This highest award from Circuits Assembly goes to companies who, like Applied Technical Services, received the highest ratings, as judged by their own customers, in each of the qualifying categories:
• Dependability/Timely Delivery
• Manufacturing Quality
• Technology
• Responsiveness
• Value For Price

Circuits Assembly Magazine acts as an independent third party to solicit feedback from each participating contract manufacturer’s customers to determine the competition results. Applied Technical Services won the top prize among EMS companies with annual revenues between $ 20 million and $ 100 million.

In 2007, ATS embarked on a “Drive for Five Program” which placed our customers as the number #1 priority in terms of providing both outstanding customer service and superior operational performance. Every year, ATS customers participate in an in-depth third party interview focused on five (5) key areas: (1) On Time Delivery, (2) Quality, (3) Price-For-Value, (4) Technology and (5) Responsiveness. The overall feedback gathered is used to develop a strategy for the following year. In 2010, ATS introduced quarterly online surveys to get more timely feedback, which complemented our periodic customer business review meetings.
“Now that we have established a new ATS standard for customer service, our goal for 2013 and beyond is to remain Number #1 in customer service across our industry. I’m confident that the ATS TEAM will continue to meet the increasing expectations from our customers relative to service quality across the demanding EMS industry. On behalf of our valued customers, I would once again like to thank our employees for their hard work and unwavering focus on the customer,” said George Hamilton, CEO of Applied Technical Services.

About Applied Technical Services, Inc
Applied Technical Services is a leading provider of contract manufacturing services including a wide variety of circuit designs, printed circuit board assemblies and integrated final assemblies. ATS provides manufacturing solutions for original equipment manufacturers throughout the US and Canada who are in the medical, industrial control, military, aerospace and energy markets. Headquartered in Everett, WA, the company also operates facilities in Hermosillo, Mexico and has business development offices in Seattle and Chicago. For further information, visit www.atscorp.net.

Charlie interviews Sparton CEO, Cary Wood

Eric Miscoll interviews Vario Systems’ Alicia Hamby at APEX 2012 in San Diego:

Charlie interviews Promex President Richard Otte

Charlie interviews Hunter Technology’s Joe O’Neill

Eric interviews MC Assembly’s Michael Cox

Eric interviews ATS Corporation’s Steve Canzano

Initiatives meet and exceed Chinese association guidelines

for labor relations and community action

Hong Kong, March 7, 2012. Ryder Industries, LLC, a Swiss-owned developer and manufacturer of electronic products headquartered in Hong Kong, announces initiatives aimed at fostering and promoting respect, egalitarianism, harmony and initiative in its corporate culture and in that of the greater community in which it operates. At the core, these initiatives reflect the strongly held  principles of management, ‘The employees are the company’s most important asset; the company grows only when its employees grow.’

To promote these objectives, Ryder staff members have undertaken a variety of people-oriented initiatives. For example, employees have established an outreach program to support a primary school in Juang Xi province, close to the location of its manufacturing plant. After visiting the school in December 2011 to discuss needs with students and teachers, the following commitments were made to provide a better learning environment:

• Equip a state-of-the art technology lab and library with computers, books and resources in literature, arts and science.
• Establish scholarships for outstanding student achievement in both academic studies and team work.
• Provide psychological counseling courses for staff.
• Establish volunteer English teacher program.
• Organize after-school activities for students.
• Provide financial assistance and/or psychological support to students with special needs.
• Organize volunteer activities for students to help each other.
• Train school staff to organize student competitions and activities.
• Provide team-building training to enhance cohesiveness of school staff.
• Initiate an idea exchange  to stimulate English learning teaching and activities, such as ‘English corner’ and English speech competitions.

Ryder’s continued focus on the welfare of its employees has resulted in the 2011 Shenzhen Harmonious Labor Relations Award, bestowed by the China Association of Enterprises with Foreign Investment (CAEFI) and the Shenzhen Association of Enterprises with Foreign Investment (SZAEFI).

