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GLOBAL SUPPLY MANAGEMENT FORUM

CASE: GS-24
DATE: 11/02/01

SOLECTRON: FROM CONTRACT MANUFACTURER TO

GLOBAL SUPPLY CHAIN INTEGRATOR
Most people think we’re a manufacturing company.
We’re good at manufacturing, but we’re really a service company.
— Koichi Nishimura, Solectron CEO1

In mid-2001, Solectron Corporation was confronting issues that it had never before faced in its
twenty-four year history. The company was the world’s premier supply chain integrator, with
$18.7 billion in annual revenue.2 Since going public in 1989, its stock had appreciated by a
factor of 280 times by the time it peaked in October 2000.

The economic downturn of 2001 hit the company hard. While revenues for the first quarter of
fiscal 2001 (ending December 1, 2000) were twice that of the same quarter in the previous year,
quarter-to-quarter revenue decreased each quarter during fiscal 2001, with a 27 percent decrease
from Q2 to Q3. The company had large amounts of excess inventory. Collections suffered, and
receivables jumping significantly (Exhibit 1).

By September, the stock had fallen 77 percent from its high, and market capitalization was just
40 percent of annual revenues (Exhibit 2).3 The company had laid off 20,000 of its 80,000
workers and closed facilities.4 What should they do now?

1
Bill Roberts, “CEO of the Year: Koichi Nishimura, Contract Manufacturing Visionary,” Electronic Business,
December 1999.
2
For the fiscal year ended August 31, 2001.
3
As of September 10, before the terrorist attacks of September 11 that drove the stock price further down.
4
Aaron Elstein and Scott Thurm, “Telecoms’ Rout May Hit Firms They Hire,” The Wall Street Journal, August 10,
2001, C1.

Research Associate David Hoyt prepared this case under the supervision of Professor Hau Lee as the basis for class discussion
rather than to illustrate either effective or ineffective handling of an administrative situation. The case was prepared in
cooperation with Solectron Corporation. The data presented is for teaching purposes only, and certain facts may have been
changed to enhance the teaching objective. Before using any facts presented in this case for other purposes, the reader should
verify them with Solectron. The case was edited by Mary Petrusewicz.
Copyright © 2001 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or
request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing
Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of
this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any
means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate
School of Business.
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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 2

THE ELECTRONICS MANUFACTURING SERVICES INDUSTRY

The electronics manufacturing services industry (EMS, also referred to as contract

manufacturing) grew out of a large number of small job shops that manufactured assemblies for
clients. The clients, original equipment manufacturers (OEMs), would often use these shops to
supplement their own production capabilities, or to offload production that did not contribute to
their competitive advantage, such as cables or simple printed circuit boards. In the 1970s and
early 1980s, production was relatively low volume, as consumer electronic products did not
require extremely high production levels.

As the personal computer became a mass-market product in the 1980s, a few contract
manufacturers grew rapidly, led by SCI Systems. The rise in PC use also drove related markets,
such as those for printers and memory devices. In the 1990s the industry continued its rapid
growth, driven by the development of the Internet, with its demand for networking equipment
such as routers and servers. The exploding demand for mobile phones and other wireless
devices, as well as other electronic tools such as personal digital assistants, also contributed to
the heavy demand for manufacturing capacity during this period. Solectron grew rapidly during
the 1980s and 1990s, becoming the dominant company in the industry by the mid-1990s.

In 2000, the EMS industry was estimated to be $103 billion, or about 13 percent of the total cost
of goods sold of OEM companies. The penetration rate was forecasted to increase to 22 percent,
or $231 billion by 2005, for an overall industry compounded annual growth rate (CAGR) of 18
percent. The same forecast anticipated that the top tier EMS companies should grow at a
disproportionately high rate, averaging 25 percent per year for the five-year period.5 The
industry consisted of several large public companies, the largest of which was Solectron, and
included Sanmina/SCI Systems, Flextronics, Plexus, Jabil Circuit, and Celestica, and hundreds of
smaller companies, most of whom were privately held.

