Electronics manufacturing in Central and Eastern European is a hot topic these days, especially with questions at the forefront about social responsibility and rapidly rising labor rates in China, as well as volcanic disruptions to global supply chains in our recent memories. Hungary, the Czech Republic, and Poland have developed strong capabilities over the last decade with Romania, Estonia, and Turkey also active areas for some electronics companies. Someday soon, North Africa will likely become the new frontier.

The main interest in Central and Eastern European capabilities is — as you would expect — to access a ”low cost” solution to fulfill manufacturing and service requirements for European markets. Although in some of the region’s countries the transportation infrastructure is not as developed as we would like, there are some tax benefits as well as time, inventory, and logistics savings to be had. The labor cost cannot match China, but if your market is in Europe, it is definitely worth sharpening the pencil to seriously consider your manufacturing-location options. With the rapid rise in wages paid to Chinese EMS workers, the cost differential may not last forever. In the end, low cost (measured as price paid by the OEM to the EMS) is paramount in the manufacturing location selection process. Other elements such as quality and social responsibility play a role, but for some research respondents these factors continue to take a back seat because they are harder to quantify as a “cost.” In the ultimate review of an accurate business case, total costs considered must also include inventory investment, logistics expense, transportation time and risks, OEM travel time, and the value of the complexities required to manage cost, quality, and delivery from afar.

Electronics companies are continuing to expand sales, service, and distribution into the region with Poland, Romania, Hungary, Czech, Ukraine, Russia, and Turkey being of greatest interest. In Central and Eastern Europe, as well as Europe as a whole, markets are fragmented and cultures, languages, customs, and regulations can vary widely adding to the complexity. It’s important not to approach business with Europe as one “entity,” due to the distinct differences between the countries. Despite some hurdles, ease of doing business and infrastructure are thought of positively and are rated by our research respondents as “fair-to-good.” For other respondents, however, the significant positives of building and servicing product in Europe for European customers are not enough to sway the decision away from Asia, where the companies have grown accustomed to manufacturing. In especially the developing Central and Eastern European countries, the lack of logistics capabilities is so far an insurmountable barrier for some.

The ultimate question is, are we really considering and weighing all of the key elements accurately enough?

I’ve learned, from serving as VP of Operations at electronics companies for many years, that it is critical to develop a sound business case that considers all of the costs and benefits in the decision to choose a manufacturing supplier and location. Further complicating these decisions is that relative costs, benefits, and risks change rapidly within constantly evolving global economies. The right choice today may well be the wrong choice on a time scale measured in only months! Risk assessment is critical, and the risks often grow exponentially with the distance between manufacturer and customer due to all the complicating factors to consider!

For anyone contemplating doing business in the European market, it’s a must to seriously consider the relatively lower risk and the great benefits of manufacturing in Central and Eastern Europe.

Weigh in on your views about electronics design and manufacturing in Central and Eastern Europe! Our report so far features country-by-country OEMs, EMS/ODMs, and suppliers; economic insights and relative ease of doing business; skill of workforce; sales channels; service/recycling; prevalent electronics industries; and strategies up and down the supply chain. Reply to the blog, take our survey, or join in with the study’s sponsors.

A Taiwanese friend whom I met in Israel had me read Prosperity Without Growth: Economics for a Finite Planet, by Tim Jackson. Jackson is Economics Commissioner on the Sustainable Development Commission, the UK Government’s independent adviser on sustainable development. He lays out rational reasons why economic growth a la the past century cannot – alone – guarantee prosperity, and how flourishing within limits is a sounder formula for prosperity to come. TFI clients experiencing rebound growth from the recent economic contraction will find insights on strategies for assuring success even when growth is not assured.

TFI Logistics Consultant Jon Gilbert dug into his bookshelf to recommend a logistics “cookbook” comprising well-written advice and “recipes” for managing outsourcing of logistics. Self published by Cliff Lynch, Logistics Outsourcing – A Management Guide, 2nd Edition is a good read and valuable tool that Jon uses frequently as he advises clients.

Kim Allen, TFI Environment Consultant, recommends Profit Beyond Measure, by H. Thomas Johnson and Anders Bröms. This gem of a book offers a simple but radical solution to operational waste that has been realized by two major manufacturers: Toyota and Scania (a Swedish truck maker). The waste reduction method elegantly eliminates the traditional structures that supposedly “manage” waste, such as complex forecasting techniques and theoretical models. Instead, intelligence is created throughout the entire system, and practical understanding by those “on the floor” is used to improve efficiency. This system mimics a natural ecosystem, and was the basis of Toyota’s market value rising above that of the “Big Three,” as well as Scania’s stability for more than 65 years.

We are lucky enough to have Ben Marshall as a summer intern; he is a mechanical engineering student at UCLA and is helping our clients with design-for-environment. The two books he recommends are Right Relationship, by Peter G. Brown and Geoffrey Garver, and Just Good Business, by Kellie McElhaney. Right Relationship is, as he describes it, about helping our economy fit into the earth’s structure, as opposed to the other way around. Just Good Business is a guide to branding a company’s corporate social responsibility efforts.

TFI Environment Consultant Nikki Pava recommends Thriving Beyond Sustainability by Andres R. Edwards (who also wrote The Sustainability Revolution). Edwards describes how we can go beyond “sustainability” and attain “thrivability.” This book features examples of people and organizations that are creating positive transformations in all areas of sustainability. The frameworks outline areas such as regenerative design, community activism, and going “glocal,” which encapsulates the “think globally, act locally” world view. Thriving Beyond Sustainability provides inspiration and optimism that we all need today.