This award requires adherence to a rigorous set of requirements, which are strictly monitored by those external associations. Award winners must meet these requirements:

• All employees must work under negotiated labor contract.
• Employees are always paid on-time, full amount.
• Zero tolerance for child labor.
• Special protection measures for female staff strictly implemented at all times.
• All technicians are well-trained and certified.
• Social insurance paid for all staff.
• No level 4 industrial injuries for one year.
• No strikes or shutdowns due to labor conflicts for one year.
• Labor unions established by law.

In addition to meeting the associations’ standards of conduct, Ryder Industries established a higher set of requirements for itself:

• Designed unique cross-level internal communication system, (”1+3 Communication and Negotiation System”), which has now been adopted by Shenzhen government entities and become the model for similar programs at other companies.
• Established comprehensive staff training programs for job-specific and company-specific education.
• Established and continue to maintain full-functioning labor conflict resolution committee.
• Established employee union committee to protect staff interests.
• Promoted corporate team building through staff social activities.

These people-oriented initiatives have made Ryder Industries one of China’s best employers, resulting in higher employee retention rates, and leading to increased customer satisfaction.

ABOUT RYDER INDUSTRIES: Ryder Industries is a privately held company headquartered in Hong Kong, with business offices in Germany and California as well as three manufacturing facilities in mainland China.  Known as Saitek until 2007, the company has for much of its history been a designer of branded products from intelligent games to computer game controls and is behind well-loved brands including Kasparov, Cyborg and Eclipse.  Ryder developed out of the expansion of Saitek’s manufacturing facilities, divesting itself of the branded products division and further developing its factories to provide EMS services to a more diversified customer base, including professional audio, smart home audio and appliances, industrial and consumer controllers and automotive electronics.

The company was started by Hong Kong Swiss entrepreneur Eric Winkler, who remains non-executive chairman.  His vision has always been to focus on technology and quality, which in his view requires a stable and well-trained workforce.  When opportunities in the PRC began to open up in the 1980s, the decision was made to set up a wholly-owned facility where employee relations would be a high priority.  This approach has paid off for the company; Ryder has received a series of awards from the Chinese authorities in recognition of its ethics, citizenship and high industrial standards, but perhaps most importantly it enjoys a strong team dynamic and high levels of employee loyalty.

For more information about Ryder Industries, go to www.ryderems.com.

The OEM-EMS relationship is often characterized as dysfunctional, inequitable, or broken, plus a few other choice terms that cannot be put in print. These characterizations might make for colorful discussions over drinks at an industry conference, but they do not tell us much about what is actually going wrong in the relationship. Fixing a relationship first requires a better understanding of the actual behaviors/dynamics that are causing the problem.
We therefore asked EMS companies a simple, but potentially revealing question: What are the most irritating behaviors exhibited by your OEM customers during either the sales/quoting process or the actual engagement?
Several dozen brave individuals responded after receiving guarantees of confidentiality and promises of retraining and entry into the Witness Protection Program if they were discovered by their OEM customers as having participated. Their responses proved very illuminating yet difficult to categorize due to the varied nature of the responses. Let’s therefore look at the data in the two general phases that were asked about: quoting and the actual engagement.
NOTE: These survey results are not intended to represent all problematic issues in the OEM-EMS relationship, just those reported by our respondents. I am sure others exist.
THE QUOTING PHASE:
The main issues mentioned as occurring during the quoting phase centered on:
• Data
• Money
• The vetting process
• OEM gamesmanship

DATA: In order to produce a quote an EMS actually requires data. This data sits in two related buckets: data about the actual build being requested by the OEM, and data about the business engagement with the specific OEM.

Surprisingly, (or maybe not) the lack of complete information needed to quote was the most frequently mentioned issue in the entire survey (38% of respondents). Respondents reported that incomplete, outdated, poor quality, and/or inaccurate data is often provided by OEM customers… yet the OEM still expects an accurate quote. This is akin to asking someone to quote a price for building you a new home without providing number of bedrooms, style or square footage…and expecting a good price with a perfect outcome. Not gonna happen!

