Venture Outsource talked with Bob Dykes, chief financial officer and executive vice president, business operations, with Juniper Networks. Transcripts from that discussion follow.
VO: Juniper is a big proponent of outsourcing its electronics manufacturing. In what ways do you see other, large OEMs embracing technology supply chain outsourcing in the future they may not be doing today?
Dykes: Most large OEM’s have already embraced supply chain outsourcing. What’s interesting is this is being done various ways. On one axis, we see the amount of related ‘overhead’ retained by the OEM when engaged in outsourcing (i.e. procurement, manufacturing engineering, logistics). On the other axis, we see IT systems and visibility processes attempting to fill the gaps created when OEMs outsource.
On the first axis, it’s hard to find a perfect balance of disciplines, but it is clear many companies are not close to being well-balanced. Take, for instance, those OEMs with internal procurement organizations attempting to negotiate component pricing when their purchasing volume requirements are less than volumes required by larger EMS companies.
Given equal-purchasing-volume, EMS companies still have an inherent advantage over OEM’s in component pricing because their profitability is lower (high profit OEM’s have trouble getting a ‘sympathy vote’); their willingness to change vendors is greater (many component vendors know OEM’s are loathe to change and take advantage of this) and, EMS providers are privy to various pricing scenarios from experience with more vendors and therefore have more knowledge to apply when negotiating.
So, I see many OEM’s with opportunities for improving their ‘balance’ of ‘what’ and ‘how’ they procure as chances for them to grab low-hanging fruit. Manufacturing engineering, bordering on engineering design work, is also an area not well-balanced. (e.g. Many smaller OEMs insist on designing and specifying every element of their product whereas, EMS companies could be tasked to leverage their component-pricing knowledge, and their manufacturing process knowledge, to help implement better designs).
There is also great reluctance among some OEM’s to outsource final configuration and test — with some OEMs believing only they have the required level of expertise. EMS companies do it sufficiently well for most of their customers so there is no excuse for this not to be outsourced. Besides the cost savings mentioned, EMS companies are also in a better position, than an individual OEM is, to tap resources for a quarter-end-crunch. This leads to the second axis – IT systems.
Many OEMs outsource without fully implementing IT systems to close the gap created by moving operations externally. Unfortunately, they don’t even see this gap. They merely complain about communications issues with their EMS partners. Subsequently, a large number of potential IT solutions companies are out there trying to fill this gap.
Meanwhile, an IT solution that fills such a void effectively has yet to emerge in industry and be defined as a clear winner.
Best practices in outsourcing should ensure the EMS partner provides strongly coupled supplier-managed-inventory hubs; the OEM and EMS partners ensure all their vendors’ supply into these hubs (and are committed to keeping them stocked based on forecasts) and, the EMS partner has systems to allow the OEM to understand the supply situation, to do ‘what-if’ analysis, etc. This said, where massive systems tracking every detail being outsourced can be overkill, it is imperative to enabling accurate visibility for the OEM.
VO: Besides price, what two other criteria are important to Juniper when evaluating potential EMS partners and, why?
Dykes: Probably, the next two criteria after price would be price, and then, price. That’s my CFO-hat speaking.
Obviously, quality is essential, but it is something all prominent EMS providers can provide. For Juniper, we also look for providers with substantial experience in very high-end systems. Additionally, we look for our providers to line-up lower cost vendors. This is increasingly important as we move more production to China.
VO: One trend in OEM-EMS relations is for greater cost visibility – for both sides. What types of opportunities do you feel exist for
OEMs to continue to build on their EMS relationships to enable them to drive down cost while also helping them continue to motivate an EMS partner?
Dykes: While we need to maintain good control of EMS value-add pricing, it is more important we continue to leverage our EMS partners to help us develop products in the most cost-efficient manner.
VO: Please name one person you admire (living or dead) and why you admire this person?
Dykes: I admire people able to gather the smartest people around them and grow companies. One example is Li Ka Shing, a self-made entrepreneur able to boot-strap his company from nothing to a world-class entity. After growing his company in Hong Kong with adroit management, he has migrated to managing a portfolio of companies and matured his organization to work effectively as a multinational.
VO: Thank you, Bob.
Dykes: You’re welcome. Thank you.
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VentureOutsource.com, April 2006
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