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Supply Chain Management: SCI CIO Melvin Talks Contract Manufacturing and Technology

By Sarah D. Scalet

July 15, 2001 — CIO —

It wasn’t exactly the most shining moment in the history of electronics manufacturing. Contractors such as Flextronics, SCI Systems and Solectron, which quietly churn out the innards of PCs, routers and cell phones for the likes of Cisco, Dell, Nokia and Nortel, were once considered recession-proof. But in March, financial analysts downgraded the contract manufacturers’ stocks, citing excess inventory and low demand from their original equipment manufacturer (OEM) customers.

Then came the bomb from the industry’s biggest OEM, Cisco: Not only would sales for the quarter ending April 30 be down 30 percent, but the company claimed that $2.2 billion of its inventories were worthless because of a decrease in demand. "This may be the fastest deceleration any company of our size has ever experienced," said Cisco CEO John Chambers in a statement.

Across the country in Huntsville, Ala., Vincent Melvin watched Chambers on TV. The next morning, he got out of bed and went to his job at SCI Systems, just as he does every morning. More pressure? Sure?but it makes things interesting. "The truth of the matter is, if you didn’t want that pressure, you wouldn’t be in the job you’re in," says Melvin, CIO of the Fortune 230 company that did $8.3 billion worth of sales in 2000.

Yet Chambers’ comments were clearly weighing on Melvin’s mind. Soon after, SCI laid off 1,300 employees, capping off a total of 5,100 layoffs between January and April.

SCI sits smack in the middle of the world’s most complex, volatile supply chain?a spot so risky that some of the most respected technology companies, such as Cisco, Dell, Hewlett-Packard, IBM, Motorola and Nokia, just to name a few, decided they’d be better off not making their products themselves. Instead, they farm them out to electronics manufacturing services (EMS) companies such as SCI. EMS companies purchase their customers’ old factories, where they will assemble as many different products for different customers as possible, to keep the lines rolling all the time and squeeze out the maximum efficiency.

Considering that the factories were pretty good before the OEMs threw up their hands, SCI’s is not a high-margin business. To make matters worse, SCI’s OEM customers are feeling constant downward price pressure on the perishable electronics they sell?pressure they don’t hesitate to pass on to SCI. And despite the fact that OEMs have cast off direct responsibility for manufacturing, they still want to be involved in the process, from forecasts to decisions to inventory. "I’d be hard-pressed to identify a business model that requires more collaboration than that between an OEM and EMS," says Todd Ackerman, a director for the management consultancy Pittiglio, Rabin, Todd & McGrath.

 

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