It is a living document. We review it every quarter. We have worldwide commodity team meetings where we go through the strategy. We ask everybody what we want to do, are these the right guys to do business with, is this what you see happening in the market, are these the things we need to prepare for?" he says.

Teams determine how many suppliers are needed for a given commodity. The number varies by commodity from about three to 10. "We share that list with our customers because we want them to drive business to those suppliers, too."

The number of suppliers that Solectron uses has been reduced. Caltabiano says that 250 suppliers make up about 80% of Solectron's spend. Four years ago the number was about 550.

As Solectron develops its supplier management expertise, more OEMs are turning toward Solectron to manage their approved vendor lists, says Caltabiano. He says one reason is that OEMs have reduced their commodity management staffs.

"We still continue to invest in commodity management expertise as our customers have had to reduce their staffs," he says. "They still need that expertise, but they can't invest in it, so we are now making that investment as a service to our customers. "

He says customers are increasingly turning toward Solectron to manage even strategic commodities such as DRAM . "We recommend sources, help them to do the qualification, order the samples and provide the samples directly into their development organization. We'll also provide them with whatever test data from the supplier that is required, follow whatever qualification process they have defined and provide negotiated prices and terms and conditions with those suppliers," says Caltabiano.

He says it is "traditional commodity management stuff," but something that CMs have not been allowed to do or haven't had the capability to do in the past.

A big part of supplier management at Solectron is measuring supplier performance. It used to be the responsibility of the sites, but measurement practices varied by site and suppliers would have different ratings depending on the site.

"We score over 100 suppliers every quarter and they get the same scorecard with the same metrics and come to a quarterly meetings to talk about it," says Burns. "That hasn't always been the case at Solectron. In the past, sites tended to evaluate suppliers differently. It was less analytical and more anecdotal. The new standardized evaluation has resulted in a much healthier discussion with suppliers about performance improvement."

"We had to get more sophisticated," says Caltabiano. "We had to demonstrate a higher degree of competence to our suppliers and customers."

The scorecard looks at total cost of ownership, price, delivery, quality and technical support. The categories are weighted based on commodity. "With some standard product commodities, price is the biggest weighted factor because the technology is very standard," says Caltabiano.

"With high technology commodities like printed circuit boards, power supplies and ASIC s, we put a higher weight on technical competency and less on service and price."

Commodity teams also review suppliers technology roadmaps. " DRAM is a good example," says Caltabiano. "We need to know crossover points (between different densities) in terms of price. We need to know when a specific technology such as double data rate II will be available, where is it going to come from and what the volumes are at what price," he says. "Those are key weighing factors because some companies are followers and some are leaders and their price is going to reflect that."

Caltabiano adds that Solectron meets regularly with its customers' product development people to discuss supplier technology roadmaps.

"Customers don't have the time nor the resources to meet with suppliers and get the information so we provide that to them. Some of our largest customers, especially on memory, we meet with regularly. We provide them an overview of roadmaps and supplier strategies that go along with them," says Caltabiano.

Solectron expects that commodity management teams and the supplier council will help mitigate some of the supply problems that might occur when the market turns to a sellers' market.

"Many in the industry are fearful because the people at the end of the supply chain get abused the most during a buyers' market," says Caltabiano. "The OEMs pushed their forecasts to the CMs, the CMs received those forecasts and pushed them to the supply base. Suppliers looked to see who they could push and the reality was there isn't anyone else."

Caltabiano says during the past year, Solectron has had a lot of discussions with suppliers on how the EMS provider could be a better customer. As part of that effort Solectron conducted a worldwide survey of its suppliers asking them to name the problems in dealing with Solectron and what needs to be done to forecast those problems.

"The survey showed that suppliers want to know how Solectron could help them improve their revenue line," says Burns. "What influence could we have at the design stage or design for supply chain stage? Secondly, they questioned how we evaluate their performance. They think most EMS companies focus on price. If you look at our industry, there is a preponderance of focus around price, but we have other elements on the scorecard."

"We measure not only cost performance, but suppliers terms and conditions performance, flexibility and liability in terms of getting this on VMI programs, as well as on time delivery and continuity of supply," he says.

One initiative that may further aid Solectron in gathering quantitative data about supplier performance is its WebPro (developed by I2) procurement tool that it is rolling out to all sites. WebPro automates the purchasing process allowing purchase orders, acknowledgements, order changes and forecasts to be transmitted to suppliers via the Internet. The tool also allows Solectron to measure suppliers' response to forecasts and orders.

About 35% of Solectron's spend is on WebPro and that will increase to 75% by the end of 2003.

Solectron's strategic purchasing is a work in progress and more changes are coming. For one thing, Solectron expects more strategic purchasing to be located in Asia in the coming years.

"Two years ago, we had 13 global commodity teams and none of the leaders were sitting in Asia," says Burns. "Today, three of them are in Asia and five will be in Asia within the next 12 months. It's not because we have more sites there, it is because that is where the supply base is."

Caltabiano adds that customers are going to expect Solectron to have more procurement capability in Asia.

S.M. Kong, vice president for materials in Asia, says there is a cost advantage in purchasing boards, connectors, passives, mechanical devices and power supplies in China and other Asian countries.

The advantage will grow as China becomes a more important player in the electronics supply chain. That is occurring because more OEMs are investing in China and the supply base is following the OEMs.

Several Asian suppliers are on Solectron's recently formed purchasing council.

"The supplier council is kind of like my extended staff," says Burns. "The idea of it is to get the right dialogue going to gauge our performance and to identify improvement opportunities. We had the first kickoff session and are already getting valuable input."

There are 12 suppliers on the council. "They are advising us of the things we need to do differently," says Caltabiano. Topics include involving suppliers in the design of customer products, steering OEM customers to supplier products and improving forecasts to suppliers.