Solectron: From Contract Manufacturer to Global Supply Chain Integrator

1. Solectron: From Contract Manufacturer
to Global Supply Chain Integrator
Prepared by: Shaheen
Sardar
SCM Lab. Department of
Industrial and
Management Engineering,
Hanyang University, South
Korea
Case Study

2. The Electronics Manufacturing Services Industry
• Electronics manufacturing services (EMS):
Also called contract manufacturing.
Large number of small job shops that manufactured
assemblies for OEMs.
• Original equipment manufacturers (OEMs):
OEMs are the Clients that used EMS to:
Increase their own production capabilities.
Get rid of production that did not contribute to competitive
advantage (e.g. cables or simple circuit boards).
• Growth of OEMs and EMS industry:
 From 1970s to early 1980s, consumer electronics
required low production levels.
 In 1980s and 1990s, the industry continued its rapid
growth.
The contract manufacturer Solectron grew rapidly.
Became a leading company by the mid 1990s.

3. Overview: Solectron Corporation (Solar + Electronics)
• Was: Global electronics manufacturing company
• Founded: 1977
• Initial purpose: Solar energy equipment
• Headquarters: Milpitas, California, US
• Focus: Quality and company culture
• Key customers: Ericsson, Cisco, Compaq, HP and IBM
• Locations: 50+ in more than 20 countries
• Employees: 80,000
• Economic downturn: 2001
• 2001: Laid off 20,000 employees, closed some facilities
• Purchased by Flextronics: 2007

4. Solectron’s Sales in Various Sectors

5. “Be the best and
continuously improve”
“Our mission is to provide worldwide responsiveness to
our customers by offering the highest quality, lowest total
cost, customized, integrated, design, supply-chain and
manufacturing solutions through long-term partnerships
based on integrity and ethical business practices.”
• Customer First
• Respect for Individual
• Quality
• Supplier Partnerships
• Shareholder Value
• Social Responsibility

6. The Five S’s
• Seiri
Organization
• Seiton
Orderliness
• Seiso
Cleanliness
• Seiketsu
Standardized
Cleanup
• Shitsuke
Discipline

7. Early Cultural Development
• Started in 1978, when Dr. Winston Chen joined the
company as president.
• He believed: We can achieve lowest cost only by achieving
highest quality standards.
• He used following two basic principles:
 Superior customer service.
 Respect for the individual.
“We don’t tell people, ‘You’re good,’ or ‘You’re bad.’. We say,
‘Here’s what customers say.’ That’s a very powerful tool.”
Dr. Winnston Chen

8. Malcolm Baldrige National Quality
Awards
Most people think we're a manufacturing company. We're
good at manufacturing, but we're really a service company.
Dr. Koichi Nishimura, Solectron CEO
Dr. Koichi Nishimura’s approach was:
Never be satisfied.
Continuously question existing practices.
Struggle for continuous improvement.
• For his advance manufacturing practices,
Solectron was twice awarded Malcolm
Baldrige Award for manufacturing
Quality.

9. Day-to-Day Practice
Tuesday
• Quality progress overview.
• Internal customer satisfaction review.
• Review of management training provided by a combination of
company executives and external guest speakers.
Wednesday
• Highly focused on quality.
• Process improvement.
• Knowledge sharing.
• Prevention rather than correction.
Thursday
• Customer satisfaction.
• Program management.
• Customers grade its performance every week.
• 7:30 A.M. meetings on Tuesday, Wednesday, and Thursday.
• 30-50 management people.

10. Culture and Acquisition Integration
Growth strategy: Acquired manufacturing operations
from customers through 1990s.
• Assigned an integration team to work with acquired
operations.
• Team (4-8 members) represent finance, Human
resources, operations, materials, and information
technology.
• Team worked with acquired company for 3-6 months
after:
The acquisition was finalized.
Training the new employees.
Acting as a Solectron resource.

12. Evolution from Contract Manufacturer
to Global Supply Chain Integrator
• It increased size and scope of business.
• It started outsourcing in 2001.
• Eventually, Solectron was in stronger position
(than its customers) to negotiate with parts
suppliers.
• Solectron began to:
Take on additional purchasing.
Parts inventory.
Kitting responsibility.