Finally, my colleague Pam Wiseman (TFI Operations and Supply Chain Consultant) shares that she is immersed in Theory U, about transformational leadership — creating the future and pushing beyond the constraints of the past. It’s especially pertinent in a complex and fast changing world with serious problems that need new and innovative solutions. Sustainability, climate change, terrorism, and our dependence on fossil fuels are a few examples of the complex and difficult problems that we face. Leaders need new ways of thinking and impetus to drive change. This framework can help drive transformative thinking.

Many thanks to the TFI team for their recommendations — I’ll load the books I haven’t yet read on my electronic reader before vacation. What are you reading that you believe will foster the TFI community’s success in business and in the world?

As product lifecycles grow ever shorter, increasing velocity becomes more critical in managing the supply chain. Reducing new product development time, supplier lead-time, and speed of transport are all key in gaining competitive advantage.

Despite all the desire for speed, numerous factors are working against speeding up transportation. In the past few months, steamship lines have begun “slow steaming” programs, reducing capacity and adding as much as 50% to transit times in certain lanes. Airfreight costs are rising with demand as capacity remains constrained, and fuel costs are on their way up once again. This all adds up to higher and higher costs to go fast.

How do industry leaders cope with these issues? Many have been looking to near-sourcing alternatives, moving manufacturing, final assembly, and/or test closer to demand. This allows for fast cycles at low cost. A recent Stanford Business Journal article talks about the benefits of keeping production close and supply chains short. The result: much greater profits. Their story focuses on fashion, but the similarities to our industry are obvious.

Interestingly, we see commonalities evolving in regional supply markets. While component manufacturing has largely been driven to Asia, it has become popular to build subassemblies and finished goods in Eastern Europe and Mexico. This specialization is partly an effect of the tendency of similar businesses to locate near each other, but it also has much to do with the economics of shipping. As components are built into subassemblies, and finally combined into finished goods, density (kilograms divided by cubic meter) of the items generally decreases. Think of shipping capacitors versus assembled circuit boards, versus finished goods. Each is less dense than its precursor. Shorter shipping distances are optimal for the lower-density finished goods.

In an ideal world, perhaps the entire supply chain would be replicated close to demand in multiple places. Instead, the manufacturing economics work in favor of a split-manufacturing strategy with multiple regions participating in the supply chain (lengthening the chain). It makes great sense to create large capacity to build high volumes of uniform parts in a single location, and Asia has largely won this market. For final assembly, the scale is much smaller, and localizing production and adding opportunities for postponement make much more sense.

For these reasons, we are seeing many of our clients pursuing strategies to satisfy demand with more localized capabilities. The benefits are clear – reduced transportation costs, greater speed to market, and greater responsiveness.

What are you doing to shorten your lead-times?

How does your company plan to compete as transportation costs rise and cycle times grow ever shorter?

From the reporter’s questions about business repercussions from worker-rights violations, I got a sinking feeling: Will the raging sales of Apple’s iPad dip perceptibly based on the now widely known string of suicides at their manufacturing supplier, Foxconn? Or will there be no business impact at all? In other words, are name-brand (OEM) companies’ sales less impacted when egregious violations of employee rights occur at their contract manufacturers as opposed to at their own sites?

(As for the underlying reasons for the suicides, see an upcoming article by TFI Shanghai-based Analyst Fanny Lee and me in SMT magazine.)

Certainly Nike shoes were boycotted years ago after the Vietnam-based employee treatment was made public. And Kathie Lee Gifford worked to counter sweat-shop abuses after a human rights group reported in 1996 sweatshop labor conditions in Honduras where Gifford’s line of clothing was made. Today, some drivers are at least thinking about choice of gas / petrol stations in light of the BP oil spill.

But is knowledge of worker rapes (as was brought out a few years ago in Mexican contract manufacturers), suicides, illegal overtime, and age violations at contract manufacturers — which granted are seen as one step removed from the name brand company — spurring corporate and consumer customers to make different choices in name brand purchases? And if not, why not?

I’d like to hear your thoughts. Please reply at the bottom of the blog.

Think about IBM’s vertical-integration model through the 1980s — designing and making semiconductors (IBM still designs), fabricating bare printed-circuit boards and component packaging (now Endicott Interconnect Technologies), assembling the components (for example in Toronto, which became (Celestica), and building personal computers (Lenovo). IBM and many other electronics companies at the time controlled product-concept design through decisions about raw materials, and product manufacturing through end of life. Today it’s hard to find vertically integrated hardware companies. Recent capital-venture-funded tech companies have outsourced manufacturing (or even much of product design!) from the beginning. Nokia has been one of the few companies hanging onto manufacturing — sometimes more and sometimes less (announcing “more,” this week).

Raw materials are sourced so far up their supply chains that supply-chain managers can’t begin to control substances’ composition, origins, and working conditions during extraction. It’s too much to ask of especially mid-sized and smaller companies to staff the number of product stewards needed to continually track global requirements for substance-restriction, energy consumption, and reuse/recycling and align their own product roadmaps accordingly.

It’s ironic, but meeting today’s environmental requirements for products would have been easier back in the vertically-integrated past than in today’s outsourced, long-supply-chain reality. Nonetheless, here are ways to meet and stay ahead of environmental requirements, cost effectively.

First, because decisions about design, manufacturing, and compliance are spread out across company departments, gain top-level executive support to make lasting and successful Design-for-Environment (DfE) processes and sustainability programs. Next, plot on a 5-year DfE roadmap the likely environmental regulations from customers, regulators, and standards committees that will affect your individual company’s product lines. Finally, proactively design to those requirements to avoid costly and iterative emergency reactions and having products blocked from an increasing number of markets.

Easy, right? Frankly, today’s changing nature and expanding scopes of global environmental-protection requirements can be overwhelming to designers and supply-chain managers.

