For technology company Calix, communication is key to getting the most out of its business process outsourcing relationships
[From Supply & Demand Chain Executive, August/September 2006] When broadband access equipment maker Calix was founded in 1999, the Petaluma, Calif.-based start-up elected to pursue an outsourced manufacturing model from the get-go rather than take on the huge costs of setting up its own production facilities. That decision was made easier by the growth of a whole contract manufacturing industry, with companies like Singapore-based Flextronics Corp. providing end-to-end production and, increasingly, supply chain services for its customers. Calix, in fact, has a longstanding relationship with Flextronics, among other outsourced service providers.
Roger Weingarth, senior vice president of product and manufacturing operations, Calix
To gain insights into how Calix has turned its business process outsourcing relationship with Flextronics into a highly integrated partnership, Supply & Demand Chain Executive recently spoke with Roger Weingarth, senior vice president of product and manufacturing operations at Calix. Formerly the president and CEO at Arista Networks and the president and chief operating officer at Optical Solutions, Weingarth handles all aspects of product introduction, supply chain management and product manufacturing for Calix. We began by asking how Calix' relationship with Flextronics has evolved over time.
Roger Weingarth: When we first engaged, we looked at Flextronics as being a full turnkey provider, which meant the traditional manufacturing functions like procurement, assembly and logistics. The relationship has evolved over time to where we now view Flextronics as more of a global full-service partner, which means that instead of just doing operations, they do end-to-end services, including the traditional manufacturing services but also engineering, design validation testing and all sorts of higher-level functions that weren't available when we first established the relationship.
S&DCE: What are the metrics that you use to judge the effectiveness of the relationship with Flextronics?
Weingarth: When we started and were just trying to get the product to market, the first metrics that we had were focused on delivery: setting up the supply chain and delivering the product to market at a target cost. That has evolved into a whole set of measurements including not only time-to-market, but also cost, operating cost of goods sold (OCOGS) expense, warranty expense — a whole bundle of new measurements that we have in place today with Flextronics.
S&DCE: How do you see the impact that the relationship with Flextronics has on Calix?
Weingarth: From an operations perspective, we can start with quality. Flextronics has plants and technology centers all over the world, and we have access to those facilities on a daily basis. When we're looking at a new design, the fact that we have access to that engineering talent pool within Flextronics is critical.
The other piece of it is time-to-market. When you have a known partner and you have processes in place [with that partner], even though you're continuously improving, you don't have to constantly recreate the processes. It becomes more of a repetitive exercise, and as it becomes more repetitive, you can launch products to market faster.
Then another way that we are evolving with Flextronics is that we are having them do the lower-level design work, which means that Flextronics is managing all the value engineering and some of the sustaining engineering efforts being done today on our current platform. That enables us, Calix, to focus on higher-level engineering and on getting new products to market.
And then, of course, let's not forget cost. Cost is huge. I'm not going to tell you the number of margin points we gain through our ability to leverage the buying power that Flextronics has, but it's been significant. Not only that, but they are able to help us get into the low-cost regions of the world relatively seamlessly with little to no cost to make that transition, thereby allowing us to be much more competitive in the marketplace.
Finally, there's lead time. Flextronics has enabled us to significantly improve our ability to react to customers' demands. We pride ourselves on the fact that we're able to deliver printed circuit cards in two to four weeks and mechanicals in four weeks, 90 percent of the time or better, and that's very important because being able to react to fluctuations in demand is crucial to our customers.
S&DCE: What is your process for reviewing and improving the relationship?
Weingarth: We have what we call WBRs, or weekly business reviews, and QBRs, which are quarterly business reviews. For the weekly business reviews, we meet with the different Flextronics entities that we use, whether that's design services, the logistics organization, the mechanical assembly organization in Guadalajara or the Shanghai facility where the printed circuit cards are being built. We review the details of our operations: How many cards were you supposed to build? What's the quality associated with those cards?