13. Outsourcing decision
Major strategic decision
Upsetting and difficult to reverse
Affected thousands of workers

14. 3 Types of Analysis before Outsourcing
• Strategic importance
• Synchronization of manufacturing strategy with
business strategy
Strategic analysis:
• Performance targets and needs of manufacturing
and supply chain (e.g. unit cost and lead time)
Operational analysis:
• Difficulty in transformation of supply chain
Organizational analysis:

15. Solectron’s Central Theme about
Outsourcing
Research and
development
Marketing
Allocate their own
resources on core
competencies

16. 3 Benefits of Outsourcing
Time-to-
market
• Decreased by
outsourcing
Economics
• Greater cost savings
• Risk reduction due to:
• (1) product changes
• (2) short product life
cycles
• (3) other sources of
inefficiencies
Technology
• Access to latest
manufacturing
technologies
• Reduced
complexity of
manufacturing
process
• Saving excessive
cost

17. Technological Developments
• 1970s-1980s: Printed circuit board (PCB)
assemblies (Pin-through-hole (PTH)).
• PTH was an inexpensive method for low-volume
assembly.
• In 1983, Solectron began building a new type of
PCB assembly (i.e. Surface mount technology
(SMT)).
• SMT offered high volume assembly.
• Capital cost of SMT was much higher than PTH.
• Solectron could balance cost of SMT equipment
across the volume of many customers.

18. New Business Model
• In 1992, Solectron introduced a new business model
when it purchased manufacturing sites from IBM.
• Model was repeated many times, and Solectron rapidly
grew.
• Solectron acquired manufacturing facilities from
customers, and used them to fulfill long-term supply
contracts.
• This allowed for risk pooling due to:
 Fluctuating demands from different companies were
smoothed.
 Safety stock levels of common component inventory could
be reduced.

19. New Business Model
• This model supported OEMs to:
Concentrate on their core competencies (i.e. product
definition, engineering, and marketing).
Use Solectron to perform procurement and
production.
• Procurement and production were the core
competencies of Solectron.

20. New Business Model
• Consolidation within the EMS industry in late 1990s.
• Solectron acquired two top-ten EMS companies.
• Solectron moved production of high volume products to
Asia in order to:
 Decrease production costs.
 Move production to future high growth markets.
• Through acquisitions, Solectron developed a global
network of facilities located close to:
 Its customers.
 To emerging markets.
Consolidation and Relocation:

21. New Business Model
• Solectron established a Web-enabled extranet
that allowed information sharing.
• Equal access to all parties for planning and
decision analysis.
• This helped to minimize “bullwhip” effect that
occurred when:
Making decisions in an uncertain environment when:
Demand signals were not aligned.
Information systems:

22. New Business Model
Information systems:
Customer
Suppliers
“Core” Enterprise Resource
Planning (ERP) Applications:
-Materials
-Manufacturing
-Finance
-Service
Applications
-Multisite Integration Model
Product Data
Management
(PDM)
Connectivity
Shop Floor
Control Financial
Consolidation
Other Financial
Applications
Customer Relationship
Management (CRM)
Fast “What if”
Sites
Warehouse
Management System
World Wide Materials
Database
Supplier/Customer Information
through the Web
Web Publishing
Report Writer
Global Enterprise and Resource System (GEARS)

23. Solectron Corporation Business Units
• Provided building blocks used to quickly get
products to market.
• 11% revenues of company’s total sales in 2000.
Technology
Solutions
• New product introduction services.
• Design for manufacturing, concurrent
engineering, and prototyping.
• 88% revenues of company’s total sales in 2000.
Global
Manufacturing
• Offered repair, upgrades, and maintenance.
• Warehousing, logistics, returns management, engineering
change management, and end-of-life management.
• Less than 2% revenues of company’s total sales in 2000.
Global
Services

24. Global Materials Services Group
→Supports three business units
→Offers following services
Managing
suppliers
Handling
procurement
Optimizing
inventories
Forecasting
Logistics
support

25. Situation in the Fall of 2001
• In the fall of 2000, customer demand started to become
greater than supply.
• Solectron observed forecasting inefficiencies.
• Solectron tried to avoid excessive orders from OEMs.
• Strong culture to “continuously improve” and belief in
“customer first” made it difficult to resist the pressure to
increase production.
• In early 2001, demand started to decrease.
• New orders decreased from $6.5 billion in the December,
2000 to $2.1 billion in June, 2001.
• Revenue declined from $5.7 billion in the December, 2000
to $3.6 billion in August, 2001.

26. Situation in the Fall of 2001
• Solectron was unable to stop orders it had placed
with its 4000 suppliers.
• This increased the inventories.
• Solectron was able to decrease its inventories
by:
Returning excess material to OEM customers.
Returning to its previous JIT practices.
• Solectron announced restructuring by:
Workforce reductions.
Facility closures.

