What do Cisco Systems, Dell, EMC Corporation, Hewlett-Packard, IBM, ICL, Sequent and Sun Microsystems have in common? They’re all industry giants that outsource all or part of their manufacturing processes. In fact, some of them have never even owned a factory.
In a market place where product life cycles span a mere six to nine months, some original equipment manufacturers (OEMs) prefer to focus on their core businesses — typically front-end design and marketing — and outsource their back-end factory operations to gain a competitive advantage. Approximately 15 per cent of the world’s US$500-billion electronics manufacturing services (EMS) market is already working this way and experts predict that by 2001, the $90-billion EMS sector will nearly double.
In the race for end-user customers, organizations that can deliver their products to market globally in volume ahead of the competition are positioned for success, which is why some are forming partnerships with EMS companies. Incredibly, more than 50 OEMs — including every one of the industry leaders mentioned above — are dealing with the same EMS partner, Celestica.
Established in 1917 as the manufacturing arm of IBM Canada Ltd., Celestica was incorporated as a wholly owned subsidiary in 1994. In October 1996, it was purchased by a group of investors led by Onex Corporation and subsequently became a public company in 1998. Today, its nearly five million square feet of manufacturing space is the launch pad for a broad range of products, including workstations, mainframe computers, terminals, personal computers, servers, routers and set-top boxes. The company supplies customers with a broad range of integrated EMS, ranging from printed circuit assembly and system build, to memory and power solutions. Add to that some very compelling value-added services such as quick-to-market supply chain management, global component-purchasing power, and industry-leading design and prototyping capabilities and it becomes fairly obvious why Celestica is thriving. The fastest growing of the three largest EMS providers — ahead of SCI and Solectron — Celestica’s annualized revenues for 1999 were US$5.4 billion.
So, if major OEMs are principally dealing with the same suppliers, how then are innovation and product distinction derived?
“Although we’re involved in the design, the fundamental new product idea still rests with the OEM,” explains Lisa Colnett, Senior Vice-President Worldwide Process Management, and Chief Information Officer for Celestica. Colnett is responsible for key corporate functions including IT, manufacturing and human resources and was formerly in charge of the company’s Memory Division. She joined IBM Canada in 1981 and, over the course of her career, has had experience in materials logistics, cost engineering, site logistics and manufacturing management.
Colnett says that increasingly OEMs are bringing their designs and product specifications to Celestica to be translated into products. “The innovation that we bring to the table is how to make them more manufacturable and get them through our processes more quickly.”
Yet manufacturing can be just the tip of the iceberg. To gain the full strategic impact of working with the EMS giant, many customers avail themselves of Celestica’s “mass customization” opportunities. Ironically, what sounds like an oxymoron is actually practicable and ingenious. Some of the staunchest competitors in the OEM market place leverage collective sourcing and purchasing power for components and related services through Celestica, all the while designing and building a customized product. Colnett describes what she considers to be her firm’s critical differentiator in the EMS market.
“We have to be the best-of-class manufacturer with the latest techniques but increasingly it’s the supply chain that customers are buying from us, of which manufacturing is one component, ” she remarks. “Our objective is to reach earlier into that process and farther into our customer’s customer chain so that we’re managing the process end-to-end. We place a lot of emphasis on after-sales support to further streamline the whole supply chain process. The argument being if you’ve built the product then you’re likely to have some special capability and knowledge to help repair the product.”
THE CIRCLE OF LIFE
Supply chain management (SCM) is the manufacturing sector’s “circle of life”. In an ideal world, manufacturers provide seamless connectivity to their customers, suppliers and partners, linking the entire trading group in increasingly tighter bonds of information flow, business cooperation and ultimately, profitability. A well-oiled supply chain management system supports just-in-time manufacturing with flexible dynamic replenishment.
For the most part, SCM applications execute operations such as managing warehouses, inventory supplies and distribution channels. There are two basic categories of SCM software: planning and execution. Execution applications track product storage and movement and help manage materials, information and financial data among suppliers, manufacturers, distributors and customers. Advance planning applications or optimization software applies sophisticated algorithms to identify the best way to fill an order based on set operation constraints.
Celestica employs a spectrum of IT tools to address virtually every stage of its customers’ supply chain processes. For example, collaborative design tools such as Valor help customer-designers develop products to Celestica’s manufacturing tolerances and design capabilities. Another important tool, Aspect Component and Supplier Management (CSM) solution provides the company with decision-support capability to determine preferred parts, designs and suppliers and make them accessible for enterprise reuse. This information enables Celestica representatives to define the fastest route for sourcing a customer’s product and getting it into the market. The product also enables customers to configure their outsourced products directly over the Internet, leveraging Celestica’s buying power through online access to Celestica-preferred components found in the Aspect CSM system.