In the quarterly business reviews, we get all the functions together — engineering, development, logistics, all the functions within Flextronics, all the plant — and review a macro-level set of metrics, looking at where the supply chain is going, or where we think strategically the next facility or country is that Flextronics is going to open up. For example, if they decide to move into Vietnam, we look at the strategic sourcing issues there. We look at the tactical performance and how we performed over the last quarter, and we also look at strategies and where Calix is going over the next two to three years and how that lines up with where Flextronics is going.
Then, sometimes as part of the QBR and sometimes separately from the quarterly review, we have an annual all-day strategic planning session. This year Flextronics came with about 15 of their people from different areas throughout the world, and we had our engineering team as well our operations team. We talked about what Flextronics' capabilities are and what Calix's vision of the future is, and we talked about how we can leverage one another to improve both entities.
S&DCE: What technologies or systems do you use to enable the relationship with Flextronics?
Weingarth: First and foremost, the most important system we have is Agile, the product data management system. It enables us to put all our information into that system in terms of product number, suppliers, preferred alternatives, all that wonderful information and engineering data. Flextronics also has that system and there's a link between the two systems so that when we release a product that information is fed electronically into the Flextronics system.
Second, over time we have developed links between our systems and their systems. For example, from a shipment perspective, when they ship their product, they're actually doing transactions back in our systems or enabling us to do those transactions electronically. While this is still a work in progress and we have a few other pieces to link in, from an inventory movement perspective, that's another piece that we've been able to automate.
Third are the quality systems. We have a couple of packages, one being SigmaQuest, and Flextronics has multiple systems too, that enable all the quality data to be captured and then reported on a daily, weekly, biweekly and bimonthly basis. Those systems are very, very important to us. For example, it lets my engineers understand every day the yields in Shanghai by just looking at a screen. That is a very useful tool for us.
The other tool is just e-mail. If you go back as little as 10 years ago, this would have been a lot more challenging, especially when you think about working in China and the language barriers. With e-mail and the sophistication of the talent pool in China these days, you can communicate back and forth relatively easily on a daily basis and can get information constantly, even though we're offset by 10, 11 or 12 hours.
S&DCE: So communication and the ability to be able to understand what's going on within Flextronics are very important for Calix.
Weingarth: It actually goes both directions, because they need to see the orders, they need to see our forecast, and they need to understand what we're doing as a company as well. Because, at the end of the day, this all becomes a parts game: Can you get the parts in at the right timeframe? Certainly the contract manufactures can build the product — that's not the issue. The issue is making sure all the parts are there at the right time. So the other thing we do is to have a formal monthly forecasting meeting with Flextronics to release to them what we call the total demand report, which is a 12-month rolling forecast.
S&DCE: Do you have links between the forecasting systems on both sides, or is it just handled in the manual process?
Weingarth: Semi-manual, let's say. We send to Flextronics, through e-mail, a spreadsheet that has all the information on it, and then they load that into their manufacturing resource planning (MRP) system. Which, by the way, is another advantage; I don't have to pay for an MRP system.
S&DCE: Finally, what do you view as the keys to a successful relationship with a business process outsourcing partner?
Weingarth: First and foremost, mutual respect and a partnership are very important, understanding that this is not a "we're the customer, you're the supplier" relationship, but a partnership. We see ways to gain from this partnership, and obviously Flextronics sees ways to gain. That is important right out of the chute. Being honest, open and trusting each other are also very important. Of course, that builds overtime, but certainly that was part of the core fundamentals of the relationship.
It's also important to establish relationships at all levels, starting with our CEO, through myself, and all the way down into the organization at multiple levels within Flextronics. I also can't stress enough in a global market and a global supply chain how crucial is communication. Just because you don't hear anything doesn't mean that everything's going well. I've been in this business for 30 years, and sometimes no news is not necessarily good news. That's one reason we do site audits. I make sure that I personally go at least twice a year to Asia, as well as down to Guadalajara, to actually have face-to-face meetings with people there. And that's just not me; my whole team is constantly engaged in face-to-face communications with Flextronics.