So, after that DfE Workshop, Mike and I developed a customized service that applies TFI’s success rate at training engineers in DfE and getting buy-in from corporate executives, along with DCA’s continual tracking and influence of global regulations and standards, to individual clients’ product roadmaps. We realized that we are well positioned to customize 5-year DfE roadmaps for individual companies’ product lines, and to recommend how to systemically and cost-effectively execute the plan. Our DfE Process Integration Roadmap aligns those long supply chains with holistic product-compliance plans, avoiding costly and arduous sequential changes in reaction to new requirements.

Mike likes to use the image of a tsunami to describe the overwhelming number of environmental requirements rushing in — sometimes with little warning and from distant shores. I like to think of the challenge facing all of us to strategically prepare for environmental requirements as yet another fiercely competitive element of excellent supply-chain management. It’s not as much surfing treacherous waves as building a strong infrastructure with insights into the future and with unwavering executive support.

If you’re curious about building supply-chain processes that indeed align with current and upcoming environmental requirements, grab your surfboard and reply below.

The market for manufacturing services and support is moving east in Europe. Leaders are already creating and implementing sound strategies for design and manufacturing in Eastern Europe. Last week Texas Instruments’ CEO Rich Templeton said that his eyes are on markets in Eastern Europe for semiconductor sales.

Contract electronics manufacturing in Europe is expanding and changing, which affects decisions about electronics manufacturing services (EMS) companies, design in the region, component and material supply, logistics, recycling, and after-market service. The world’s largest electronics contract manufacturer Foxconn (HonHai) is building HP computers in Russia (near St. Petersburg) and is the second-largest exporter in the Czech Republic.

The European Union economy (GDP) is ranked #1 and the manufacturing center has shifted to Eastern Europe; being “absent” from this region is not an option.

Eastern Europe is not one market — it is a dozen or so markets defined by varying levels of economic vitality, socioeconomic slices, languages, business customs, quality of infrastructure, and laws. To succeed in the region, it’s essential to gain insights about each market and choose the best ones for design, manufacturing, sales, and services.

Environmental regulations in Europe are on the forefront globally and in continual progression. One must take into account how current and future regulations will affect the way the industry designs, produces, ships, reuses, and recycles products.

Recent global current events (Icelandic volcano, tainted products from China, a well-spring of corporations publicly announcing carbon footprint and reduction plans) underscore the imperative of exploring close-to-customers manufacturing strategies. So many of our tech clients generate 25% to 50% or more of their revenue from Europe. We say it’s critical to understand how best to serve customers there.

For these reasons, TFI is launching a study called Electronics Design and Manufacturing in Eastern Europe. Huge thanks go to our Founding Clients for supporting this research. Let us know if you’d like to become a Founding Client for first access to the insights, or would like to be interviewed by the TFI research team for the study to receive a complimentary executive summary.

I invite you to reply at the bottom of the blog regarding your views on Eastern Europe as a strategic venue for electronics design and manufacturing.

One San Francisco Area-based client found out this morning that her flight this week to Europe has been canceled. One European-based EMS company reported its inability to meet product shipments. A European conference and expo scheduled for later this month and early next is sure to be lightly attended, because the exhibitors are supposed to ship their booth and demonstration equipment this week and attendees’ travel plans are in question while wondering if the event is still on.

Regional strategies for manufacturing, sales, and customer support — as well as using travel-alternatives such as web- and video-conferencing — are about reducing risk, expense, and environmental impact. No one would have asked for a volcano to further illustrate the strategic importance of reducing movement of product and people around the planet, but now that we have this one we can connect the dots.

What else do you think it will take for industry executives to markedly reduce travel of people and product around the world?

Until now many tech companies approached the warranty and product service parts of their business as a functional necessity –- far less glamorous than new-product development or even supply-chain management. But today’s industry leaders are finding new business reasons to strategically approach global service depots:

- profit
- competitive differentiation
- cost-effective logistics
- shorter response times
- environmental compliance
- reduction of cost of goods sold through reuse
- lower inventory levels

Better service is a path to higher revenues
I had a first-hand view of the significant business value of a top-notch service business in 1998 when, as Director of Field Service Operations for a company supporting printed-circuit-board assembly equipment, I observed that whereas customers interact closely with the sales team in the beginning of the relationship, the lasting impressions and loyal relationships are formed after the sale. Customer service is tantamount to gaining repeat sales and generating customer satisfaction. Even when faced with a significant quality issue, customers will remember how responsive the service was and how the issue was handled –- that is what makes the lasting impression.

Just how strategic was the service business? During the bubble of the late 1990s, my company’s reputation as premier provider of service had tangible value prompting customers to choose our products, often regardless of price and without sacrificing margin on spare parts. Other equipment providers made significantly less investment in 7×24 2-hour parts availability and quick-turn repairs, and their sales suffered.

Cross-functional, life-cycle strategies
Servicing equipment is yet another area where operations, manufacturing, supply chain, logistics, and environmental strategies come together into one strategic whole. Companies that are truly optimizing value across products’ life cycle incorporate design for service (DfS) in their new-product-development processes, requiring an intense cross-functional team approach and consideration of the business and marketing drivers throughout the product life cycle. Strategies deployed across the life cycle can match parts availability and even encourage customers to purchase the newest technology!

How You Can Engage
Currently, we at TFI are analyzing tech companies’ service-depot strategies and measures of success. We are documenting how companies determine and establish KPIs (key performance indicators) for service depots and the effectiveness of these measurements. We are weighing the relative merits of using numerous customer-focused depots, 3PL (third-party logistics) services, profit-and-loss or cost-center business models, service offerings (same day, 4-hour, etc.), and geographical preferences. Some metrics are related to inventory, turn-around time, customer satisfaction, and repair success.