Regarding the actual terms of engagement that the OEM is asking the EMS to enter into with them, 13% of our respondents reported that OEMs often fail to share strategic data such as forecasts or their Terms & Conditions (T’s & C’s) that would allow the EMS to assess whether they even wish to engage with the particular OEM. This consideration is important for the EMS and definitely influences the mark-up they would choose to apply in their quote.

MONEY: Whether you call it cost, pricing, or fee for service, money is always an issue in both the quoting and engagement phases. 29% of respondents reported concerns with OEMs that were most interested in “nickel and diming” them up front, and then insisting on continued “cost downs” or free services throughout the engagement.

THE VETTING PROCESS: Many respondents (33%) cited issues with the engagement process that OEMs force upon EMS. To begin, the vetting process is considered too long, involving multiple and sometimes repeated quoting exercises when the OEM is often only trying to get a benchmark so they can squeeze their existing supplier. Several respondents also reported that after a lengthy vetting process the OEM had actually disqualified them for not having a facility in a low cost region, a fact that was apparent at the outset of the process. Many respondents also reported irritation at the “hurry up and wait” attitude wherein OEMs expect quick responses from the EMS while the OEM themselves are slow to respond to the EMS requests for further data and needed clarifications.

OEM GAMESMANSHIP: Business is all about winning and gaining advantage, but a fair number of respondents (21%) cited OEM behaviors that they found especially irritating. These included:
• Overstating the size of the opportunity or using unrealistic forecasts to get a lower price.
• Expecting certain services (e.g., testing), but leaving them out of the RFQ.
• Quoting only for benchmarking purposes.
• Requesting repeated quotes on the same BOM.

EMS companies have limited resources and would prefer to engage in quoting activities only if they have a real chance of winning the business and being allowed to earn a decent return.

THE ENGAGEMENT PHASE:
The main issues mentioned as occurring during the engagement phase centered on:
• Materials
• Changes
• OEM manufacturing support
MATERIALS: As in any for-profit enterprise, the EMS industry achieves its gross-margin by applying a mark-up to the underlying elements of Cost of Goods Sold which includes Labor, Overhead and Materials. OEMs try to save money and defer liability to their EMS partners in this area. So it is not surprising that this would be a sensitive area for our EMS respondents. A large proportion of our respondents (28%) cited concerns with OEMs in this area. The main issues were: disagreement over component liability, disagreement over lead times, and receiving insufficient and/or bad parts when the OEM is kitting material to the EMS. These issues result in the EMS having to devote more time trying to negotiate and resolve the challenges. And time, as they say, is money.
CHANGES: Electronics manufacturing is often portrayed as a perfectly rational, linear process, but in reality it is always changing based primarily on OEM actions. 15% of respondents cited OEM actions such as: changing their requirements between the quoting and engagement phases; changing or cancelling orders with little notice and with an “oblivious attitude to the impact of the changes on the EMS”; and shortening their delivery expectations once the engagement begins.
OEM MANUFACTURING SUPPORT: 18% of respondents cited issues with the oversight provided by OEMs during the engagement that caused them problems. The majority of these related to the perceived lack of manufacturing knowledge that their OEM customers possess. The other respondents commented on issues of OEM internal disconnects that made satisfying their requirements more challenging. This included different objectives between manufacturing and quality, and between purchasing and engineering especially in regards to changes in specifications.

WHAT DOES IT MEAN?
Based on these results, some OEMs do not need a manufacturing partner…they need a magician.
Good relationships require two basic ingredients: good communications and honesty. Consistency in these areas allows trust to develop. If an OEM is interested in having their EMS perform optimally, then they must acknowledge and address the behaviors that are hindering performance.
After decades of over-capacity in the contract manufacturing services industry, and companies like Foxconn stealing market share through questionable business practices, it isn’t surprising that OEMs have gotten used to a master-slave type relationship with their EMS. However, the times are changing. With the continuing consolidation and shrinkage in the industry, and a substantial number of EMS and ODM companies exiting the services business model altogether, it might be worthwhile for OEMs to consider taking a closer look at this relationship. A good place to start might be asking your EMS suppliers the same question that we posed in our survey.