27. Situation in the Fall of 2001
• Solectron formed a high level cross-
functional team to:
Validate the value scheme at each Solectron site.
Develop restructuring goals and plans.
Monitor progress.
• The team evaluated:
New cost structures.
More efficient organizational designs.
Improved customer relationship management.

28. Situation in the Fall of 2001
• By October 2001, the workforce reduced from
its peak of 80,000 to less than 60,000.
• Number of SMT lines cut from 1100 to less
than 700.
• Floor space had been reduced from 14 million
to less than 11 million square feet.

29. Situation in the Fall of 2001
• Solectron remained optimistic for the long-
term.
• Use of outsourcing as an OEM strategy
continued to accelerate.
• It expected dramatic growth in Asia.

30. Situation in the Fall of 2001
• It struggled with the question of
“How to weather the current storm
and
ensure that
it was properly positioned
for
the future.”

31. June 2007
• On June 5, 2007, Flextronics International Ltd., the
Singapore based contract electronic assembly firm in
the U.S. announced its intention to buy Solectron.
• On October 15, 2007, the evening before of the
Solectron's 30th anniversary, Solectron was acquired
by Flextronics.

32. Market Mix of Flextronics
International Ltd.

33. Study Questions
1. How has Solectron’s value to its customers evolved over
time?
2. How has global expansion contributed to Solectron’s
ability to move from a contract manufacturing supplier to
a supply chain integrator?
3. How has the company been able to successfully integrate
its acquisitions?
4. What was the impact of the company's culture on the
success of the company, on the business downturn of
2001, and its ability to respond to the business downturn?
5. What additional products and services should Solectron
provide to its customers in future?
6. What should the company do in the short term? In the
long term?

34. Question 1: How has Solectron’s value
to its customers evolved over time?
Answer:
Dr. Chen’s Practices
 Highest Quality Standards at Lowest Cost
 Superior Customer Service
New Business Units
 Global Services offered product repair, upgrades, and
maintenance
 Technology Solutions helped minimize time-to-market
Long term Contracts
 Reduced prices for volume purchases

35. Question 2: How has global expansion contributed to
Solectron’s ability to move from a contract
manufacturing supplier to a supply chain integrator?
Answer:
Information Integration: Reduced bullwhip, early
problem detection, fast responses.
Workflow Coordination: Improved services, earlier
time to market, efficient and accurate gains.
New Business Models: Higher efficiency, new
markets, new products.

36. Question 3: How has the company been able to
successfully integrate its acquisitions?
Answer:
• Company culture supported integration.
• They assigned an integration team to work with acquired
operations. This integration team was composed of 4 to 8 people
representing the major functional areas: Finance, Human
Resources, Operations, Materials, and Information Technology.
• The integration team became involved even before the
acquisition was closed.
• A detailed plan was created after the acquisition was closed.

37. Question 4: What was the impact of the company's culture on
the success of the company, on the business downturn of 2001,
and its ability to respond to the business downturn?
Answer:
1. Continuous improvement: Could have slowed
the response to business downturn.
2. Quality: Advantage in the marketplace.
3. Customer satisfaction

38. Question 5: What additional products and services
should Solectron provide to its customers in future?
Answers:
• Solectron has remained optimistic despite economic hardships.
• The firm claims demand for OEM customers would soon increase
and also the EMS industry would expand substantially in future.
• Continue their history of success in Quality and Customer Service by
looking for new markets to enter.
• Thinking globally-Approximately 50 sites worldwide.
• Bought by Flextronics-(2007) to better serve customers increasingly
complex requirements more efficiently and more competitively.

39. Question 6: What should the company do in the
short term? In the long term?
Answers:
Short term:
 Continue cutting costs and inventory levels.
 Keep struggling for continuous improvement.
 Continue to be in a position to negotiate with suppliers.
Long term:
 Keep adapting to economy and the customers demand.
 Continue to make acquisitions to help fill long term
contracts.
 Continue to be a global force that focuses on quality.

40. References
• Barnes, E., Dai, J., Deng, S., Down, D., Goh, M., Lau, H. C., &
Sharafali, M. (2000). Electronics manufacturing service industry.
The Logistics Institute–Asia Pacific, Georgia Tech and The National
University of Singapore, Singapore.
• Simchi-Levi, D., Kaminsky, P., and Simchi-Levi, E., & (2008).
Designing and managing the supply chain: Concepts, strategies, and
cases (3rd edition). United-States: McGraw-Hill.
• http://en.wikipedia.org/wiki/Solectron
• http://www.flextronics.com/