If you are involved at a mid-sized electronics company in the areas of Customer Service, Spare Parts/Aftermarket and/or Support, then please talk to us. We will interview you by telephone (ensuring that your comments are not linked to your company) and send you a complimentary summary of aggregate positions and trends. Contact us today to schedule an interview.

ISO 14001 is certainly not new. As shown in TFI’s electronics-industry environmental timeline, as far back as 1996 North American companies were implementing environmental management systems and certifying to ISO 14001, driven largely by European corporate customers’ demands. Nearly all 17 electronics manufacturers profiled in my book Lean and Green had certified to ISO 14001 by the end of the 1990s — including Celestica, which was the first major electronics contract manufacturer to certify.

But until recently, most technology companies that do not manufacture hardware opted out of the ISO 14001 track. The position at many electronic-product companies with a 100% manufacturing-outsourcing strategy was, “Most of our contract manufacturers are certified, so we don’t need to be.” Most software companies — even many large ones — did not certify.

Why now are many non-manufacturing electronics companies and software firms opting in to creating an environmental management system and certifying to ISO 14001? It’s mainly because corporate customers not only in Europe and Japan but also in North America are starting to demand to see suppliers’ environmental programs, with a specified requirement or “bonus given” for ISO 14001 certification.

The good news is that if you have been creating and executing a strategic, profitable environmental roadmap at your company (like many of our clients do), you may be closer than you think to honing your processes and documentation resulting in an environmental management system that independent auditors will certify. And the requirements for non-manufacturers are, in some areas, lighter than for manufacturers. In fact, the process of certification will make your sustainability roadmap even more successful in terms of continually reduced environmental impact and more cost savings.

So, whether you work for an EMS or are writing an EMS, move steadily forward in certifying to ISO 14001. Life is better when you can reply to customers’ requests for proposals: “Yes, we are certified to ISO 14001.” (Hear about ISO 14001 and other voluntary and required environmental standards in the electronics industry at the April 7th Design-for-Environment Webinar.)

If your company has already been certified, what advice would you give to those companies considering or going for certification now? (Please reply below.)

Here are some examples of electronics-manufacturing moves in recent history, by region:

Europe: Elcoteq opens a plant in Estonia, Nokia Siemens lays off 450 employees in Finland.
India: Jabil opens a plant in Chennai 2007; closes it in 2009.
North America: Celestica closes a plant in USA (Nashville); Foxconn expands in Mexico for Dell
China: CEC Telecom lays off a quarter of its China employees; Flextronics develops new facility in Suzhou (Wuzhong)

–Confused about which regions are hot and which are not? Let’s look at this strategically: in general, the hottest regions in which to manufacture are those where end customers reside. Regional manufacturing strategies can be best for bottom-line performance by allowing greater efficiencies in logistics, reducing costs and carbon emissions, decreasing supply-chain risk (through reduced lead times and improved responsiveness), and reducing total cost of ownership (when distance and risk overshadow lower labor rates).

Close-to-the-customer thinking also applies when the customers are product designers. It’s wise for electronics contract manufacturers to set up prototype facilities and for component companies to establish sales centers near electronic-product companies’ designers. (Our clients in sales and marketing have been trying to convince their management of this for years.)

In the mid-1990s when writing one of TFI’s Contract Manufacturing from a Global Perspective reports, my team and I debated whether Greenland would be the next hot region for electronics manufacturing. It was mostly in jest to underscore how far-flung manufacturing locations were becoming. Of course, with regional-manufacturing thinking, we don’t recommend setting up manufacturing in areas for only 55,000 potential customers (which is the population there).

What are your thoughts about regional manufacturing? Are you willing to eschew manufacturing where few if any customers reside?

Many companies have begun working on environmental initiatives within their own four walls by increasing energy efficiency and reducing waste. It seems that everyone’s favorite these days is to remove single-use cups with forever-use ones. This internal focus is natural because it is where managers exert the most control, and it is where clear metrics can be established. (Let us know if you’d like to receive our new data supporting that ceramic cups are best for reducing costs and environmental impact.)

Going much deeper into the supply chain
But companies are interactive entities, part of a larger system. Sustainability managers quickly discover that fulfilling environmental objectives – especially in the areas of product design, distribution, or procurement – means working with suppliers and customers. A seemingly simple task such as reducing the packaging on a component can involve lengthy communications and negotiations with a surprising number of people both inside and outside the company. (We recently helped a client create an efficient packaging solution when the prior method used four times the packaging necessary!)

Sustainability in the supply chain is increasingly important because of regulations also. For instance, the REACH Directive requires companies to know (and register) the chemical contents of their products in far greater detail than ever before. They are reaching back into their supply chains for basic information, which can lead to collaborative product redesigns to avoid harmful chemicals.

Insights from the CDP
The folks at the Carbon Disclosure Project have been working to ease the transition to sustainable supply-chain operations by creating a network of member companies called the CDP Supply Chain. As stated in the flagship 2010 Supply Chain Report, “The CDP Supply Chain is a collaboration of global corporations who have extended their climate change and carbon management strategies beyond their direct corporate boundaries to engage with their suppliers via CDP’s annual Information Request. …This year, 44 member companies reached out to 1,402 of their suppliers, and 710 (51%) responded to the request.”

The report summarizes the findings. Members of the CDP Supply Chain are intent on reducing the carbon emissions from their supply chains, and are working on the challenges that currently hinder progress. Some challenges involve education of suppliers, who are generally at an earlier stage of sustainability planning than members; 56% intend to deselect suppliers who fail to meet carbon management criteria in the future. Some challenges will improve with clearer communication. Collaboration and sharing of best practices is a key priority at this time.