In the closing paragraph of article number 6 of this Risk Series I mentioned that “Risk is not always a noun (i.e. a probability) as it can also be a transitive verb (an actual exposure) and in the world of business its many underlying elements tend to pile one on top of another.” When I wrote these words, in my mind’s eye, I saw a stack of irregularly shaped blocks struggling to remain vertical. The vision of a Jenga game where no one wins as each bock is so interdependently connected that if even one was removed the entire pile would topple.

Not a pretty picture but here’s what it looked like…

At the top of the stack was the destabilizing influence of price reductions during periods of increasing cost being wobbled by the reduction of internal resources at OEMS just below it, then in the middle a shrinking demand cycle struggling to counterbalance the ever increasing velocity of change in business, and on the bottom, the process of geographic concentration slowing crushing the principle of institutional continuity out of shape.

But it wasn’t this image that worried me the most, as we spend a great deal of time at CBA thinking about how these individual pieces interact AND how their shapes evolve over time.

What worried me was the platform they were sitting on, a three legged stool of:

• Unpredictable capital markets
• Geopolitical unrest and instability
• Overtaxed infrastructure in low cost regions

Why are these three elements so worrisome? Because, in spite of what you might see or hear from your favorite news source, geopolitical and geo-economics outcomes are simply beyond anyone’s ability to forecast.

Meteorological analysis is a good comparable, as even after centuries of study and the development of very sophisticated modeling software running on the world’s best supercomputers the farther you go out in time with weather forecasts the broader the range of error becomes. Same-day forecasts are usually pretty good, five to seven day projections are a crap-shoot and beyond that it literally becomes a “guess”.  The reason is simple; there are just too many variables. A butterfly flaps its wings in Singapore and three weeks later a hurricane begins to form over the Atlantic Ocean.

So given this reality how do you deal with unmanageable risks?

Our recommendation is “change the game.”  Playing Jenga in business is a bad idea to start with but then doing it on an unstable, unpredictable platform makes it even worst. A better game would be one that eliminates the “vertical stacking” of risk variables so that when the platform does begin to shake (which it inevitably will even if we can’t predict when) the blocks might move around a bit but hopefully won’t all fall off the stool.

What’s better than Jenga?

How about going back to the basics, like the fundamental tenets of business that we all learned and have practiced for many years? I know you know them…

• Create innovative products
• Produce them to high standards
• Sell them at competitive prices
• Enrich the customer experience
• Build lasting value for your stakeholders
• Be a good corporate citizen

Obviously each of these objectives can be fulfilled in countless ways, which is exactly as it should be. Business is all about creativity and competition; no one deserves or is given a free-pass. Success is only granted to those who are the most creative and diligent and then only until they are replaced by someone who can play the game even better.

This means that winning isn’t easy and unfortunately, perhaps because of human nature – perhaps because we’ve lost our moral compass, it has become far too easy to drift off the highroad into a swampland composed of…

• Me too solutions
• Marginal quality
• Pricing gamesmanship
• Enriching yourself at your customers’ expense
• Short term thinking
• Exploitation

Which I believe is the poisoned well from which excessive risk springs.

In this series we have reviewed each of the nine elements of risk that have more than doubled our Composite Business Index over the past four years.

Including:

1. Prices are down but costs are up
2. Fewer resources at OEMs worldwide
3. The demand cycle has shortened
4. Businesses are operating at higher velocities
5. Supply chain concentration in Asia
6. Loss of institutional continuity
7. Unpredictable capital markets
8. Geopolitical unrest and instability
9. Overtaxed infrastructure in low cost regions

Wherever possible we have offered suggestions and alternatives. Where options were few we have provided insights gained from watching this situation develop.  We have tried to be direct and unambiguous in our presentation of the facts.

We have already notified our Outsourcing Navigator Council membership that we have raised our risk advice to “LIKELY” meaning that on an industry average basis it is now likely that an OEM will experience a serious disruption in their supply-solution in CY2012.