When you establish those kinds of relationships and those kinds of communication patterns, people are honest, they understand that you won't overreact, that you'll you listen and say, "Okay, how do we fix this, how do we improve that." And that's the cornerstone to everything, that kind of relentless commitment to continuous process improvement. Because everybody starts somewhere, and the key is to ask how we get better, how we improve our yield a little bit, how we get a little more cost reduction, how we get more efficient, how we reduce time. Constantly looking for the next level is very, very important.
The one piece of advice I would give everybody when it comes to this type of relationship is that just because it's being outsourced doesn't absolve you of the responsibility. I think a lot of people make that mistake, thinking, "Well, it's outsourced, they can handle it." No. You've got to be in tune, you've got to have the measurements, you've got to understand who owns what, and you've got to have control points and staff restraint and escalation patterns. It really all comes down to good project management, good communication, setting the tone and the strategy upfront, and then constantly measuring it.
SIDEBAR: When Outsourcing Doesn't Compute
By Geary Barnes
In the cost-cutting, margin-tightening world of petrochemicals, outsourcing is an all-too-common approach to business. Maybe. When faced with this decision in its freight payment system, however, Chevron Phillips Chemical Co. LP (Chevron Phillips Chemical) found that the cost savings predicted just didn't compute.
Chevron Phillips Chemical manages its freight payables via a corporate integrated SAP platform that automates the accrual and payment of its outbound freight invoices.
Offering services that could provide greater reporting capabilities and potentially save the company thousands of dollars in processing costs, multiple third-party freight payment companies contacted Chevron Phillips Chemical. Each touted the cost savings of outsourcing the freight payment system through detailed cost-benefit analyses.
"If any of the freight payment service companies could show a meaningful outsourcing value proposition for Chevron Phillips Chemical, I would have happily given them our business," said Richard Roberts, Support Services manager for Chevron Phillips Chemical.
Check, double-check, and triple-check
An accurate and efficient SAP freight rating process allows a staff of six FTEs to rate and pay the incoming invoices. An internal post-payment review identifies errant payments so that overpayment claims and system adjustments can be made. The company also depends on the third-party freight bill auditing company Audit Techs to perform quarterly post-audits to fine-tune the identification and elimination of payment system exceptions and errors. This serves as the final check for errors.
Richard Roberts, Support Services manager, Chevron Phillips Chemical
This system of triple checking has enabled Roberts' department to lower the overpayment amounts found by Audit Techs to 0.03 percent of its total freight spend.
But what about overhead costs?
The analysis of the multiple third-party bill payment service company's proposals proved that the economy of scale was on the side of outsourcing the bill payment process. Chevron Phillips Chemical's cost for processing a bill under the outsourcing proposals would be reduced by approximately 40 percent. This savings had the potential to significantly reduce Chevron Phillips Chemical's total departmental costs.Chevron Phillips Chemical's analysis of the various capabilities of the outsourcing companies indicated that the third-parties' strongest skill set was bill processing. The weakest component was the post-payment auditing process. As a result, the cost benefits of reducing headcount and lowering the per bill processing figure could not off-set the current departmental performance that drives a confirmed 0.03 percent overpayment rate.
The industry norm for freight bill overpayment ranges from 2 to 5 percent. With this calculation, Chevron Phillips Chemical concluded that outsourcing its bill payment process for the invoice processing "savings" may put as much as 12 times more in favorable payment accuracy benefits at risk. Even a small increase in error ratio would quickly negate any savings from the outsourcing.
"The outsourcing companies might have provided us with lower processing costs and enhanced reporting tools," said Roberts, "but when we shared with them our payment accuracy rate and asked them to match it they couldn't do it."
About the Author: Geary Barnes is a Senior Partner with AUDIT TECHS, a 28 year old freight payment analysis firm, which audits varied clients' $1.5 B in annual freight spend.