Wiring Harness Maker
or EMS Provider

Is There an Identity Crisis?

By Jennifer Read

The outsourcing phenomenon has created an industry with its own set of trends
and benchmarks. Many original equipment manufacturers (OEMs) have made
the decision to allow another company to take over the actual making of their
product, so they can focus on other core competencies, like design and marketing.
They are selling off manufacturing facilities to electronic manufacturing services
(EMS) providers and getting hard assets, like capital equipment, off the books to
improve their bottom lines. What occurred first in the PC market is now
widespread in telecom, and other consumer electronics. In the telecom
industry, these outsourcing deals among the top tier EMS companies are
astounding. In a white paper published by Thomas Weisel Partners, LLC,
an investment banking firm, author Jim Savage described a number of
billion-dollar plus deals signed in 2000, including IBM's divestiture of
facilities in the U.S. and Italy to Celestica; Nortel's multibillion dollar
divestiture to Solectron; as well as NEC, Sony, Ascom, Fujitsu-Siemens,
(computers and cell phones) Cabletron, 3Com, Ericsson, Alcatel, Motorola,
Zhone, and IBM, each divesting assets encompassing multiple hundreds of
millions of dollars of annual Cost of Goods Sold (COGS). Further, Flextronics
announced a long-term strategic agreement with Motorola to gain as much as
$30 billion in outsourcing revenue over a five year period. The banking firm
predicts as much as $20 billion or more in new outsourcing agreements this year.

One such mega-agreement between Ericsson and Flextronics is indicative
of the direction the industry is headed, according to Savage. "While positioned
to the marketplace as a divestiture, the agreement should be viewed, in our
opinion, as a large strategic program award with some assets attached. In
summary, Ericsson is transferring most of the manufacturing, as well as
supply-chain functions, regarding their cell phone business, to Flextronics.
The assets purchased by FLEX are primarily raw materials, along with some
equipment."

There are several implications to these events. Since top tier EMS providers
must operate on very tight margins to win the business from the OEMs, they
must run their supply chains with utmost efficiency to make a profit. After all,
you can't lose money on every transaction and make it up in volume.  The
revenue growth statistics for top- and mid-tier EMS companies reflect the
very rapid growth of the outsourcing phenomenon. Between 1997 and 2000,
the EMS top tier grew revenues at a 55% compound rate. In 2000, the
world's top 50 EMS players grew revenues 68%. Demand has been so
strong, that even smaller companies have been able to grow. However,
according to Savage, this growth is not sustainable in the mid-tier because
the top tier has advantages of scale and purchasing power, information
technology (IT) infrastructure, and global operations that, once demand
subsides, will cause the mid-tier EMS companies' growth to slow substantially.

Inventory control is one of the major issues in managing these high growth
companies profitably. And it isn't as easy as it looks. The EMS companies
that do it well are successful, and those that don't are not, according to Savage.
The financial community tracks these numbers very closely (see charts). 
"At the end of 2000, with end-market demand drying up as fast as the Aral
Sea, it was apparent that inventory levels across the supply chain had risen
far beyond the near-term ability of the market to absorb the excess. Among
EMS industry leaders, overall inventory turns had declined by approximately
25%. The dollar value of Flextronics' inventory rose 123% year over year
on 83% revenue growth, and Solectron's inventories grew 206% -- to
$4.6 billion – on 85% revenue growth," he said in the white paper.

While those numbers seem pretty scary, EMS providers are in a very
good position when they negotiate with OEMs. During this recent economic
slowdown, the electronics industry faced the double-edge sword of bloated
inventory due to double and triple ordering during the component shortages
of last year, and a substantial slowdown in demand across several end markets.
Contract manufacturers order parts for their OEM customers based on a
forecast provided to them. Since these forecasts are historically unreliable
because of the difficulty of predicting fickle consumer demand, OEMs
have agreed to assume liability for excess inventory ordered in accordance
with their forecasts. Earlier this year, many analysts thought EMS providers
would cave in and not enforce these contracts, since the drop in demand was so precipitous. However, that was not the case, and these EMS companies have
emerged in fairly good financial shape from the last two disastrous quarters.
Cisco Systems, an OEM pioneer in developing and refining the virtual
manufacturing business model, announced a $2.25 billion inventory
write-off (including $1.8 billion in raw materials), evidence that even the
big guys got it wrong this last cycle.

