NVR Examines Best Practices in the EMS Industry

In highly competitive industries such as EMS, people often want to know what business practices ensure ongoing success. Given that we have tracked this market for more than 15 years through industry surveys and field research, we set out to measure the most successful companies and determine if there were any themes that stood out to differentiate those highly successful EMS companies when compared to average ones.

Depending on how one defines success, it turns out that there are certain business practices that work time and again. We define success as a company that grows sequentially, maintains a healthy profit margin (this would be 15 percent top line growth with EBITDA margins of 10+ percent) and maintains unusual customer loyalty.

We are happy to present several successful companies in the EMS industry that have achieved high levels of growth, profitability and customer satisfaction. The EMS companies profiled have demonstrated superior performance on an ongoing basis and reside in the small-to-mid-tier market sectors. They include Creation Technologies, EPIC Technologies, EN ElectronicNetwork, Morey Corp., NexLogic and Zollner. These EMS companies stand out as leaders in our Best Practices Survey and have articulated important concepts that have been critical to their success over the years.

Creation Technologies

Based in Vancouver, BC, Canada, Creation Technologies has one of the best performance records of any contract manufacturer around in the sense that the company has been continuously profitable since 1991. It’s 2008 revenues reached $385 million through its 10 operations in North American and one in Changzhou, China. While other companies have struggled with multiple downturns, Creation has continued to expand its top and bottom line revenues each year through organic growth and by acquisition. Creation has successfully acquired and merged 7 EMS providers since 2003 giving it a broad manufacturing footprint to support and grow its customer base. When asked how the company has been so successful, President and CEO Arthur Tymos points to four keys:

“The first key to success is our customer-focused people and solutions and the long-term, loyal relationships this results in. The second key is our people and our culture. Our culture is amazing and is a true differentiator. Approximately 540 of our 2,300 employees are owners in the company. The third key to success is our focus on ‘Lean Thinking In Action’ through every facet of the company. And fourth, our financial stability. We believe we are an industry leader in each of these areas.”

And, Creation’s customers would agree. The company surveys their 190 customers on a regular basis and is rated extremely high in each of the four key areas. Tymos says that customers notice their unique culture, its lean processes (it has 14 black belts and 15 greenbelts in quality), its 18 years of continuous profitability, and the regional locations of its business units which allows for “lots of close personal touch with our customers” says Tymos.

The only downside that Tymos sees is the company’s lack of visibility. “We are not as well recognized in the market as we would like to be. We need to get better at creating awareness. Our growth has been fast, but we are a private company and we don’t share a lot of information, so our great success story hasn’t gotten around yet. We do have a strong brand for those that know about us.” Creation‘s service offerings best align with business products versus high volume consumer products. Most assemblies are medium volume, complex products, PCBA to systems to fulfillment and after market services.

Competitively, Creation believes its service offerings to be top notch and highly competitive. “The competitors that have caused us the most grief are those that come down-market and confuse the customer with their offering. It often takes a while for a customer to discover that it is a bad fit. We always encourage OEMs to look at true strategic alignment rather than just price alone. Under-priced suppliers will, eventually, go out of business.” Given Creation’s market focus and successful value-proposition, it seems likely that the company will continue to experience strong growth and expansion in the future.

EPIC Technologies

Headquartered in Norwalk, Ohio, EPIC Technologies (EPIC) has experienced similar strong growth as Creation with revenues of nearly $300 million in 2008, with three operations in the U.S. and two in Mexico. EPIC is particularly recognized for its lean manufacturing operations (the subject of an article by the authors in Circuit’s Assembly in 2004) and its exceptional customer satisfaction. The company acquired the assets of Siemens Energy and Automation and Philips Consumer Electronics operations in 2006 and is a portfolio company of the private equity firm CIVC Partners L.P.

Vice President of Supply Chain Management Todd Baggett states that EPIC’s extremely high customer satisfaction ratings are the result of its exceptional flexibility and responsiveness. “We typically turn customer orders within a 3-5 day lead time, and have several customers where we demonstrate 99+% on time delivery with 24 to 48 hour contractual order fulfillment lead times.. We have implemented a unique manufacturing strategy to facilitate this level of agility”. Additionally, Baggett believes that EPIC’s program management is second to none in the EMS industry, noting that “Our PM’s have P/L responsibility from a cost management standpoint. They are responsible for on-time delivery, quality and scheduling as well as the health and growth of the customer relationship, performance metrics and customer satisfaction and are empowered to adapt their teams as necessary to meet and exceed customer expectations.”