Although the CDP work involves manufacturing supply chains, there are other efforts afoot in the world of sustainable supply chains also. The first-ever Forest Footprint Disclosure report looked carefully at forest practices among companies in that industry. Ceres issued a report on corporate water-risk management based on disclosure data from 100 large companies. And other groups (ForestEthics, Earthworks, and OxFam America) are beginning to ask questions about “dirty resources” – raw materials like metals and minerals that are often acquired at considerable environmental and human expense.

Focus Questions for VP Operations & Supply Chain
TFI recommends that VP Operations / Supply Chain as well as Sustainability Executives ask themselves these five questions, toward creating supply-chain sustainability strategies:

o Where are the potential hot spots in our supply chain for illegal or unethical labor practices, or for irresponsible treatment of electronic waste (e-waste) and emissions to air, soil, or water?
o Which of my contract manufacturers (electronics manufacturing services (EMS) and original design manufacturers (ODM)) have made visible to us as much information about their suppliers’ labor and environmental practices as we need to reduce risk of being complicit in violations and bad publicity?
o Have we reduced the mass (weight, bill of materials, unnecessary components) of our products and packaging sufficiently for economic and environmental advantage, and which of our suppliers have been most proactive in this continuous Design-for-Environment (DfE) improvement?
o How are our internal supply-chain managers and buyers rewarded – through cost savings alone or also for reducing the company’s risk from associating ourselves with suppliers violating law or engaged in unethical labor and environmental practices?
o How many times do our products circle the globe from raw materials through product usage through end of life? Have we measured the wasted time, expense, CO2 emissions, and risk in transport, compared to a using a regional-manufacturing, logistics-efficient strategy?

How prepared are you to discuss these deeper levels of your supply chain? And what do you still need to understand in order to make it more sustainable?

Quite a few years ago I had the pleasure of living in Europe, Asia, and the United Arab Emirates. My work took me to the offices and boardrooms of some of the largest companies in the world, many with annual revenues larger than those of some countries.

Each day I interviewed managing directors and presidents about their company policies and economic outlook. Often, I was greatly impressed with their overall vision and their ability to lead large groups of people toward a common goal. However, in many cases I was disheartened at the responses from these business leaders when I asked about their company’s manufacturing policies — particularly the social and environmental elements. During the course of these visits, I also toured the factories, met with some of the workers, and analyzed the network of distributors, suppliers, retailers, and wholesalers that helped bring their products to market. Some companies implemented impeccable processes. Sadly, I also witnessed subpar standards that had me question many of these companies’ practices.

It was then that I realized that the best way for the world to change was for business to change. As a result, I began to direct all of my efforts and energy to create awareness for more sustainable business practices, including supply chains.

Since the days of my global CEO meetings and factory tours, I completed an MBA at the Presidio School of Management, a traditional business school that threads sustainable values into every aspect of the curriculum. Additionally, three years ago I co-founded a company called EcoTuesday, which brings sustainable business leaders together in cities across the USA. I now am honored to work with Fortune 500 companies, start-ups, and non-profit organizations by developing strategic plans and coordinating teams to reach specific, measurable goals. It’s great meeting more and more of TFI’s clients and witnessing their clear understanding between sustainable supply-chain practices and robust company performance.

My international business experience and the formal education I received at the Presidio have provided me with the tools needed to help TFI clients transform their businesses by increasing efficiency, decreasing waste, and saving money within all points of their supply chains. I look forward to using my skills and insights to support our clients in being financially successful and highly competitive in their industries. Additionally, it is important to me that all of our clients are in compliance with applicable product-and-manufacturing regulations and that all of their stakeholders are in alignment with the company’s vision.

Do you believe any business could truly transform without a thorough examination of its own supply chain? (Please reply at the bottom of the blog.)

Now that the economy is reportedly on the upswing, manufacturers are readying to boost production in anticipation of seeing business pick up. But operations executives are experiencing a chicken-and-egg situation concerning their fragile supply chains.

They ask, “How and when do we dip our toe in the water and expand capacity, labor, and inventory?” We know that whoever acts first may have an edge, but those acting too fast will suffer from anemic cash flow. And whoever acts last will miss the window and lose critical advantage. So, how does one “read the tea leaves” with confidence about an upswing in orders, and boost operations accordingly?

Crossed signals about when orders will pick up
Operations executives wonder, will the industry build and ship product “like we used to” or are today’s off-balance supply-and-demand conditions creating a lasting tug-of-war? It’s understandable why they are perplexed. Last week I read a difficult-to- believe study suggesting that 1 in 4 manufacturers felt no impact of the recession (I don’t know any of these manufacturers; do you?). The next article I read noted that unemployment rose in December in 43 USA states. I am an optimist, but even I am still compelled to be neutral at best about the pace of the recovery.

Lengthened lead times
One major risk lies with lengthening lead times. If no one is holding inventory, are we really working in an environment of cold starts–starting from scratch? Suppliers, OEMs, distributors…none is holding inventory that isn’t supported by a commitment, if they can help it. And what about the service parts on which customers depend — 24-hour turn-around promised with stocking levels based on past consumption? How do we walk this tightrope when consumption has been at an all-time low and could turn on a dime any minute now? I wrestle with these decisions every day.

Over the past year, sales-and-operations planning (S&OP) processes have been battered. What is a demand forecast anyway, when there is little certainty behind potential bookings figures? Pull systems, build-to-order, vendor-managed inventory – how do our lean-materials management systems work when no one will carry inventory and the demand is so uncertain? Ultimately, clients ask this key question: “Should we switch manufacturing strategies to buy-and-build-to-order instead of driving material to an S&OP build plan? If we buy-to-order to conserve our cash for actual customer orders, will our lead times grow and cause us to lose these same potential orders to a more aggressive or cash-rich competitor?”