OVERVIEW OF SOLECTRON CORPORATION

Solectron Corporation was founded in 1977 to make solar energy products as part of the solar
energy boom of the mid-1970s.6 The company struggled financially, and began to build
assemblies, primarily printed circuit boards (PCBs) for other electronics firms. Located in
Milpitas, California, Solectron was close to the fast-growing Silicon Valley electronics industry,
and thus had ready access to a large number of potential clients for its manufacturing services.
Starting in the early 1980s, it focused its complete attention on contract manufacturing, and
changed the PCB job shop business into an important industry, providing high quality electronics
manufacturing services.

An essential element of the company’s strategy was an intense focus on quality and a company
culture that reinforced this focus in all areas of business. Solectron won the prestigious Malcolm
Baldrige National Quality Award in 1991, and again in 1997 (its first year of eligibility after the
first win, making it the first repeat winner in the award’s history), and by 2001 had won more
than 250 quality and service awards from its customers. The Baldrige application process had

5
Ellen Chae and Todd Bailey, “Annual EMS Industry Update,” Prudential Financial, August 2001, 7. Forecasts
from IDC, Technology Forecasters, and Prudential. These estimates incorporate the effects of the weakness in
demand for electronic products in 2001, but were made before the events of September 11.
6
The company’s name is a combination of “solar” and “electronics.”

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 3

been a cornerstone of the company’s operations since 1989, helping focus the company’s
attention on quality and customer satisfaction.

In the early 1990s, the company began a program of strategic acquisitions, in which it purchased
the manufacturing facilities of its customers, and received long-term contracts to supply those
customers. Under Solectron, these facilities could also be used to supply multiple customers,
increasing the plant utilization. The company made many such acquisitions, fueling its rapid
growth. In 1994, it passed $1 billion in annual revenue. In 1998, it became the first company in
the EMS industry to be added to the S&P 500.

Solectron manufactured a wide range of products for its customers in many business segments,
including:

• Networking (27 percent of FY2000 revenues) — hubs, modems, NICs, remote access,
routers, switches.
• Telecommunications (29 percent) — access equipment, base stations, IP telephony
equipment, mobile phones, pagers, switching equipment, transmission equipment, video
conferencing equipment.
• Computers (25 percent, PCs/Notebooks 16 percent, Workstations and Servers 9 percent)
— docking stations, Internet access devices, mainframes, midrange servers, notebooks,
PC servers, PCs, retail systems, supercomputers, workstations.
• Computer Peripherals (7 percent) — disk and tape drives, fax machines, laser and inkjet
printers, projector engines.
• Others (12 percent) — avionics, consumer electronics, GPS, medical electronics,
semiconductor equipment, test/industrial controls.7

The company was heavily dependent on its largest customers; 72 percent of sales in FY2000
came from the top ten customers, led by Ericsson at 13 percent and Cisco at 12 percent. Others
in the top ten included Compaq, HP, and IBM.8

As Solectron grew, it expanded its services. In 1996, it began quick-turnaround prototype

services as the result of its acquisition of Fine Pitch Technologies. By the end of the decade, it
had three strategic business units: Technology Solutions, which provided technology building
blocks that helped customers minimize time-to-market for new products; Global Manufacturing,
which provided design, new product introduction, and manufacturing and distribution services;
and Global Services, which provided repair, upgrade, and maintenance, as well as logistics,
return management, warehousing, and many other post-manufacture support activities. A Global
Materials Services group supported all three business units by providing sourcing, procurement,
and other common supply base management resources.

7
Solectron Web site, http://www.solectron.com/about/index.html. Percentage shares from Solectron’s 2000 Annual
Report, 8.
8
Solectron 2000 Annual Report, 20. In FY1999, the top ten accounted for 74% of sales, led by Compaq (12%) and
Cisco (11%). In FY1998, the top ten accounted for 68%, led by HP (11%) and Cisco (10%).

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 4

CULTURE AND QUALITY

Solectron’s corporate culture, and its overriding emphasis on quality, was an essential element of
its success. The company’s core values and beliefs were thoroughly ingrained in Solectron’s
management and strategic planning processes (Exhibit 3).

