Judging from the number of times he uses it in conversation, Jim Molzon's favorite word has got to be "doable."
It's fortunate that the vice president of global logistics with Solectron Corp. is such an optimist. His company, the world's largest contract manufacturer of high-tech electronics, is at a critical point. Not only are sales of high-tech goods sharply down, but Solectron faces some unique problems. Others in the electronics manufacturing services (EMS) sector are more efficient, and potentially more profitable. In fact, Solectron this year is in danger of losing its status as the top EMS company in revenue terms.
Milpitas, Calif.-based Solectron has battled adversity over the past year. Personal computer sales, which make up a large portion of the company's business, have continued to fall. Even in good times, EMS profits can be elusive, with big customers like IBM, Cisco Systems and Nortel Networks demanding quality product at the lowest possible cost. An inefficient supply chain and high restructuring costs were additional reasons why Solectron lost $52.5m, or 8 cents per share, in the quarter ending Nov. 30. That compares with a profit of $190.6m (29 cents per share) in the same period of 2000.
SOLECTRON CORP. AT A GLANCE
What it is: In revenue terms, the world's leading contract manufacturer of high-tech products and equipment on behalf of customers such as IBM, Ericsson, Compaq Computer, Cisco Systems and Nortel Networks. Founded in 1977, its headquarters are in Milpitas, Calif.
It isn't waiting for economic recovery to fix the problem. Management has launched a company-wide program of restructuring and reengineering, calculated to drive down overhead and streamline the entire supply chain.
High on the list of priorities is better management of global freight. In the EMS industry, notes stock analyst Kevin Denney of Brean Murray & Co. Inc., transportation typically accounts for between 1 and 1-1/2 percent of the cost of goods sold. Producers' transport needs are unusually complex, with finished product often consisting of parts from multiple countries.
Molzon inherited a global logistics organization that was fragmented and driven by manual processes. Control of logistics was scattered over many production sites, and there was a pressing need for centralization of data. In addition, the company was running more than half a dozen enterprise resource planning (ERP) and order-management systems, many of them legacy- based.
Solectron's supplier network is vast - more than 6,000 overall, although fewer than 300 account for 90 percent of the company's purchases. On freight alone, it spends some $150m a year, of which $120m is on inbound transportation. It has manufacturing operations on five continents, in more than 23 countries. Its raw materials inventory is valued at more than $20bn.
Learning Where to Start
Molzon focused on the company's three areas of greatest need, from a logistics standpoint: carrier selection, trade compliance and inventory visibility. Historically, it had used paper routing guides to select and manage carriers. Cumbersome manuals and denied-parties lists governed compliance with tricky customs regulations. And the visibility of inbound goods in transit was variable at best. Says Molzon: "It showed up when it showed up."
Initially, Solectron picked compliance as the area to fix first. Companies that run afoul of customs regulations, or inadvertently sell high-tech goods to banned buyers, can be hit by crippling penalties. But Solectron soon learned that carrier selection and visibility were equally important. The three were too intertwined to be addressed separately, says Molzon. And no one wanted to undergo two more painful implementation phases.
The decision to implement three solutions at once carried its own problems. For one thing, there was no software vendor who could do it all - a fact that Solectron quickly discovered. Instead, it went looking for a partner who would be willing to develop such a capability.
Searching for a tool that didn't exist, Solectron couldn't go the usual route of product demonstrations and hands-on testing. It sought out providers with expertise in at least one of the relevant areas, then assessed their ability and willingness to tackle the rest. "Some had that deer-in-the- headlights look," Molzon recalls, "while others understood what we were talking about."
Over a period of several months, an initial list of 22 prospects was whittled down to three. Ultimately, one of the finalists was deemed too far from designing a workable system. A second, with experience in inventory visibility, proposed to team up with another vendor to provide trade compliance. That raised the unsettling possibility of a three-way implementation.
The last vendor left standing was Arzoon, a San Carlos, Calif.-based vendor of logistics software, which had only been formed in September of 1999. Molzon felt that Arzoon founder Farid Dibachi appreciated the importance of a multi-pronged tool for managing global freight - even if he didn't have one to sell. Nevertheless, says Molzon, the final choice of vendor "came down to a gut feel."
Solectron was impressed by how fast Arzoon mobilized its forces. With 90 days, the vendor had gone from nothing more than a PowerPoint presentation to a working demonstration model.