Yes, the current situation is that bad.

Bottom-line, do yourself and your stakeholders a favor and do something – TODAY – to start mitigating risk. Looking over your shoulder is a waste time you can’t afford; the risk is directly in front of you!

The issues surrounding this risk factor are subtle and difficult because they pertain to the fabric of the outsourcing rationale, and theoretically have been resolved ages ago. What we mean by institutional continuity could be confused with the concept of ‘core competency’. As most will recall, companies were advised to outsource all but those activities that were considered ‘core.’

I want to be crystal clear about this: institutional continuity is not related to the ‘core competency’ of an organization. I have always felt that the latter was a very misleading concept. Why is it useful to consider activities in this manner? Does it mean that a company has ‘core incompetencies’? Outsourcing something you can’t do very well is obviously very risky; and the current state of many of the outsourcing relationships we observe in our consulting practice proves how risky it is. Most OEMs are not satisfied with their EMS supply solution, in spite of the ‘master-slave’ power imbalance that exists.

The loss I am talking about is deeper than the core competency discussion indicates.

Institutional continuity is what is elemental in an organization. It  relates to the way business is conducted, the company’s history and purpose; and how and why it exists. Does outsourcing in itself break institutional continuity? Not necessarily. But when you outsource everything – not just manufacturing, but design, logistics, customer service, accounting, IS/IT, and human resources – the system does break down, and I see that happening in some OEMs, especially in the past few years. So many pieces have been removed from the flow of the organization’s value stream that the value begins to leak out the holes.

To illustrate: in the US we have a Constitution, which has been the law of our land for nearly 230 years. Its power comes from the fact that it hasn’t changed much, so a body of law can be developed based on the expectation of continuity. Some people think certain parts are too flexible in fact, e.g. the Commerce Clause, originally meant to limit Federal power over the states, has been interpreted to allow most anything.

But what if we did change the Bill of Rights and other parts of actual Constitution itself every decade or so? What if, like at the state level, it was easier to amend? What if during some difficult times we threw out altogether the First Amendment guaranteeing freedom of speech, or the Fourth Amendment prohibiting unreasonable search and seizure. There would be far less stability in the courts, and among lawmakers and eventually the country would no doubt devolve into chaos.

This is the risk we are talking about related to loss of institutional continuity. It is why businesses fail — they lose their sense of purpose and some central competitive advantage slips away. This can happen at any size company, in any industry, and outsourcing too much, too often, can be a symptom, but it isn’t the disease itself.

In electronics companies, where innovative products are part of the institution’s DNA, outsourcing the manufacturing of those products can lead to a loss of the ability to find the competitive advantage in this skillset. I can’t tell you how many times we hear OEM outsourcing managers saying that all EMS companies are the same. Granted, the marketing departments in the EMS industry sometimes fail to communicate their company’s unique value. But the OEM has often lost the insights required to identify, understand, evaluate and, most importantly, leverage the unique and varied capabilities that exist in the EMS industry. CBA will be talking more about this in future blogs.

Look at Hewlett Packard. This company began when two EE’s, Bill Hewlett and David Packard, started building test equipment. The company’s history with these two men has always been part of the institutional continuity of HP. I remember visiting the company and seeing the two partners’ desks left intact since their retirement. Now, I wonder how potent that history is for HP — and if this isn’t a good example of the risks associated with loss of continuity as the company has considered abandoning hardware altogether. Certainly HP has faltered in the past 18 months.

In chasing “low cost” at any price, many electronics companies have taken their eye off the ball of their own businesses. And continue the sports analogy, it is similar to what happened to the San Francisco 49ers football team.  In the 1980’s the 49ers developed the most replicated model in professional football, the aptly named “West Coast Offense.”  This was the brainchild of legendary coach Bill Walsh, facilitated by owner Eddie DeBartolo, and executed by Hall of Fame quarterback Joe Montana.  Deploying this model, the 49ers won five Super Bowls and were named the “Team of the 80’s.”  Then in the late 1990’s things started to go wrong.  A new owner, a series of new coaches, and various quarterbacks thought they could easily continue the success of the franchise while also changing the underlying factors that had allowed the team to be successful.  The team was losing its institutional continuity. One coach, Hall of Fame linebacker Mike Singletary, even stated that the position of quarterback was not the most important position on the team.  How wrong he was!  The result was that the 49ers have been a sub-par team for over a decade and have not made the playoffs.  They are only now reclaiming some of their past glory,  by many accounts by going back to the principles and style that initially made them great.