Early Cultural Development

The cultural development started in 1978, when Dr. Winston Chen, a long-time IBM executive,
joined the company as president. At the time, electronics companies that contracted their printed
circuit board (PCB) assemblies to outside manufacturers chose vendors based on low price and
fast delivery, and did not expect high quality. Dr. Chen challenged this practice, insisting that
only by achieving the highest quality standards could one achieve the lowest cost.

Harkening back to his IBM days, Dr. Chen used two basic principles to run the company:
superior customer service, and respect for the individual. In order to fully implement these
principles, he established systems that provided rapid feedback of required information, and the
freedom for employees to act in order to fulfill these objectives. For instance, he established a
process for measuring customer satisfaction weekly, by asking all customers to provide
assessments according to five criteria: quality, responsiveness, communication, service, and
technical support. The results were reviewed by management every week, and posted weekly at
each production line. Chen commented, “We don’t tell people, ‘You’re good,’ or ‘You’re bad.’
We say, ‘Here’s what the customers say.’ That’s a very powerful tool.”9

The company also developed weekly profit and loss statements for each production line, which
were distributed to all line managers. Chen noted, “If you really want to respect individuals,
you’ve got to let them know how they’re doing—and let them know soon enough so they can do
something about it. Ultimately, the measures that matter are customer satisfaction and profit and
loss.”10 In 1984, when Chen became CEO, his vision was to “revive American manufacturing
competitiveness and become the best manufacturing company in the world.”

Solectron’s operations utilized a highly diverse group of employees, which the company called
“associates.” Many associates were recent immigrants. The contract manufacturing industry,
Solectron included, typically paid relatively low wages to its production workers. Yet, the
company could not achieve its vision unless these people were highly motivated and unified
toward a common purpose. The Solectron culture provided that unification.

In 1988, Dr. Chen convinced one of his former IBM colleagues, Dr. Koichi Nishimura, to join
the company as chief operating officer. By this time, the company had grown to $93 million in
revenue, with solid profits. Dr. Nishimura’s approach was to never be satisfied, continually
question existing practices, and strive for continuous improvement. This applied to all aspects of
business, whether it was the time required to prepare financial reports, improvements in
production quality, or increased customer satisfaction.

9
Alex Markels, “The Wisdom of Chairman Ko,” Fast Company, November 1999.
10
Ibid.

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 5

The Baldrige Award, and the Focus on Quality

Soon after arriving at Solectron, Dr. Nishimura learned of the Malcolm Baldrige National
Quality Award, which had been instituted by Congress in 1987 to promote excellence in the
nation’s manufacturing and service sector. He decided that the award’s evaluation process was
similar to Solectron’s principles, and that it could be a benchmark for continuous improvement.
The company applied for the 1989 award, but did not receive a site visit, which is a required step
for all finalists. However, it did receive a report from the evaluators recommending
improvements in many aspects of the company’s operations.

Dr. Nishimura was delighted with this “free consulting,” and implemented the recommended
improvements. After failing to get a site visit again the next year, Nishimura commented, “We
weren’t trying to win the award, we were simply trying to build a quality company. And the
award was the template.”11

In 1991, Solectron did get a visit from the Baldrige Award examiners. The company received a
large amount of advice for improvement—and won the award. It was the first time the award
had been given to a company in the contract manufacturing industry.

Baldrige award winners are ineligible for the prize for five years, but Solectron felt that the
application process was so valuable that it prepared internal evaluations based on the Baldrige
Award every eighteen months. Nishimura noted that “[this] keeps us focused on continuously
improving things for our customers. That’s the only way to be the best.”12 In 1997, the first year
it was eligible to reapply, Solectron again won the Baldrige Award—the first repeat winner in
the award’s history.

Day-to-Day Practice

Cultural practices at Solectron had several components, each of which reinforced the others, and
most of which were directly related to the company’s stated mission.