As it turned out, Arzoon was already deep into the painstaking process of crafting its identity. "We went through three months of sitting around and brainstorming what our product should have," Dibachi says. Two elements were considered critical: that the tool be web-native, built specifically for use over the internet, and that it begin with the inbound side of the global supply chain.
The ability to track parts on the move was needed.
Both considerations were of equal importance to Solectron, which needed to get a grip on communications with its huge, diverse supplier base, not to mention internal management. "The information isn't for our logistics team," says Molzon. "It's for the supply-chain organization. We needed to let them access it no matter where they were."
Solectron did more than nudge Arzoon toward clarifying its vision. The manufacturer worked closely with its chosen vendor to create a logistics resource management (LRM) system from scratch. In fact, Solectron was only Arzoon's second major customer, following pharmaceutical supplier McKesson Corp.
The result of the collaboration was Arzoon LIFE, an LRM package that encompasses all three of Solectron's chosen functions related to logistics. The tool was built on the run, so to speak - it went through three generations in just about a year, with version 4.0 released last October, and 5.0 due out in May. Dibachi stresses the need for "a quick process of taking what you learn in the first two years if you want to be responsive to your customer's needs."
LIFE is still a work in progress, although some functionality had to be in place from the start. Right away, says Molzon, Solectron needed to hook up with suppliers via multiple channels - electronic data interchange (EDI), the internet, even the extensible markup language (XML) still being developed to standardize internet data exchange. And it had to be able to create an order and shipment from scratch, along with achieving total visibility of that order in transit.
How it works is this: Solectron drops an order onto its supplier, which picks up the information, ships the part and matches it against the file created from the customer's purchase order (PO), of which Arzoon has a copy. Using that document, Arzoon's Transportation LIFE module selects the best carrier, based on rules and routing supplied by Solectron, and tenders the load. The system then notifies the proper party of the schedule for pickup, keeping all documents up to date. Arzoon also generates reports on supplier routing and PO compliance.
Molzon stresses the importance of a single database for transportation, even if other functions aren't centralized. Solectron continues to run multiple order-management systems, he notes, "but if I can carve off a piece over which I have direct responsibility, I can manage it. It's the doable way around."
Flexibility was equally important to Solectron - to a degree it might not have fully appreciated prior to Sept. 11. Roughly 88 percent of the company's inbound shipments move by air, but after the terrorist attacks on the U.S., Solectron needed new business rules that could rapidly adjust to a sudden disruption in its supply chain. Paper routing guides and toll-free telephone numbers couldn't do the job.
Arzoon Global LIFE, the cross-border trade component, provides Solectron with its much-needed centralized database of rules, including trade advisories, license requirements, denied-party and controlled-country screening, document determination, and tariffs and duties. The system scans purchase orders and shipments prior to execution, issuing alerts in the event of possible violations.
A key aspect of Global LIFE is the landed-cost engine, an extensive database that calculates the real cost of importing product into a given country. Factors include transportation, duties, taxes, and import/export fees. By automating a process that once was done inadequately if at all, the system allows users to compare various routings in order to determine the cheapest way of sourcing and shipping parts.
At the time it was courting Solectron, Arzoon was proposing to obtain its landed-cost data through a partnership with Dulles, Va.-based Vastera. It was a match encouraged by Solectron, despite the company's desire to minimize the number of players involved in the implementation. Most providers of transportation- management software prefer to contract out for the landed-cost portion, because of the huge task involved in building and maintaining the necessary database.
Early on, however, Arzoon shifted to what both vendor and customer agreed was a better solution. In March of 2001, it acquired outright the assets and landed-cost engine of the fledgling From2 Inc., based in Miami. Arzoon was attracted by the web-native platform of From2, which was about to market its product independently.
The information within From2's landed-cost engine came mostly from a network of customs brokers and freight forwarders around the world. The deal also gave Arzoon access to a team of ex-Customs attorneys and software engineers who could clean up the data and ensure its continued accuracy. In a recent report, AMR Research analyst Michael Bittner called the From2 acquisition "a positive step" in Arzoon's quest for one platform to manage transportation procurement and execution, along with global trade compliance and visibility of orders.
How to Keep Track
Global inventory visibility rounds out the LRM suite. In particular, Solectron needed a means of tracking components and finished goods on the move, which number in the thousands at any given time. It also needed to keep tabs on PO fulfillment at the part number or SKU level. When a shipment is in danger of missing its delivery date, the system automatically issues an alert.