EPIC thinks that management of the supply chain is its biggest challenge to success in EMS, since the cost of purchased components accounts for nearly 80% of the cost of doing business in EMS. Given the companies short order turnaround time expectations, materials management requires and even higher level of focus at EPIC. The company uses a Kan Ban component purchasing methodology, with protected buffer quantities tp support flexibility. This breaks sharply from the traditional MRP approach to materials management in EMS. Baggett states, “In many ways, you don’t need buyers or planners in the traditional sense, as we have automated tools to respond to Kan Ban replenishment signals. Our buyers are therefore able to focus more on strategic supply chain initiatives, such as customer specific bonding or buffering strategies.”

EPIC believes that its extreme flexibility is a true differentiator in the industry, and recent customer service awards support that contention. The company uses a customer focus team (CFT) approach which literally becomes an extension of the customer organization. EPIC’s motto is, ‘any product, anywhere and anytime’ with real time order flexibility and is made possible as a result of its non-dedicated line operations. Baggett states, “Most EMS companies are driven by an MRR model, whereby a customer forecast is loaded, component parts pipelined and transformed to finished goods as quickly as possible for shipment to the customer, regardless of current customer needs. EPIC works with a “delayed transformation” model, whereby parts are pipelined, preferably on vendor consignment models, but EPIC delays product transformation until they see consumption on the part of the customer from the established finished goods bins. This ensures that EPIC builds only what customers need and do not waste manufacturing resources on products that customers do not need. Resources are therefore available to support immediate customer requirements on very short lead time.

EN ElectronicNetwork

EN ElectronicNetwork AG (EN), is another mid-tier EMS company based in Germany with sites all over Europe. It has experienced strong growth over the last five years, with the exception of 2008 when its revenues were flat ($274 million). The company’s focus on the industrial market segment drives revenue and profits which accounts in part for its good profit and strong revenue growth. EN’s Leading customers include ABB, Bosch, Moeller and Siemens. Other market segments served are medical electronics, renewable energy and railway transportation.

EN was established as a result of a spin-off from Philips and is privately held which makes it very flexible concerning investments and their focus on their customer’s needs. Customer satisfaction is taken very seriously and checked quarterly by surveys. “We want to keep our customers happy, because that’s the only way to participate in each others success. Just recently a long-term worldwide customer returned to EN from one of the big players in Asia. The customer got disappointed by the poor quality, lack of interest and long-term decisions. Turn these three reasons around and you will know why they want to be with EN. We’re proud of that” states Ernst Gockel, Chief Sales Officer. Due to the high focus on quality, EN invests a lot in certifications. A recent one was IRIS [International Railway Industry Standard] which is a requirement to manufacture for the railway industry.

EN differentiates itself by excelling in providing the so-called “Germany Preciseness” in its operations throughout the whole product life cycle. Leading products include, drive technologies such as measurement and control, frequency converters, motors, power supplies, production technology, robotics, automation technology (ticket, beverage, deposit, cash, cigarette and gaming machines), and military systems. EN offers support in the design process by offering ODM services in their areas of expertise, manages the supply chain, produces prototypes as well as launching low-to-high volume products, and offers repair services and distribution as required.

Ernst Gockel points to the company’s rapid response time as a competitive strength. EN offers ODM services but if there are many projects at once, it partners with an outside R&D company with deep experience in the Medical, Defense and Aerospace markets. Yet EN faces challenges in providing services in metals and plastics which some of its competitors can offer. Increasing market awareness of the company is another problem which Gockel notes stating, “It’s a gap we need to close and will.”

Morey Corp.

The Morey Corporation is one of the EMS industry’s best kept secrets. This family owned operation started in the 1930s and evolved through three generations yet stands out as being one of the most successful privately-held companies in the industry. Morey Corp. achieved revenues of $120 million in 2008 which represented growth of approximately 50 percent from the previous year.

In recent years, Morey Corp. has positioned itself as an ODM in the area of high-level controls, displays and telematics. Some of its leading customers include Caterpillar, International and Case and therefore it has gained considerable expertise in the industrial segment involving heavy equipment and process control applications. President and CEO Scott Morey states, “Caterpillar is the number one OEM supplier of ruggedized equipment in the world and we are one of their primary ruggedized electronic subcontractors.”

The company recently open up a 27,500 square foot R&D center (the Richard and Gene Morey Innovation Center) to support its 100,000 square foot manufacturing facility. This ODM capability gives the company advantages in providing the latest generation of technologies, improved technical problem solving, improved speed-to-market, and greater flexibility in configuration and quality. Morey has also applied these skills to the aerospace/military and energy markets by focusing on low-to-medium volume/high mix products.