The emphasis on continual improvement, and the process of creating and reinforcing values, was
institutionalized throughout the organization. For example, 7:30 A.M. meetings on Tuesday,
Wednesday, and Thursday had been an institution since the early days of the company. The
meetings were attended by about thirty to fifty people, ranging from engineers and program
managers to site management personnel. Each meeting began with a site overview of the quality
results from two days before the meeting (the most recent results available). Progress toward site
quality plans objectives was also reviewed at each meeting. The remainder of the Tuesday
meeting was devoted to an internal customer satisfaction review, or management training
provided by a combination of company executives and external guest speakers.

The Wednesday meeting was highly focused on quality, and was a forum for process
improvement and knowledge sharing. The emphasis was on prevention of problems rather than
correction, through the use of self-directed work teams (SDWT) and the company’s Quality

11
Ibid.
12
Ibid.

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Improvement Process (QIP).13 SDWT members made presentations at the 7:30 A.M. meetings.
The meeting also served as a forum for recognizing excellent performance. When a team
received a recognition award from a customer, Solectron’s president presented a check to be
shared equally by the members of the team, and publicly recognized the team at the meeting.

The focus of the Thursday morning meeting was customer satisfaction and program
management. Solectron asked each customer to grade its performance every week on quality,
delivery, communication, and service. At the Thursday meeting this data was reviewed,
problems discussed, and improvement plans presented. Decisions were made by consensus of
the site management team. Consensus decision-making was intended to strengthen teamwork,
which was a strong Solectron value, and heavily emphasized by top management.

Symbolism was also used to unite the workforce. For instance, all employees, from the CEO to a
beginning assembler, wore identical white smocks with the company logo.14 While the smocks
were justified on the basis of electrostatic discharge control, their larger purpose was to help all
associates feel part of one family. Signs with the company beliefs and the “Five Ss” were also
prominently displayed in Solectron facilities.

Culture and Acquisition Integration

Through the 1990s, Solectron’s growth strategy included acquiring manufacturing operations
from its customers. By late 2000, the workforce was over 80,000 people, many of whom had
joined Solectron as the result of acquisitions. Integrating employees was essential to the success
of the acquisition, since success was highly dependent on the ability of Solectron to harness the
intelligence, know-how, and experience of the new employees. The company culture was an
important part of that integration.

The company assigned an integration team to work with the acquired operation composed of four
to eight people representing the major functional areas (e.g., finance, human resources,
operations, materials, and information technology). The team became involved in the early
stages of the due diligence process, long before the acquisition decision was finalized. The
business integration process utilized an extensive checklist, and included all major functional
areas covering activities from just prior to the announcement of the transaction all the way
through the first 100 days after the transaction closed (Exhibit 4). When the decision was made
to proceed with an acquisition, a detailed integration plan was created. The development of this
plan included participation by the acquired operation, ensuring that it was a part of the process.
The Solectron integration team worked with the acquired company for three to six months after
the acquisition was finalized, training the new employees and acting as a Solectron resource.15

EVOLUTION FROM CONTRACT MANUFACTURER TO GLOBAL SUPPLY CHAIN INTEGRATOR

Solectron grew from a contract manufacturer into a global supply chain integrator as it increased
the size and the scope of services it offered. The OEMs’ vision for their use of outside services

13
QIP teams were cross-functional, and addressed specific problems or opportunities for improvement. They
developed action plans based on the company’s objectives for customer satisfaction, quality, and flexibility.
14
Visitors are issued blue smocks, so that they can be identified.
15
“Solectron’s Acquisitions Get Careful Attention,” Electronic Buyers’ News, July 24, 2000. Available online at
http://www.ebnonline.com/story/OEG20000721S0011.

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 7

evolved concurrently, so that by 2001 they outsourced activities that they would never have
considered only a few years before (Exhibit 5).

One Solectron executive described this evolution by comparing it to the change in bridge design
as steel replaced wood.