Another important tool, Matrix, is the company’s common bill of materials repository. It assists with product data management and rapid parts sourcing. i2 Technologies’ RHYTHM software advance planning tool provides real-time product demand information and allows Celstica to simulate a range of order decisions to meet customers’ needs cost-effectively. Celestica also builds Web interfaces across these tools to make them more easily accessible to customers and suppliers. Operating within an AS/400 environment, transaction-based tools such as BPCS from SSA, and SAP are used for Enterprise Resource Planning (ERP) applications and SFDM software from Genrad is used for shop-floor applications.
“Our whole business is about time to market and velocity of information,” comments Bernie Uhlich, Celestica’s Manager of Global SCM Web Commerce. “Effectively managing the supply chain enables customers to get improvements in inventory turns, material flow, improved planning, and ultimately, reduces the time to market significantly.”
He notes that with product life cycles shrinking by the minute, qualities like responsiveness and flexibility based on quick accurate information differentiate winners from losers and today’s Web-based EDI facilitates the transition from mere e-commerce to e-collaboration.
“Traditional EDI is good for high-volume transactions but only three (per cent) to 10 per cent of the North American market place uses it,” he remarks. “How do you get into the remaining huge untapped supplier and customer base?”
Uhlich says that Internet-based EDI (or Web EDI) and XML information standards are the answer. With the caveat that users must maintain the same degree of discipline and legal standards as in traditional EDI, he stresses that both project and connectivity development can be expedited tremendously over the Web.
“I wouldn’t be too concerned about the costs of implementing it, he advises. “It’s a very strategic investment. We have some 2,000-plus suppliers. By implementing Web EDI we opened up the opportunity to electronically trade with a huge portion of our supply base that we otherwise wouldn’t be able to access.”
He adds that there are other significant benefits such as alleviating the need for human intervention with suppliers and the ability to process all supplier-related information electronically.
“Once everyone is connected, you can hook these suppliers up with the same back-end systems that you’re using internally. That speeds up the time and it’s a huge win. It also enables you to manage by exception.”
With short product life cycles, the speed of reaction and response has become more important than even a good long-term forecast. Forecasts tend to be driven from historical demand patterns. Colnett says that a better way to determine a customer’s future requirements is to leverage the supply chain strategy by creating closer customer ties.
She cites the example of a customer with a six-month supply chain that wished to significantly shorten its time to market.
“The first thing we did was diagnose their supply chain from end-to-end, searching for opportunities for earlier and better information. We applied our ability to influence the design so that we could build it better, faster and more cost-effectively.
“We explained to the customer that we could help them get to market faster if we and they used a certain set of tools. Once we were in production, we applied some advance planning tools to enable us to look at forecasts sooner and prepare earlier for the next version of the product. That’s also where we identified where we could provide innovation to the supply chain, determining how to collapse process steps and get the product into the channel more quickly. In some cases we ship directly to end customers worldwide. We also identified opportunities to leverage commodities across customers. (Celestica spends approximately $5 billion per year on materials.) The outcome was absolutely amazing.”
A key strategy that ensures Celestica’s dominance as a global provider is its practice of selectively acquiring facilities in business-critical geographies. In just over two years it has made 17 acquisitions, of which several were facilities formerly owned by customers such as Hewlett-Packard, ICL and IBM. “We are their virtual and real manufacturer,” Colnett notes. ” Some of them have enough faith in us to actually sell us their assets and their people.”
For example, in January, Celestica significantly expanded its business relationship with IBM through the purchase of that company’s Enterprise Systems Group and Microelectronics Division operations in Rochester, Minnesota, and Vimercate and Santa Palomba, Italy.
Valued at US$500 million, the agreements included the license of intellectual property and transfer of assets relating to the three operations, with approximately 1,800 IBM employees joining Celestica. The EMS giant will be handsomely rewarded for its investment. Strategic supply agreements with annualized revenues of approximately US$1.5 billion were entered into between the two organizations. The deal makes IBM Celestica’s largest account while significantly expanding the EMS firm’s operations and capabilities.
With more than 20,000 employees worldwide, the company operates 27 manufacturing and design facilities in the United States, Canada, Mexico, the United Kingdom, Ireland, Italy, Thailand, Hong Kong and China. To put it mildly, Celestica is growing in leaps and bounds — approximately 40 per cent year-over-year, in a market sector whose average growth rate is about 27 per cent. This is both a blessing and a challenge organizationally.
