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Flextronics International

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Executive Summary
Born out of the vision of two creative, technological supply chain trailblazers, Flextronics- the world’s second-largest provider of electronics manufacturing services and the largest global manufacturer of cell phones- took form. Tapping into a burgeoning market of overflow manufacturing services, this unique electronic visionary busted onto the technological scene, through its humble origins. With service offerings ranging from “stuffing” printed circuit boards, for electronic firms, within California’s Silicon Valley, to an ever-expanding full-service handling of all aspects of the production process- component manufacturing, assembly, testing, packaging, distribution, and later, product design and development- this one-stop, outsource depot carved its niche, and claimed its status, as a well-established, electronic manufacturing service giant. Guaranteeing efficient reliability, through its unbeatable, deal-securing offering of short lead times and final lower unit costs, this industry-leading conglomerate (a) maintained a constant “finger-on-the-pulse” connection to their original equipment manufacturers, (b) developed a flexible and uniquely responsive manufacturing system that in turn created a permanent, presence-building existence, which (c) secured itself on the industry map (Huckman & Pisano, 2010).

Due to the strong growth within this arena, as well as the increased propensity for enterprise outsourcing, Flextronics acted upon the following reality: “In order to effectively utilize supplier capabilities and technologies within product innovation efforts, a firm must take into account its position, with respect to the supply network, complementarily of technologies, within the supply network, and the method with which the focal firm controls the suppliers in the network (Narasimhan & Narayanan, 2013).” Thus, during the growth of the 1990s expanding EMS Industry, Flextronics invested heavily in acquiring control of critical manufacturing and distribution centers, to increase their scale of existing manufacturing capabilities, as well as enlarge their scope of the capabilities that could be offered to customers in key areas of manufacturing and product design. Through their substantial technological acquisitions, this multinational powerhouse’s strong and targeted supply chain strategy- a comprehensive control over manufacturing- ensured consistency in product quality, continuing their industry domination until threats of changing demands and increasing competitors.

Moreover, even though Flextronics ran a fairly inexpensive, affordable operation, an overall sluggish economy, downturn in global demand, increased demand to lower selling prices thus production costs, coupled with increased competition from newcomers/imitators threatened this industry leader’s almost monopolistic market position. Consequently, in an effort to combat the aforementioned combined threats to its competitive advantage, Flextronics executives were charged with the task of brainstorming, identifying, designing, developing, testing, evaluating, marketing, and selling new innovative solutions, products and services (Huckman & Pisano, 2010). The purpose of this paper is to explore Flextronics” role in maintaining market relevance and dominance, as they sustain “shared value,” to continue to achieve an effective “triple bottom line,” comprehensive sustainability model, within its long-term supply chain management networks and plans.

Furthermore, a (1) review of Flextronics’ historic and evolving company business model, an (2) analysis of the advantages and disadvantages of their substantial horizontal (competitors) and vertical (suppliers) integration initiatives, and the (3) identification of potential conflicts relative to the risk of sustainability in the form of cannibalization, as related to the selection of one of the three Original Design and Manufacturing (ODM) Model options, pertaining to the distribution of the Phone 4, will be discussed. Finally, (4) final recommendations, addressing Flextronics’ future economic well-being will be proposed.

Background

Flextronics International, a Singapore-based global corporation, was launched by Joe Mackenzie in 1969. It’s the world’s leading electronic manufacturing services providers building complete products that range from complex printed circuit board assemblies for computer workstations to personal digital assistants (Robert & Gary, 2010). The company is a leader in design, manufacturing, distribution and aftermarket services (e.g., “About Us,” n.d., para. 1). Flextronics operates 29 countries all over five continents (Robert & Gary, 2010). Throughout the 1980s, Flextronics has grown to roughly $202 million in annual revenues. The company moved from a “board stuffer” to a contract manufacturer. Initially providing turnkey solutions, Flextronics encased customer-furnished designs into a suite of manufacturing offerings. By the end of 1980s, Flextronics progressed to “full box” assembly that assumed responsibility for the manufacturing and assembling of printed circuit boards (PCBs) finished electronic systems (Robert & Gary, 2010).

By 1990s, the growth of the market and the maturity of the industry drove the OEMs to increase its propensity to outsource to electronics manufacturing services industries (EMS), and focus in other areas. As a result, the three following business segments- Contract Manufacturing, Contract Design, and Manufacturing and Original Design Manufacturing- emerged within the EMS industry. As profit margins declined within the contract manufacturing (CM) arena, Flextronics’ income experienced an adverse effect. Evolving with obvious shifts in demand and increased competition in the market, the company became the exclusive manufacturer of the Palm Pilot and the contracts design. Receiving a major boost in profits, Flextronics attracted Inventec, an original design and manufacturing (ODM) competitor, who offered the manufacturing of Palm Pilot at a sizeable 10% lower price. Consequently, Flextronics experienced a substantial loss of its business to Inventec (Robert & Gary, 2010). With the design of Flextronics’ Phone 1, 2, 3, 4 series, Michael Marks, Flextronics Chairman and CEO, decided to venture into the ODM arena, through the development and sale of its own product designs.