At first, people duplicated the designs of wooden bridges, just replacing the
material. As they learned more, they began to modify the designs to take
advantage of the properties of steel. Bridges still looked like they traditionally
looked, but the modified designs couldn’t have been built in wood. Finally,
engineers developed entirely new approaches to bridge design, which couldn’t
have been imagined previously. That’s where we are today. The manufacturing
and information technology that we have today allows a fundamental change in
the way our customers operate.16

When it first offered contract manufacturing services, Solectron provided little more than
substitution for capabilities that its customers already possessed. Customers were driven by two
forces: cash flow and resource allocation. They looked to outsourcing if they could cut costs, or
if they needed extra short-term capacity to meet peak demand. Customers would often maintain
a level of internal capability appropriate for ongoing needs, outsourcing when peak demand
exceeded this level.

Because customers maintained some production internally, and might only outsource some
assemblies, customers were often in a stronger position than Solectron when negotiating with
parts suppliers. As a result, customers often consigned kits of parts that Solectron assembled.
Solectron differentiated itself from other PCB assembly companies primarily because of its focus
on quality.

As Solectron added more customers and took on more business from existing customers, its total
volume increased. Eventually, it was in a stronger position to negotiate with parts suppliers than
were its customers, and began to take on additional purchasing, parts inventory, and kitting
responsibility. Solectron could then offer customers capability that they couldn’t get themselves:
reduced prices due to greater volume purchasing. Rather than outsourcing as a way to access
relatively inexpensive, skilled labor, it became a source of tactical advantage. Tactical turnkey
assembly meant that OEMs specified what was needed, and Solectron bought the materials, built
the product, and shipped it to the customer.

Technological Developments

The development of surface mount technology (SMT) offered an important opportunity. In the
1970s and through much of the 1980s, PCB assemblies were constructed by inserting
components into holes in the boards and soldering the components. Pin-through-hole (PTH) was
an inexpensive method for low-volume assembly, but only a limited number of the relatively
bulky components could be placed on a PCB, and they could only be placed on one side of the
board. In 1983, Solectron began building a new type of PCB assembly, in which components
were pasted directly onto the planar surface of the board. This surface mount technology used

16
Arthur Chait, corporate vice president of worldwide marketing, teleconference, July 30, 2001.

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 8

much smaller components, and enabled components to be placed on both sides of the PCB,
greatly increasing the density of the circuit that could be placed on an individual board.

The advantages of SMT came at a price. The capital cost of SMT equipment was much higher
than the equipment needed for PTH assemblies. At the time, few products were needed in truly
high volume. In the early 1980s, mobile phones were not yet in production, and even personal
computers were not mass-produced. Most OEMs could not justify the capital cost of SMT, even
though they could benefit from the technology.

Solectron, however, could amortize the cost of SMT equipment across the volume of many
customers, providing capability that OEMs could not economically acquire. By 1992, most new
designs used SMT, relying heavily on Solectron and other contract manufacturers for production.

New Business Model

In 1992, Solectron introduced a new business model when it purchased manufacturing sites from
IBM. As part of the asset acquisitions, Solectron received long-term supply contracts. This
approach enabled OEMs to make the strategic decision to concentrate their efforts and resources
on their core competencies, generally product definition, engineering, and marketing, and to use
Solectron to perform procurement and production, which were its core competencies. Since they
no longer maintained internal production capabilities, this was a strategic, rather than tactical
decision for the OEMs.

IBM’s Bordeaux, France plant, an early acquisition in 1992, was illustrative of the success of the
model. The 27,000 square meter facility had struggled to be profitable, and IBM placed all the
people it could think of, such as sales staff and software developers, in the plant to fill the empty
space. Still, employee numbers had shrunk to 1,000, of which only 500 worked in
manufacturing, and only half of those were making PCBs. By early 2001, under Solectron, the
plant employed 4,200 employees building mobile phone switching gear for Ericsson, networking
equipment for Cisco, bar-code readers, and medical instruments. Products built for IBM utilized
only a small fraction of the plant’s capacity. The IBM plant manager, who stayed on as a
Solectron employee after the sale, noted that it was almost like working at a completely different
factory. “It’s unbelievable, it’s booming.”17

This model was repeated many times, and Solectron rapidly grew. It acquired manufacturing
facilities from customers, and used those facilities to fulfill long-term supply contracts. It also
used the acquired facilities to produce products for other customers. This allowed for risk
pooling, as fluctuating demands from different companies were smoothed, and safety stock
levels of common component inventory could be reduced (compared with levels required if
stocked individually by each company).