The Best Counsel for Now
In my 20 years of operations management experience, I haven’t experienced such a “perfect storm” as we have now. But it actually creates a window of opportunity to gain insight enabling more certain decisions.

I see only one real answer: customers, OEMs and suppliers all need to work together as a united supply chain, sharing information to reduce risk more than ever to get through this transition period and prepare to take maximum advantage of an increase in business. And the “perfect storm” actually gives us greater opportunity than ever to gain inter-supply-chain-partner cooperation. We’ve found that right now in the business cycle, the best externally focused tool is plain and simple – increasing the level of direct communication with customers and suppliers and listening carefully for the clues.

We start internally — by helping our clients discern: Do they have significant numbers of customers and suppliers both on credit hold? Are they rationing cash? Is it possible that they, our client companies, may be on credit hold with some suppliers? And we immediately assemble a senior-executive-driven, cross-functional (comprising Sales, Operations (Manufacturing, Supply Chain), and Marketing) internal forum to drive S&OP process, balance risk, and make optimal choices right now. Then, talk more openly than ever with customers and suppliers, who themselves are needing insight just as much or more than your company does.

How is your company coping with supply-chain uncertainty? Would you be more willing than usual to engage in frank, cross-company discussions to strengthen supply-chain predictability?

Celestica, in response to the Montreal Protocol phasing out ozone-depleting substances was the first electronics contract manufacturer to leap-frog from cleaning printed-circuit-board assemblies with CFC (ozone-depleting) solvents to the no-clean process. In doing so, Celestica leaped over the aqueous-cleaning technique requiring costly capital equipment, floor space and power for the equipment, labor hours, and disposal of heavy-metal water with permits and treatments. I interviewed the parties responsible for this change a few years afterward (for my book Lean and Green: Profit for Your Workplace and the Environment), and the smarts behind the leap-frog move were motivated by environmental conservation and competitive savings of time, cost, real estate, and more.

HP, anteing up for a package-reduction challenge by Walmart, did not do as most of its competitors did — incrementally or even substantively reducing the size and weight of the packaging surrounding the products. One HP employee had the idea to make the packaging part of the product itself. The notebook computers, cables, and accessories were packed in attractive over-the-shoulder “messenger” bags — three to a cardboard shipping box without any other packaging material. In one fell swoop, this leap-frog move resulted in 97% reduction of packaging, conservation of fuel, and reduction of CO2 emissions by removing the equivalent of one out of every four trucks previously needed to deliver the notebooks to Walmart and Sam’s Clubs around the USA.

I encourage you to take advantage of the New Year to use leap-frog thinking — in your companies’ manufacturing strategies, supply-chain and logistics designs, Lean programs, sustainability programs, and every other aspect of your workplaces. Make it easier for yourself! Raise up your company’s efficacy 4-5 steps at once instead of inching upward — facing organizational resistance to change each time. Leave the arduous step-by-step improvements to your competitors, who will arrive at the finish line much later and with far more cost.

Will you face more organizational resistance to this one leap-frog improvement than to a more routine change? Perhaps yes. But if you are like me, one of the reasons you get up in the morning and head to your desk is to make your organization and the world better places.

Do you want to try on some leap-frog ideas with the TFI and TFI Environment consultants and/or community (reply below)?

It’s typical during challenging economic times for corporate executives to focus internally — especially on costs and cash. Many subscribe to a survival plan mandating full attention to internal metrics, to the extent that they are more willing to play tug-of-war with customers to cut inventory, slow payments to suppliers, and protect cash. Plus, the executives find it even more difficult than usual to predict customers’ moves, so they focus on the internal metrics they can control. This is the way to survive, right?

Wrong answer! Putting the customer at the forefront and satisfying their requirements should never take the backseat to singular attention on internal operational metrics. The latter is surely the path to decline and gives an advantage to competitors who keep a steady eye on pleasing the customer.

In the electronics manufacturing services (EMS) business especially, it’s important to reflect regularly on the fact customers are never 100% dependent on your services. Having managed outsourced manufacturing for electronics companies for 9 years, and now managing TFI Customer Retention for Business Growth programs, I have seen first hand the end result of EMS companies who were inwardly focused.

One time, at an instrumentation OEM, we were counting on the quarterly cost-reduction program that our new EMS highly advertised would deliver savings. Their “aggressive cost-down program” was one of the reasons we had chosen them. After not receiving any updates early in the relationship, we quickly learned that the EMS was really working from a Pareto of ALL customer material spend, and our parts did not make their top 10%. As a result we were quite dissappointed and needed to micromanage the situation ourselves to get attention for our account.

When dissatisfied, the customer can switch to another EMS or even bring the manufacturing back under their direct control in-house. The only reason customers use the supplier’s services is to add more value than they can produce internally. So if suppliers do not proactively view customers’ operational challenges as their own, the suppliers get off track and miss key intelligence that will benefit their own bottom line.

I advise EMS clients to take a look at how they are working with customers. Are they… (1) Proactively collecting and analyzing quality data? (2) Continually looking for purchased-part cost reductions and sharing benefit? (3) Suggesting design and process changes to reduce cost? (4) Reinventing themselves to deliver more value to customers? Or, instead, are the suppliers causing customers pain with parts shortages, average or worse-than-average costs on materials, delivery snafus, poor inventory management, and other sub-par results? Of course, the EMS needs to make a profit, but if they are truly adding value, the profits and increased market share will follow.

We would never encourage an EMS management team to accept a customer’s rules and conditions that would critically deplete the EMS company’s margins. One of my program managers showed me a Service Level Agreement that outlined the amount of forecast change that the EMS could support. We knew that the EMS would end up holding inventory and would eventually try to back out. So, we revised the agreement to be more of a win-win. It’s always best when the EMS and OEM can donate resources to a project team and build a sense of team spirit.