As Flextronics entered into this new competitive realm, senior executives assessed the subsequent affect this innovative market strategy would have on their relationship with their core customers base. Facing pressures from burgeoning competitors, increasing higher cost-to-income ratios, and threats of self-cannibalization, Flextronics management had to make a difficult business decision in an attempt to preserve their historic market share: one that would change the whole company’s future strategy. Consequently, Flextronics considered and assessed this critical query “what is the best distribution option that will prevent self-cannibalization of their core CM and CDM business?” Thus, three viable distributions options were evaluated: (1) distribution exclusivity, (2) “all-or-nothing” bulk distribution, or (3) regional product distribution.

Analysis
Historically, Flextronics had been a substantial player within the contract design and manufacturing business. Depending on contract companies who continually produce technologically advanced products, with short life cycles, this model relied heavily on the success of contract company market share sales. No longer relying solely on CM or CDM business, Flextronics’ CEO, Michael Marks, shifted the company’s future focus, developing a sustainability objective, by tapping into the exceedingly competitive environment ODM market. Recognizing that a bold shift towards an ODM model may cannibalize their existing CM and CDM core business (Huckman & Pisano, para. 55). Flextronics executives decided to push through obvious reservations, believing that, if successful, ODM phone projects had the potential to produce increasingly higher revenue margins.

Since Flextronics competed with a number of major global EMS and ODMs providers, current and prospective customers (who evaluate the company’s capabilities in light of their own capabilities and cost structures), and other smaller EMS companies (that have regional or product-specific focuses), the risks associated with such a shift were relatively high. Furthermore, because this industry is extremely competitive, many of their competitors had achieved substantial market share, with some offering even lower cost-structures, greater financial, design, and manufacturing resources, than Flextronics. In particular, competition from Asian-based competitors, including Taiwanese ODM suppliers, who compete in a variety of similar end markets as Flextronics, had a substantial share of global information technology hardware production.

Additionally, if Flextronics were unable to provide a comparable improved products and manufacturing service, at a lower cost than the other companies in the market, their net sales could decline. Progressively, “build to print” business, where EMS firms would simply manufacture a design, created by the OEM, was not enough to fund EMS firm existence. Supplement business segments, such as ODMs emerged, along with CMs, to allow OEMs to concentrate their manufacturing capacity and decrease price-cost margins. Compared to the production of computers in 2000 (47.5%) to 2005 (68.6%), projected global outsourcing trends indicated increasing trend percentages of outsourced contract manufacturing opportunities, within the cellular and electronics communications markets: 2000 (39.1%) to 2005 (67.6%) (Huckman & Pisano, Exhibit 1).

From 2000 to 2002, industry analysis of top contract manufacturing firm reported decreased net income financial performances of major firms (Huckman & Pisano, Exhibit 2). Likewise, financial performance indicators for major OMS indicated the rise in net income for most of ODMs from 1998 to 2002 in (Huckman & Pisano, Exhibit 4). ACM’s (Acer) net income ballooned from 45 million in 1998 to 250 million in 2002. Comprehensively, these numbers denoted large increases in CM net income, as well as the criticality and impact of the burgeoning EMS industry. Functioning as an EMS, Flextronics primarily faced less invasive risks related to the manufacturing process, as they have substantial experience in managing them. Functioning as a CDM, Flextronics ran the risk of design viability. Functioning as an OEM, Flextronics would be compensated for its design, regardless if the product ever made it to the market. Moreover, functioning as its own OEM, Flextronics absorbed both the technical and market risks associated with an unsuccessful product becoming its sole responsibility.

Thus, if Flextronics pursued the design, manufacture, and sale of their own products, then they bared the total financial loss, if the actual market does not want nor desire their products in the future (Huckman & Pisano, para. 42). To avoid foreseen acts of self-cannibalization, Flextronics assessed three critical feasible options: (1) distribution exclusivity, (2) “all-or-nothing” bulk distribution, or (3) regional product distribution. Option 1 offered an exclusive distribution model to one of its largest cell phone customers. This option required customer dependability upon Flextronics technological support in an effort to sustain increased revenues and manufacturing economies of scale. However, it limited Flextronics ability to manufacture more products for the rest of the market, which may have caused conflict with its core CM and CDM business. Option 2 offered an “all-or-noting” reasonable size deal for the overall market for Phone 4, maintaining an exclusive relationship with them (Bhardwaij). Option 3 offered limited geographically drawn, regional exclusivity, allowing Flextronics to have preferred pricing, with its current customers, throughout multiple distribution streams, as they continued their CM and CDM capacities.