Morey’s President/CEO Scott Morey is supported by his brothers Dana and Jay, and sets the standard and vision for the company. He has joked that some of the long-time employees jab that, “he couldn’t hold a candle to his grandfather, yet the loyalty within the company is palpable. The moral and ethical values that he advocates engender an integrity to which customers instinctively respond. “We all work best with companies and people with whom we share values. Who are you friends with? It’s the same with our customers.”

Morey’s success is derived not from any one thing; rather it is a combination of business values and practices that make it unique among its employees and customers. These include the philosophies of lean manufacturing, Deming, Goldratt and “The Bible”. The company pursues a conservative growth strategy, often eschewing acquisitions and opportunistic customer engagements. As a result, Morey focuses on the markets and products that it can excel in, and then excels in applying its value-proposition.

NexLogic

NexLogic is a Silicon Valley-based operation that has demonstrated exceptional financial performance by achieving some of the strongest profit margins in the industry according to our statistics. While the company is small ($16 million in sales in 2008), it is extremely well-positioned in the industrial, medical and military market segments, which seem to be the only ones where good profitability can be achieved.

When asked how it came to be so successful, President and CEO Zulki Khan replies, “We have developed an ideal customer profile to help us understand the kind of customer we want to serve. Once we decide on a customer, we go the extra mile to do what we need to get the product finished. We are extremely flexible in terms of delivery and in rapid turnaround time. We like to spoil them and are constantly achieving miracles. After a while, if you do that enough times they will come to rely on you and price becomes second to service. Eventually, they become champions for you inside the company.”

NexLogic doesn’t lose many contracts once its sets its sites on a particular customer. Yet, it is quite particular about the kinds of projects it will take one, focusing on those that it believes it can excel with. Khan says, “We offer a one-stop-shop like the big guys, providing layout, testing, assembly but try to reduce the suppliers to one contact. We try and keep our finger on the pulse of the technology needs, processes, and packages requirements and will invest in equipment if necessary as well as certifications. Additionally, we are very proactive and try to solve problems in advance before it’s too late. We upgrade our capacity and capability by buying things that will help us to better serve the customer.”

NexLogic has kept some customers up to ten years and nearly 80% of its business is from repeat business. The company employs nearly 25% of a total staff count in engineers. NexLogic invests considerably in certifications (RoHs, medical and military, etc.) and other specialties to keep on the leading-edge of its field. The company realizes that it needs to maintain high levels of technical, quality and performance capabilities to be successful. These and other things keep NexLogic on the forefront in being one of the best small-size performing companies in EMS.

Zollner

Zollner is the second largest EMS company in Europe (behind Elcoteq), and the largest in Germany with 12 locations in Europe, one in China and one in North Africa. The company exceeded $1 billion in revenue in 2008, more than doubling its revenue since 1993. The company does this by developing a very strong customer base around medium- to high-volume, low-mix assemblies as well as complex and low-volume production involving advanced technology. Zollner has a diverse product base of electronic assemblies across all major industry segments.

Similar to other companies profiled in this report, Zollner is privately held which allows it to plan for the long-term as opposed to short-term which most public companies must do by quarter. This long term advantage provides a spirit that others can’t afford by allowing it to invest in a range of portfolio products. Zollner is a full-service, vertical provider including offerings in sheet metal, plastics and full-turnkey services.

Markus Aschenbrenner, VP of Business Development, believes that these features allow it to act as a medium in size business that can give customers a lot of personal attention, unlike the first tier suppliers. He reiterates, “Our program management is very good at hearing what the customer really needs. The customer is only one step away from being able to call executive management if a problem doesn’t get satisfactorily solved. Every three years we do an extensive customer satisfaction survey, where the PM and a member of executive management go to the customer’s site to address our performance and their needs.”

Zollner is a technology driven company. “In Europe we are always the first ones to adopt new technology. For example, we were the first ones in Europe to purchase the new series of Agilent X-ray equipment” states Aschenbrenner. Moreover, flexibility is very key to customers. “They rely on us today for everything and want manufacturing to be the same as it used to be in-house. As a result, we have standard systems, equipment, processes and software across all our sites as we did not acquire other companies and so no need to integrate different set ups into our organization. We’re not like the big guys that buy their customer’s manufacturing operations and inherit inefficient operations.”

Like many growing EMS firms, Zollner believes that it needs to do better in supply chain management. While the company has a fully established procurement capability in China for the benefit of better pricing on components, although there is more room for improvement. With more than 500 customers, Zollner has seen it all – big/small, Asian/domestic – but perceives that things are picking up again in 2010. Executive management pays close attention to these trends and the specific needs of its customers.

For more information please contact:

Randall Sherman
New Venture Research Corp.
337 Clay St., Suite 101
Nevada City, CA 95959
USA
530-265-2004
rsherman@newventureresearch.com