But I remind our EMS clients that their companies exist for one reason only: making customers more competitive and successful than they would be without them. Metrics should be aligned to eliminate debate. Strong open communication is key. Adding value, both strategically and tactically, and being proactive — soliciting feedback and suggesting where to team will — sets suppliers apart. EMS companies that strongly enable customers to reach higher levels of performance in quality, cost, and delivery for the benefit of their mutual ultimate end customer, can parry other EMS companies out of the way.

What have you done for customers lately?

Last week’s InForum for the Electronics Industry — formerly known as the Quarterly Forum for Electronics Industry Outsourcing and Supply Chain, which TFI started in 1999 – was well attended and full of insights. When a couple of long-time members independently asked me, “What are you up to these days?”, I updated them on TFI’s numerous international manufacturing, supply chain, and logistics research and consulting engagements, as well as our TFI Environment consulting practice.

Their polite surprise owed to their mistaken assumption that when I passed the Quarterly Forum onto Kathleen Geraghty and Douglas Kent’s capable hands, I had also passed along TFI’s consulting and research (not true – TFI divested only the Forum program). Though thankfully that erroneous assumption is not too widely spread – as evidenced by TFI’s thriving consulting and research this year – I would like to share with our readers some examples of TFI’s current consulting and research projects on operations/supply chain and manufacturing relationships:

• Customer Retention for Business Growth program, in which we are interviewing our clients’ corporate customers in Asia, North America, and Europe/Middle East. (Our international scope was bolstered by my working abroad in the past year.)
• Reliability benchmarking for networking equipment.
• Failure Modes, Effects and Criticality Analysis (FMECA) training.
• Manufacturing-overhead benchmarking for outsourcing networking/telecom equipment companies. (Let us interview you for this important study, which provides a complimentary summary for all qualified respondents; email AFeith@TechForecasters.com to see if your company qualifies and to schedule your interview.)
• Executive coaching for CEOs of electronics contract manufacturing companies, spanning corporate strategy, marketing, customer identification, and operations.
• Identifying and quantifying innovative markets for components and materials used in the electronics and other industries.

I am delighted to have recently added Pam Wiseman to our consulting team; she was VP Operations at one of our electronics-instrumentation clients for many years, and is proving to be an excellent leader on many of our projects.

It could be the increasing attention received by TFI Environment — an organization within TFI leading teams at OEM, EMS, and supplier companies to increase profits through competitive sustainability programs — played a part in confusing some folks about “what I’m up to.” It’s true that I am immensely enjoying the High-ROI Environmental Partnership program with a growing number of clients, backed by a talented team of TFI Environment consultants and analysts. But catch me on any day and I’ll espouse equal enthusiasm about all the ways we are supporting our clients – with operations/supply chain strategies and with profitable sustainability programs.

So, what have you been up to lately?

Let’s start with a small electronics-manufacturing services (EMS) company example. I’ve known Mo Ohady since 1982 — the year he started Digi-Com Electronics down the road from TFI’s headquarters. He’d called to ask questions about an article in which I’d been quoted. We started to meet for lunch every few years, and last month I was delighted to hear that Digi-Com received certification to ISO 9001 (quality management) and ISO-13485 (bio-medical devices).

I asked Mo how he has managed to champion his small electronics contract manufacturing company through numerous economic ups and downs. He said that his tenacity owes in part to his credo: “At the top of our concern is to look for partners that are a good match. Take the right steps at the right time, and resist falling into the traps of ‘anything goes as long as the numbers are there’.” As the economy rebounds and Digi-Com receives an uptick in requests for proposals, Mo will continue to control his company’s growth. “Be well aware of the pitfalls of poor matches or of grabbing too much.” This is good advice for EMS companies small and large alike.

Large-sized EMS companies whose executives best know which customers match their company’s strengths will fare better than those who grasp wildly at opportunities outside their sweet spots. At the same time, though, these executives need to realize that the economic downturn and new trends have changed the thinking of executives at some of their long-held customers.

Several OEM executives I know are planning to redirect manufacturing strategy as orders resume — toward in-house manufacturing, toward ready-designed products by original-design manufacturers (ODMs), toward other OEM companies with platforms they can leverage, and toward manufacturing in customers’ regions. (More examples are in a recent blog by new TFI Senior Operations / Supply Chain Consultant Pamela Wiseman.) Frankly, not all OEM executives are yet thinking holistically enough — systematically weighing all changes from product concept to customer usage and whether these changes will still foster corporate objectives.

Perhaps OEM executives can take a pointer from Digi-Com’s Ohady, who told me he most admires supply-chain partners with these attributes: “Fast responsiveness, no mistakes, and personalized service.” While looking to new manufacturing models, OEM executives will be wise to keep sight of customers’ needs for responsive, accurate, and customized products and services. See that the new manufacturing relationships meet this core business principle at least as much as did previous paths.

What changes to design or manufacturing strategies are you planning to make — either as a supplier or customer — as the economy rebounds? (Please reply below.)

Manufacturing out- and in-sourcing strategies are controversial and lively topics these days. Even people not directly involved in manufacturing discuss these themes in daily conversation, prompted in part by the media being quick to ensure that we all know that Whirlpool will move a portion of its manufacturing from Indiana to Mexico, and that Nokia , NCR, and LeCroy have all decided to reverse their outsourcing trends to bring some manufacturing back in house. The economic downturn has been a catalyst for change and adaptation, prompting executives to reassess and reposition manufacturing strategies.