Conclusions & Recommendations
In summary, major technical and market advancements such as the rise of EMS firms forced Flextronics to explore avenues of expansion that would (a) cater to their core business base, (b) maintain their market share, as they (c) ventured into new potentially profitable comprehensive business pursuits. Flextronics’ the shift into the development of original design and manufacturing (ODM) products was imperative as well as innovative in the ever-evolving design, manufacturing, and feature-specific cell phone and electronics industry. Its decision to grow through acquisitions, allowed Flextronics to establish an adaptive supply chain design with segmentations and organizational culture, led by executives that find pioneering ways to anticipate and respond to customer demands for higher quality and lower costs. Ultimately, the acquisition of several supplier and competitive firms rendered significant purchasing power.

Additionally, the utilization of the CDM model created a solid business model that afforded them the wide-range control over their total manufacturing and distribution operations. Nevertheless, the increase in both quality and quantity of competition, due to globalization and rapid technological change, will continue to make it increasingly difficult for fairly integrated companies to be ‘the best’ in all segments and all markets- i.e., Borders Book Sellers and Barnes & Noble’s vs. Amazon.com. Consequently, isolated niche-masters such as Flextronics- competing in its specialized cell in the marketing chain- may have greater difficulty staying ahead of the new combinations of partners emerging around them. Thus, as Flextronics diversifies, it can continue to build a portfolio of companies that provide a wider array of products for customers. Ultimately, as conditions change, Flextronics can conduct periodic reviews of its current horizontal and vertical integrative acquisitions and partners, to balance and modify their relationships continuously (Billon, et. al, 1988).

When a company segments it supply chain, it can offer increased responsiveness for fast growing channels and product lines, while providing better cost control in mature, stable segments (Sanders, 2012). Flextronics’ must continuously stay ahead of the creative market curve through innovative creations, enhanced product growth, and extended brand presence. In an attempt to exploit certain aspects of their core competencies, Flextronics can continue to take advantage of their great reputation, previously built and maintained with suppliers, distributors, and customers. Flextronics is advised to continue to invest in their development of ODM capacities as a long term sustainability approach. Flextronics should devise an effective strategy to launch their own products worldwide. Continuous focus on maintaining complete control over their global supply chain and distribution networks will automatically render heightened product and brand extension, in relation to the growth of their core competencies.

The global power of the brand can be used to extend their trademark through product licensing; providing opportunities for the Flextronics to extend their brand beyond into emerging markets. Through diverse partnerships with the relative partnerships, the Flextronics brand can introduce Flextronics-branded technologies, and build a loyal retail following. Flextronics will gain an advantage, through their proficient, all-inclusive, in-house, cost reductive efforts, goods, and services, as well as increasing market share. Equally essential, through tighter fiscal practices, Flextronics can gain a significant purchasing power over its competitors. Additionally, Flextronics will continue their dominance within the EMS arena, creating completed, consistent, standardized products that render heightened demand. The key behind Flextronics’ agile supply chain is fulfilling the fast paced, proficient model. With a laser focus on being responsive to customer needs, Flextronics can continue to build upon its exceptional comprehensive production system. By creating efficient, multifaceted production, distribution, warehousing, and shipping facilities, they can create unprecedented, highly effective, solid supply chain management regional networks that are gifted with the flexibility to adapt to an ever-changing market.

They can equipped themselves with the required materials, machines and mold to designs meticulous, elaborate contingency plans for seasonal situations where demand exceeds the amount of products ordered, thus satisfying forecasted and unforeseen excess demand for its products. In effect, these planned actions assist with the transfer of machines between linked manufacturing plants as needed, as well as decrease the costs associated with excess amounts of inventory overages, while reducing the risk of having surplus manufactured product that may not sell. In addition to Flextronics’ maintenance of adequate machinery and materials, strategic planning within the company is top notch. Management can introduce and test products in different regions, allowing them to read individual, specialized market features, while evaluating the possible effect of this product elsewhere. In case of unsold merchandise in a specific region, distribution centers are resourceful enough to move this merchandise to different regions. By adapting to the retail market needs, having great communication with customers, and maintaining a remarkable supply chain management, Flextronics will sustain their revolutionary way of doing business, for generations to come.

References

About Us. (n.d.). Flextronics Website. Retrieved from:
http://www.flextronics.com/about_us/default.aspx
Billon, S. A, Stralkowski, C. M., (1988). Partnering: A strategic approach to productivity improvement. National Productivity Review; (Spring, 1988) 7:2; ABI/FORM complete. 145. David, P. A. (2013). International logistics: The Management of International Trade Operations. Berea, OH: Cicero Books LLC

Huckman, R.S., & Pisano, G. P. (2010). Flextronics International, Ltd. Harvard Business School 9-604-063 (April, 2010): 1-18.
Narasimhan, R., & Narayanan, S. (2013). Perspectives on supply network-enabled innovations. Journal of Supply Chain Management, 27-42.
Robert, S. H., & Gary, P. P. (2010). Flextronics international, ltd. Retrieved from:http://www.hbs.edu/faculty/Pages/item.aspx?num=32211 Sanders, N. (2012). Supply Chain Mnagement: A Global Perspective. Hoboken: John Wiley & Sons, Inc.

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