Risk is not always a noun (i.e. a probability), it can also be a transitive verb (an actual exposure) and in the world of business its many underlying elements – including loss of institutional continuity – tend to pile one on top of another. Until ultimately, we see them show up as the 40% increase we’ve recorded over the past four year in the Composite Business Risk Index.

I think it’s time to say “enough is enough” and start thinking about how to recover what we have lost versus focusing on what else we can change.

http://charliebarnhart.com/gpm-webinar/

http://charliebarnhart.com/oems-internal-spend/

http://charliebarnhart.com/global-risk-module/

What if these stories were in today’s news?

Widespread Destruction
The morning after China was struck by the most powerful earthquake to hit the nation in recorded history the disaster’s massive impact is only beginning to be revealed. Rescue efforts began with first light as military helicopters plucked survivors from roofs and carried them to safety. The 8.9-magnitude temblor, centered near the east coast of China, killed hundreds of thousands of people, caused the formation of 30-foot walls of water that swept across rice fields, engulfed entire towns, dragged houses onto highways, and tossed cars like toys.

“There are a huge number of little bits of the high-tech food chain which are done nowhere but in China,” Jane Doe, senior investment manager of MMM Equity said. “Nobody else has the capacity, and in some cases the technology, to do it.”

Hopefully by this point you’ve realized that these news articles were actually from the horrible catastrophe that struck Tohoku, Japan on March the 11th, 2011. The only thing we’ve changed in the copy was the geographic location, the scale of impact (i.e. increased the numbers in these stories to reflect the differences in the populations in these two areas) and the names of the entities cited.

But what if it really had happened in China instead of Japan? What would the impact have been on the global electronic industry?

We are not going to argue the proportional concentration of electronics related resources in Japan versus China or quote endless statistics on what percentage of this type of material or that type part are controlled in which geography. Everyone has their favorite source for this data and we encourage the reader to select whichever they feel most comfortable using; we all know what the reality of the situation is.

Over the past decade the global electronics supply-chain has migrated to Asia with the majority of it concentrated in the river delta, industrial hubs of China.

Bottom-line: if a Tohoku type of event occurred in one of these regions of China today it wouldn’t be weeks or months for the industry to recover, it would be years. Global businesses would lose billions if not tens of billions of dollars in revenue, lay-offs would be in epidemic proportions, even enterprises with rock-solid balance-sheet would immediately switch to a survival mode of operation (i.e. meaning there would be widespread failure of any supplier/service provider whose business was related to either discretionary or B to B spend) and some significant percentage of OEMs reliant on a commodity-based business model would simply go out of business.

It’s harder to think of things that wouldn’t be impacted, than to think of those that would.

We have a model for what happens when a critical resource is concentrated in just a few areas, like oil. Supply and demand is artificially managed (to control prices), geopolitics vs. the market dynamic becomes the basis of distribution and strategic interests are protected (read: wars are fought). Not a pretty picture.

Are we overstating the probable outcome? Perhaps, but to be honest we don’t think so. What we do know for certain is that a gentleman named Edward Aloysius Murphy, Jr. once said “Anything that can go wrong will go wrong.” I just hope the term “China Syndrome” doesn’t end-up taking on a whole new meaning.

Closing note: We apologize to anyone we may have offended by using the consequences of the Tohoku tragedy in this article to make a literary point. Our hearts go out to the people of Japan and those around the world who were impacted by this cataclysmic event. We recognize that it was not only a natural disaster but a human one as well.

NEXT ARTICLE: Risk Factor #6: Loss of institutional continuity