A Google search for “Nokia outsourcing” yields a 5-year chronology of the company’s decisions. As the market forces ebb and flow, Nokia’s decisions have appeared to be frequent and seemingly fluid and reversible. This flexibility in manufacturing strategy has great value in volatile market environments, where demand — as well as energy and transportation costs — can fluctuate dramatically. Carbon footprint and protectionism are also becoming valid concerns when devising a manufacturing strategy. Both traditional and new variables must be considered, all of which seem to be more difficult to forecast than ever before.

The uncertainty in global economics and politics amplifies the fact that decisions made based on today’s lower demand for production volumes, current energy costs, and other influences will certainly need to be revisited — probably sooner than expected. The more flexible the manufacturing model, the more rapidly a company can respond to changing business dynamics. As global demand recovers it will be key to reassess our manufacturing strategies to build in more flexibility than ever.

Nokia appears to have skillfully devised a hybrid manufacturing strategy and capability that balances outsourcing with in-house manufacturing. Today’s volatile demand is presently associated with the downturn, but — in fact — this demand pattern is also true of products during a typical lifecycle. The hybrid model provides resiliency and options when business forces are changing.

Executives with the capability to outsource when economics are favorable while maintaining in-house proficiency are positioned to optimally respond to the varying cycles. This strategy also protects against the loss of leverage and skills resulting when giving up in-house manufacturing capability. Ultimately, executives will assess the changing forces and align capability to best meet customer demand.

Many questions remain (consider replying below). Do you think this degree of flexibility is practical, in light of possible trade offs for quality, supply chain, logistics? What additional costs come along with flexibility, and will they be offset by the value of potential market responsiveness? Has your company rapidly relocated manufacturing capability with minimal repercussions?

This week I had the pleasure of meeting a CEO whose vision is driving him to move manufacturing from Southeast Asia to Midwest USA. But this was no shock to his COO (sitting with us at the coffee house), because this company — Vista International — is founded on CEO Johan Smith’s bold vision to power a cleaner world and to “Reducing carbon footprint one step at a time” (trademarked). Vista, headquartered near Denver, Colorado, is a technology holding company in the renewable energy industry. During the past 20 years the company has acquired technologies as diverse as energy-efficient lighting for facilities, converting waste to high-octane fuels, high-efficiency wind and hydro turbines, and higher-BTU coal with less pollutants.

Though Smith has lived and worked in several countries and has advised government officials in China, Mexico, St. Lucia (Caribbean), Bulgaria, and Israel, he wants to build the company’s largest-yet production facility in the Midwest USA, serving both domestic and international customers. He mentioned tactfully that he is not entirely comfortable with manufacturing in China. It’s likely also that the energy-efficiency investment portion of the American Recovery and Reinvestment Act of 2009 strengthens his decision.

The return to regional manufacturing — making products close to customers — is a strategy TFI has been recommending to clients brave enough to counter a trend. The benefits include meeting regional customers’ requirements more quickly and precisely, mitigating risk compounded across multiple national borders, and reducing carbon footprint — the latter being more visible these days to investors and corporate customers. The CEO must share this vision because an operational shift this far-reaching is rarely championed by a singular manager outside the executive suite.

The electronics contract manufacturing industry is full of CEO visionaries who dictated manufacturing locations: former Flextronics CEO Michael Marks envisioned complete supply-chain campuses in Mexico and Eastern Europe to serve customers on those continents. Former Sparton Electronics CEO David Hockenbrocht foresaw that keeping manufacturing in North America would appeal best to his regulated-industry customers; then in the last years of his tenure he pioneered (amongst his EMS peers) the building of a facility in Vietnam (when I asked why, he spoke about the comparatively high education and low labor rates there; I always wondered if his reasons came from his values as well).

I invite you to comment (below): Has your company’s CEO been instrumental in determining manufacturing locations? Does your company’s manufacturing-location strategy prioritize cheap labor rates or a regional strategy emphasizing customer responsiveness, risk mitigation, and smaller carbon footprint?

What is it about EMS companies that has inspired investors to clamor over them despite the industry’s consistent, remarkably low profit margins? How did the “board-stuffing” suppliers – once only whispered about by the name-brand companies that outsourced to them — transform themselves into multibillion dollar international players with star-power executives such as Michael Marks and Tim Main?

From the perspective of having tracked and served the industry since 1985 (2 years before starting Technology Forecasters Inc.) when “board-stuffers” was actually an accurate and not pejorative moniker, I believe that it’s the personalities of the companies themselves that have won them fame (if not also fortune).

It was the people who loved building things who ran these companies originally – before visionaries and financial experts arrived on the scene. They had an earnest desire to build products better than the name-brand (former) product builders. They had the thrill of crossing the Atlantic then Pacific Oceans to open up facilities in Scotland and Ireland, then Singapore and Malaysia, then China and Eastern Europe, then Vietnam and Jordan (I’m projecting, now). Empire builders they were, and we all rooted for them, discussed them like favorite sports teams, and felt badly when they suffered.

So that’s why when we reflect today about these EMS giants and the challenges they face, it’s as if we are speaking about friends whom we wish well — even though mistakes were made (such as Solectron buying C-MAC), bubbles were burst (“I can be a product company if I want to be”), and profitability disappointed all (countless EMS executives dream to work for healthy-margin OEM companies).

Why do you think that the EMS industry has acquired such a high profile? It is sheer size, or something more? (Please leave a reply below.)

Post Note: I dedicate this blog entry to the memory of a real friend from the EMS industry, Scott L. Hudson, who this month while riding his motorcycle was killed by a drunk driver. Scott worked for EMS-company Sanmina-SCI and before then was a TFI Analyst. I will miss Scott as team member, client, and friend (remembering especially his love for sailing, international travel, and modern art). A memorial service will be held in Los Gatos, California, Sunday August 2nd from 4 to 7pm at the Los Gatos History Club.