While e-commerce is exerting a tremendous impact on the IT infrastructure needed to support customer needs, integrating new acquisitions into the global organization quickly while providing seamless customer support through information exchange is a tall order.
“Our first priority is to leverage the skills the acquisition already has and determine where we can best provide support from the pool of IT talent that exists within Celestica,” Colnett explains. “The next thing that we do is examine the acquired company’s product data management tools. We think that they’re very important things to have in common.”
Within the industry, the bill of material is the currency that needs to be common for information exchange about products, consolidating purchasing and leveraging buying power.
“Using common part numbering schemes and bill of material systems is not negotiable,” Colnett stresses. “They can interface to many ERP systems. We use Matrix as our common bill of materials repository. Everyone in the corporation has to keep their master bills of material there. From there we can make strategic business decisions.”
Another major consideration is to determine what applications are “customer-touching”. In other words, what applications will the customer reasonably expect to be the same in its interactions with this new acquisition?
“Our goal is to be a global player,” explains Harv Sembhi, Director of Corporate Supply Chain Integration at Celestica. “That’s why companies like Dell, Lucent, HP and IBM are coming to us. To that effect, our design point is to provide our customers with a common look and feel across our organization. That’s why it’s important that all of our locations are using similar platforms.”
Sembhi uses the example of a customer that needs to transfer a product from Toronto to Mexico. If both locations of Celestica were using the same application, processing the transfer electronically would be absolutely straightforward.
“I think that’s what our customers are expecting us to have,” he stresses, “a very well-defined clear integrated application and ERP strategy with similar business systems and processes across the globe. That’s really what we’re bringing to the table. We’re very actively involved in migrating these sites where it makes sense. In some cases we’re integrating them through data warehousing systems.”
Sembi adds, “Internal to our company we need to minimize the investment we make in different IT platforms. We need to standardize and minimize the costs. Externally, we need to be able to link these standard applications through Business-to-Business processes that are customized to specific customers. It’s kind of like trying to operate a central kitchen with personalized dining.”
WHAT THE FUTURE HOLDS
Sembhi stresses that from an IT perspective, the design point for the future is to compress the information pipeline to days, if not hours, by using applications that have intelligence.
“Through Business-to-Business applications you can develop very tightly linked processes where customers, Celestica representatives and suppliers can come together and in one swoop do a full pass on an entire supply chain plan. By doing so you can eliminate the lumps out of the supply chain. On top of that, if you bring together your top eight to ten major suppliers based on product complexity or lead time and collectively plan everything before firing up your execution engines to place purchase orders, then you’ve taken an enormous amount of time and inventory out of the process. It’s mass customization — when you want it, you’ve got it.”
Sembhi remarks that although most outsourcing requirements come from OEMs who used to manufacture, increasingly companies that have never manufactured, such as Cisco Systems, are entering the networking and the Internet-based economy without the need or desire to manufacture.
“The whole question of virtual corporations and virtual integration is becoming more important. Companies will have to be able to make decisions very quickly based on what is available through their SCM pipelines.”
Celestica appears ideally positioned to accommodate the arrival of these new players. The company’s strategic management of its customers’ supply chains — supported by best-of-breed IT tools — will likely ensure that the SCM pipeline is ready for any eventuality.
Pat Atkinson is a freelance writer specializing in IT management. She is based in Oakville, Ontario.
Steps to Effective Global SCM
“As the supply chain window shrinks, information is cheaper to move than inventory. Managing with timely accurate information based on the best IT tools in the industry enables you to orchestrate smooth flow and improve risk management,” notes Bernie Uhlich, Manager of Global SCM Web Commerce for Celestica.
Here are a few basic recommendations.
Transactional Information — Get as much of your supply base and your customer base as possible doing electronic transactional exchanges. This allows you to manage by exception rather than being involved with every minute detail.
Information Sharing — Leverage technology to provide 24-hours self-service to suppliers and customers. (Celestica does this by buffering them through a portal or Web front-end.) This capability provides you with value-added information and reduces the need for human intervention. What’s more, it enhances your profile as a global company.
Advance Planning — Design a program that provides optimal supplier flexibility, reduces costs and guarantees quality.
Order Fulfilment — Develop collaborative order-fulfilment by using the Web to link into your customer’s supply chain.
Global-sourcing and Global-pricing Capabilities — Establish global-sourcing and global-pricing capabilities and apply e-business tools to them. In that way you capture global leverage and receive global supply-chain capabilities. Concurrently, identify suppliers that have strong local delivery capabilities that link to supplier-managed inventory.
High-volume Key Components — Keep high-volume key components readily available to accommodate unforeseen demand. Use IT tools to manage that information.