Dibachi considers fast, accurate tracking to be "the price of admission" among transportation vendors. Still, the success of any such application depends on cooperation from carriers. And that often requires the clout of a major shipper like Solectron. At least one parcel carrier balked at sharing information on status and rates from its proprietary system until Solectron temporarily took the business away. Within two weeks, he says, the carrier was back on board.
The initial phases of implementation went fairly smoothly, marked by the usual need for debugging a brand new system. "Software that's got no more bugs in it is obsolete," observes Dibachi. In addition, over a six-month period, a number of changes were made in response to customer feedback. Arzoon was receiving daily, even hourly, reports from Solectron on the new system's performance. Monthly meetings with key Solectron staffers provided more in-depth analysis.
Solectron simplified matters by allowing Arzoon to host the system on its own servers. By having the vendor play application service provider (ASP), Solectron could better cope with rapid growth and maximize its limited information-technology resources, Molzon says. (Arzoon also offers the LIFE software in a client-server mode, Dibachi notes, although no user has yet requested it.)
Solectron expects to reap numerous benefits from the LIFE package. It hopes to cut freight costs through better use of low- cost carriers and modes, and overall transactional costs through the elimination of manual processes. In addition, it should reduce its exposure to bruising customs penalties for non-compliance, while speeding up deliveries and minimizing shipment delays.
The company won't wait long for those benefits to materialize. Molzon says Arzoon didn't promise a specific schedule of payback on Solectron's investment. "I wouldn't have believed them if they had," he says. But Dibachi says Solectron wanted a full return in less than a year - with clear results in three to nine months.
Solectron has said publicly that it expects to reduce its logistics costs by more than $20m over three years. For a $16bn company, that might not seem like much. But EMS producers exist on notoriously thin margins, often in the range of 2 to 3 percent. At a time when sales are down and competition fierce, that kind of savings can make a difference in overall supply-chain efficiency.
The Road Ahead
In the coming months, Solectron will be looking for every opportunity to cut supply-chain costs. One bright spot in an otherwise depressing financial picture has been its focus on reducing inventory. In the first quarter of its 2002 fiscal year, ending Nov. 30, the company cut inventory levels by more than $450m, and by $1bn in the previous quarter.
According to analyst Denney, some 60 percent of those reductions were the result of shipping parts back to customers. Many had over-ordered during a period of spot shortages and brisk sales, and had failed to anticipate the subsequent slump in demand. Such product pushbacks will continue, and EMS producers' inventory glut might not clear up until the third quarter of this calendar year, Denney says.
Much work remains to be done on Solectron's supply chain. In a report issued last June, Brean Murray estimated the company's inventory turns at 4.4 a year, versus 7 for rival Jabil Circuit. (Six turns is the level for which EMS companies should strive, Denney says.) Its total sales cycle was a languorous 90 days, compared with Jabil's 39.
Solectron has improved since then, but a company-wide program of restructuring continues. Early this year, Lehman Brothers predicted that Flextronics International Ltd. would pass up Solectron as the EMS revenue leader. Others question that scenario; Alexander M. Blanton of Ingalls & Snyder LLC says Solectron's sales estimates don't include the results of new outsourcing programs, several key acquisitions, and "the strong probability of additional new wins for Solectron in calendar 2002."
On the logistics side, Solectron is anything but complacent. Denney says EMS providers are being asked to provide customers with a wider range of services, including fabrication of metals, plastics and circuit boards. Solectron itself formed a global services business unit in 1999, providing repair and refurbishing of parts, among other things. Such an end-to-end strategy calls for even tighter control over the logistics function.
Molzon now divides his time between broadening the implementation of the Arzoon LIFE suite and boosting its functionality. Fifty suppliers were up and running on the system as of January, with a goal of 300 - comprising the lion's share of Solectron's purchases - by May. (At the same time, Molzon plans to cut the total number of Solectron suppliers in half.)
Solectron will increase its dependence on LIFE for outbound transportation, while striving to manage both stationary and in- transit inventory in a single function. Eventually, Molzon wants to extend his reach to second- and third-tier suppliers, so that Solectron and its customers can begin planning production earlier. That should help to slash order-cycle times, while replacing expensive inventory with the credible promise of goods arriving on a just-in-time basis.
Finally, Molzon wants access to harder, more objective data on carrier performance, in order to make the logistics piece of the supply chain more reliable. "Let's push the button and get the information," he says, adding: "The technology has made it doable."
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