Article

Outsourcing provides alternative

Companies turn to manufacturing partners to stay focused.

April 15, 2007

Outsourcing is changing the way U.S.-based companies are doing business. NCR Corp. and redbox are two in point and each is reaping the benefits of having someone else do the manufacturing "dirty work" for them.

 

Redbox, based in Oak Brook Terrace, Ill. is a small company that is jointly owned by Coinstar Inc. and McDonald's Ventures LLC. Redbox operates a small army of DVD rental kiosks located in McDonald's restaurants and grocery store chains throughout the United States. The Dayton, Ohio-based NCR manufactures kiosks for multiple applications and businesses, most notably for financial institutions and retailers.

 

Both companies have partnered with the Milpitas, Calif.-based Solectron Corp., a provider of electronic manufacturing services and integrated supply chain solutions, to manufacture either its entire line of kiosks, as is the case with redbox, or only for certain segments of its business, as NCR did. Redbox and NCR, despite their differences in size and focus, have taken advantage of their outsourcing agreements with Solectron, and others, and capitalized on the advantages they offer.

 

Franz Kuehnrich, vice president of engineering for redbox, said designing and building a kiosk from scratch was an option but one that was quickly scrapped. "We were emerging into a new market and emerging quickly," he said. "And the timeframe where you have to establish yourself is fairly short. There really aren't enough years to work yourself into the space you need to be in, manufacture and deploy your hardware and be successful. You have to be out there in weeks, not months, or else the door of opportunity closes."

 

Solectron isn't the only manufacturing giant with toes in the self-service world. In February, Flextronics acquired WebRaiser Technologies, whose Vendi platforms power applications such as bill payment, photography, public Internet access and e-commerce.

 

Flextronics, which manufactures electronics for companies like Dell, Ericsson, Hewlett-Packard and Siemens, reported sales of $15 billion in 2006. The company operates factories on four continents and has approximately 99,000 employees. During the third quarter of fiscal year 2005/2006, the company announced profit that nearly tripled from the previous year.

 

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Focusing on the core

 

Kuehnrich said in order for redbox to develop, build and manufacture a kiosk suitable for a quick expansion, it would have had to shift its focus from what it already targeted as its core competency, DVD rentals, to something it had no intention of becoming, a player in the manufacturing business.

 

Mike Webster, vice president and general manager of NCR's Self-service Division, said going with an electronics manufacturing services provider "allows us to leverage our providers' experience" and "focus on our core competencies. All of it is done with a keen eye toward benefiting our customers."

 

The Solectron manufacturing plant in Milpitas, Calif.

"There's a better utilization of (the company's) working capital when you can partner with the manufacturing partner that has the capabilities of manufacturing and managing the supply chain," Douglas Britt, executive vice president of Solectron's sales and account management, said. "Is manufacturing a core competency or is it not a core competency? And we've been inviting that discussion to say that it's the time to rethink the strategy to determine what is core and what is not core."

 

Britt cited the high rate of growth in emerging markets Asia and Eastern Europe as another reason companies are turning toward EMS partners. The cost to develop, manufacture and then successfully deploy a kiosk network, including its supply chain and services, is too much for many to handle. The solution, Solectron maintains, is to turn toward an EMS partner which has those resources already in place.

 

"We have worked through our broad spectrum of customers very hard to develop local suppliers in the emerging markets, specifically in this area around the mechanical supply chain," Britt said. "And that's a benefit to the customer as we engage in helping them design the product, not only for lead time but also for cost reduction, to make it a more competitive product."

 

Any company redbox chose to partner with, Kuehnrich said, needed to be strong in its manufacturing capability. It also needed to be large enough so if redbox grew as rapidly as it hoped its manufacturing partner would not be turned "upside down" if the company's potential demand went from 100 kiosks to thousands. The "added value" of engineering support was also a factor.

 

Britt said through programs called ‘Redesign for Cost' and ‘Redesign for Lifecycle Extension,' Solectron is able to extend a product's life expectancy by years.

 

"We can reestablish that product through a redesign and helping the customer generate more margin into an existing product, where maybe they weren't investing the resources to redesign that product because all their resources were diverted to generating new products," Britt said. "We find that our customers just don't have the R&D resources to do that."

 

Other factors redbox considered were the experience in quality assurance and the added value of engineering support. Experience is the first thing NCR looks for when assessing a manufacturing outsourcing partner, Webster said. "We want a level of experience that aligns with our volumes."

 

Both Kuehnrich and Webster believe the outsourcing model will become more prevalent in kiosk manufacturing. Webster believed it would be due to industry maturation and the consolidation of EMS capabilities. "There's more of a potential and opportunities become more accessible," he said.

 

"Speed is the bottom line," said Kuehnrich, since the lifecycle of products that capture the market is very short.

 

Possible disadvantages?

 

Webster said, there are no disadvantages to outsourcing, saying instead there are "trade-offs" which must be accepted, such as issues with an EMS company regarding flexibility and the speed to market.

 

Kuehnrich said in the DVD rental marketplace, nimbleness and speed were key factors since redbox was entering into a relatively untested retail market.

 

"If a company does not have the in-house knowledge and wherewithal on how to go quickly on a ramp up, than the safer route is to go with outsourcing. "But there is a lot of risk mitigation."