So What Does All This Have to Do With Me?

Wiring harness industry watchers have expressed the question of what –
if any – intersection exists between the wiring harness world and that of
the contract manufacturers that have emerged from the outsourcing trend.
We asked some industry insiders to clarify the situation.

William Brown, president of Cornelius, Oregon-based Squires Electronics
believes the two industries are very different. "To be a contract manufacturer
you have to make printed wiring boards," he declared. "We are primarily
dealing with wire. There is significantly different technology and equipment
in the two industries. The biggest thing is in procurement. A PWB has
hundreds of parts, and you have to keep track of all of them, get them
soldered, tested. Wiring harness companies have fewer parts. We are
more manual, more assembly, less manufacturing," he concluded.

Elliott Erickson, president of Heale Manufacturing in Waukesha,
Wisconsin disagreed. "Wiring harness manufacturing is just a subset
of contract manufacturing. We are just one set of products. We both do
business in the same way, partnering closely with our customers."

Whatever the definition, both agreed that the outsourcing trend has changed
the way the entire supply chain functions. "I have seen the industry get a lot
more serious about wire. We hold the dimensions much tighter, and there is a
greater emphasis on quality," explained Brown. "We used to deal with
distributors, but now we have achieved a certain size, and we deal directly
with the manufacturer. We have found the economies of Just in Time (JIT)
not to be applicable to our supply side, because we buy in large quantities
from the East coast, and we are in Oregon. There is a delay getting the wire
here. But someone has to maintain the stock, so that is one of the services
we offer our customers. We offer JIT delivery to our customers, because
from our experience, wire is the last thing that is thought about, and so we
sell it as needed."

"We find we are doing a lot with JIT," commented Erickson. "Smaller
orders, faster turnaround… it is an important part of our way of doing business.
We make wire harnesses for military ground vehicles, and in the last few
years we have branched out into commercial work, machinery and equipment,
off-road vehicles – everything but appliances. Right now, the government
side is still okay, while business on the commercial side is very weak."

Same as the Big Guys

Collaboration represents the frontier in supply-chain integration. The
ability to work closely with suppliers and customers must now be a core
competency of every organization. The wiring harness makers we talked
with are using many of the same supply-chain management techniques
as the EMS providers to service their customers. The only difference is
scale. "We try to form win-win relationships with the supplier side. But
many of the distributors and manufacturers we deal with are so big, we
don't have much say in how they operate. It would be like David trying
to manage Goliath," laughed Erickson. "They have all the horsepower.
But we are fully EDI capable, and Internet capable, since we work with
the government, so we are ready to hook up to an extended enterprise."

"Different companies want to draw the line at different places, in terms
of what services we provide," explained Brown. "We are different than
some wire harness makers, in that we mainly do wire prep. We cut and
strip the wire, and sell to the equipment manufacturers. We sell to a
broad range of end users; we have 2000 active customers, each with
fairly small dollar amounts of business."

"We are in some instances an extension of our customer's manufacturing
plant," added Erickson. "We make up a prototype jointly with their
engineers. It used to be that we would do a prototype and then send it
back and forth while it got tweaked. Now we do it hand in hand and
fix things on the spot. It is much easier to do that as you form these
partnerships and alliances."

And this ability to form mutually beneficial partnerships and alliances
will most likely be the difference between success and failure for
companies that do contract work in the future, whether they are top
tier EMS companies or the smaller harness shops. The past two
quarters have been particularly brutal, causing some serious
soul-searching in the industry. Supply-chain management issues —
especially concerning inventory management — continue to plague
companies hoping to manage assets in the most efficient manner. However,
a supplier that can help its OEM customer speed products to market faster,
with a cost model that allows both companies to achieve acceptable
financial returns, will be successful under any market conditions.

For a complete reprint of this article E-mail: marilyn@wiringharnessnews.com