Founded in 1999, Calix is the largest telecommunications equipment supplier focused solely on access solutions for broadband service delivery. Service providers deploy Calix access systems to enable a rich set of information, communication, and entertainment services for their subscribers and to expand their revenue base beyond connectivity. Calix has deployed millions of ports and tens of thousands of systems into hundreds of networks throughout North America. Its partnership with Singapore-based Flextronics for manufacturing and supply chain services has been a critical factor in the company's success.
Q: How broadly dispersed is your supply chain?
Weingarth: Today all of our customers, which number about 400, are in North America. Our distribution to these customers is all direct-ship from Flextronics' manufacturing sites. Early on, we had Flextronics send a lot of the inventory to our facility here at Petaluma and we distributed out of here, but that was only for the first year. Since then, everything has shipped direct. Our full printed circuit boards are moved by air. Our cabinets and other big mechanical devices ship by water and land and, in some cases, by air, depending on what the customer wants.
Q: Was Flextronics a part of your business model from the beginning?
Weingarth: Yes. The founders and the early management team at Calix had a vision to totally outsource manufacturing and, really, to employ a full turnkey outsource strategy. So they evaluated a number of EMS [electronics manufacturing services] providers and came up with a handful of finalists. They selected Flextronics, so right out of the chute we have been engaged with Flextronics as a key business partner. They do the day-to-day procurement for our products, the assembly of the cards, the testing of the cards and the logistics, in terms of sending the product to our customers. We control the approved vendor list (AVL), so in that regard we manage the sourcing of our supply.
We also developed systems on the front end to make sure that our customers could easily order our equipment. Those systems in turn are then integrated down into the Flextronics systems. So we get the information from Flextronics' systems, but our customer gets status out of our Oracle-based systems and the custom solution we put on the front end.
In terms of systems, I would like to give a plug to Agile, which is our product data management software and is absolutely crucial. I can't emphasize that enough. Having the Agile system internally and at Flextronics as well, allows me to link our systems together. This enables our engineers to be able to control the vendor list as well as all of the costing. We can change things online and send that information to Flextronics anywhere in the world and they can immediately implement the change in their Agile system, so these links are very important.
Q: Is yours a highly configured product?
Weingarth: Yes, we have a number of SKUs that customers can order and they are highly configurable-that's one of the advantages of our products. But this is very easy from the customer's perspective because of the way we designed the product. In other words, any interface card can fit into any slot, so the customer just has to figure out what interfaces they are going to order and we put that into the configurator and it blows down into an order. That order then is transmitted down into the Flextronics system.
To elaborate on that, the products we sell are referred to as platform or system products and that means it is a system into which you can put line cards. For example, the Calix C7 is a signal product and there are some 80 different line cards that it can be populated with, so with 80 line cards and 20 slots you can see that there are many possible permutations and combinations.
Now, everything starts with the forecast or what we call the total demand report. We look at the history of our shipments and we also work with the sales and marketing organizations to look at programs and new products that are coming out. Then we put together the forecasts. That then gets turned over to Flextronics, which loads it into their MRP system. We don't have an MRP system at Calix, nor do we ever envision needing one. We just give a high-level breakdown to Flextronics, they load it into their MRP and then they drive the supply base or the parts. Our requirement to them is that we be able to move our cards within two weeks and our cabinets within four weeks. One other thing I want to be clear about: Flextronics does the procurement but we control the vendor selection list, so when we are doing our designs, we encourage our engineers to look at where Flextronics is buying, because we want to leverage their buying power. So we try to make sure that we use their supply list when possible to ensure our designs are cost efficient. But once we create a design, we tell Flex they have to buy from specific vendors.
Q: Do you partner with Flextronics on design as well?
Weingarth: Initially we were looking at Flextronics as a typical contract manufacturer. But Flex has had the vision over the last three to four years to start investing in the engineering side of their business-software and hardware engineers, all of those support functions that make them a global, end-to-end, full-service partner. So our relationship has expanded from just manufacturing to having them do the procurement and the testing and the building of the cards at multiple global locations. As they grew their engineering services, we also expanded the relationship into innovation, which is one of our key processes. What we like to do, as we bring Flextronics up to speed on our existing designs, is to transfer that knowledge to them. So things like value engineering and sustainable engineering become a Flextronics function. They are then able to do that for us in lower-cost regions of the world and we can keep our U.S.-based engineers concentrated on new market opportunities, new products and new innovations.
Q: Does Flextronics do all the testing and quality control as well?
Weingarth: They have all of the processes and procedures to handle these functions and, of course, they have manufacturing engineers and process engineers and test engineers. I have a quality organization here that makes sure all those things are in place and we have audit functions to ensure that these are working as they should. The one caveat there is that the functional testers-not the in-circuit testers-are developed by us and implemented by us. We turn those functional testers over to Flextronics and they execute the tests.
Because our product is not a commodity product, a certain skill set is needed to be able to test, repair and troubleshoot. So when Flextronics points us into multiple facilities in multiple areas of the world, we first look at the cost of manufacturing and at the talent pools in these different locations. Before we decided to move to Shanghai, for instance, we looked at probably 15 sites throughout the world and came to the conclusion that Shanghai was the best place to put our product. Flextronics is in maybe 16 different countries throughout the world. We don't want to be on the bleeding edge in terms of low-cost countries, but we do want to be on the leading edge. But, first and foremost, we want to make sure that a location has the core infrastructure set up for engineering talent.
Q: Do you consider your use of Flextronics for supply chain management to be a competitive advantage?
Weingarth: The design for the supply chain is very crucial because if I can leverage the relationships that Flextronics has as a $20bn company, I certainly want to do that. And so, as I mentioned, one of the things we do is when we have new designs is to try and influence our engineers to use Flex's supply chain. That leverages our costs and all the other supply chain factors, like quality and delivery. We also try to use SMI [supplier managed inventory] agreements, especially on custom parts, where we have supplier stock at Flextronics, but not on Flextronics books. This allows the inventory carrying costs to be shared among us all and enables us to react to demand swings, which happen very frequently when you have as many SKUs as we do.
Strategically, we also want to concentrate on lead-time reductions, because obviously with the large number of SKUs that we have, inventory is more valuable to us when it is in a liquid state. If we can work with Flextronics and the supply chain to be able to have the SMI inventory at Flex's site and then be able to assemble and test the cards and have them in finished goods within two to three days, that gives me a lot more flexibility to handle those swings in demand.
Another advantage is the ability to have sources in multiple locations around the world. Flextronics touches hundreds of customers and, again, when you look at the $20bn revenue they have, that gives us a big leverage. So, yes, using their supply chain and not having to worry about or staff up all of those potential buyers and expeditors is a big plus for us. It also is important for us, because of our designs, to be able to put control points in place, because the one thing we don't want Flextronics doing is going off and buying from brokers or other places like that, so all of that has to be tied into the process as well.
When you look at the relationship between Flextronics and Calix, one of the things we did strategically that has worked for both parties, is to establish face-to-face communications at all levels. This has led to a great working relationship. I can go on a daily basis to Flextronics' CEO or to the senior vice president who runs our division, and it is that way all the way through the ranks. Any of my people can touch base all the way up and down the chain. Having that visibility and establishing those relationships is also very crucial from a business perspective because if I need something or need to communicate I can always just pick up the phone-and that goes for anyone else. This open communication allows us to be honest with one another. If we have an issue or a challenge that we think we need to attack, it's easy to have that discussion. And this also allows us to have strategic alignment between the companies, which is very important.
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