Over the next few years, Solectron acquired facilities in such strategic divestitures from more
than twenty companies, including Hewlett Packard, Texas Instruments, NCR, Nortel Networks,
Sony, Ericsson, Cisco Systems, Philips Electronics, and Mitsubishi.

As Solectron took over production for several major companies in the same industry (e.g., Cisco
and Nortel), the economies of scale escalated further, since these companies shared similar

17
Michael J. Ybarra, “Vineyards and Surface Mount Technology,” Upside, April 2001, 116–119.

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 9

processes and many common parts. Solectron also increased its visibility of these industries,
through the aggregated forecasts of each major player. However, the demand projections made
by each OEM were still subject to demand information distortion, and might not reflect the true
demands of the ultimate customer.

Consolidation and Relocation

In addition to acquiring facilities from OEMs, there was consolidation within the EMS industry
in the late 1990s, driven by the increasingly close relationships between OEMs and their
suppliers. OEM companies preferred to establish strategic relationships with a few top tier EMS
suppliers, who could fulfill their worldwide needs. In July 2001, Sanmina, then the fifth largest
EMS, acquired SCI, the fourth largest, and twice the size of Sanmina. Solectron acquired two
top-ten companies, NatSteel Electronics in November 2000, and C-Mac Industries in August
2001, as well as the Bluegum Group, the largest EMS firm in Australia.18

There was also a trend for the top companies to move production of high volume, predictable
products to low-cost regions such as Asia (excluding Japan), Mexico, and central Europe. By
mid-2001, Solectron had 30 percent of its production in such areas, with the goal of increasing to
70 percent.19 This had two benefits—decreasing production costs, and moving production
capacity closer to future high growth markets.

Through acquisitions, Solectron had developed a global network of facilities located strategically
close to its customers and to emerging markets. This enabled it to introduce products in its new
product introduction centers and then rapidly transfer production to the facilities best suited to
volume production, either due to the low cost structure of the volume production site or its
proximity to the end user, depending on the needs of the OEM customer. Load could also be
balanced across the network, and production of a particular product could be transferred between
sites as it passed through different phases of its life cycle, in order to maximize profitability.

Information Systems

The development of the World Wide Web and tools for communication between information
systems in different companies allowed Solectron to use technology to improve its operation and
enabled its customers to optimize their supply chain in a fundamentally different way.
Internally, the company invested heavily in information technology for the management of its
worldwide network of facilities and suppliers. Its Global Enterprise and Resource System
consisted of an enterprise resource planning system combined with additional applications such
as product data management, shop floor control, warehouse management, materials database,
rapid “what if” tools, financial analysis and reporting, and human resources. The company
established a Web-enabled extranet that allowed the sharing of information with customers,
suppliers, and partners. This helped integrate the supply chain by giving all parties equal access
to certain information for planning and decision analysis. This visibility of critical information
helped to minimize the “bull whip” effect that often occurred when making decisions in an
uncertain environment when demand signals were not aligned (Exhibit 6).20

18
Petri Lehtivaara, “The Electronics Manufacturing Services Industry,” Case GM 863, International Institute for
Management Development, October 1, 2001.
19
Chae and Bailey, 16.
20
Brian Fukumoto, corporate director of business transformation, e-mail communication, October 28, 2001.

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 10

Supply Chain Management

For its customers who fully utilized this approach, Solectron took responsibility for end-to-end
supply chain management. The customer was responsible for the basic research and
development of products, but Solectron played an important role in the actual product design.
Solectron did all parts procurement, assembly and testing, and delivered the product to the
location specified by the customer. Solectron also took responsibility for service and technical
support, as well as for recycling the product after its useful life. In short, Solectron was
responsible for the entire product lifecycle planning. The customer focused its efforts on
research, product definition, marketing, and sales.

From the OEMs’ perspective, the major driver was no longer whether to make or buy a given
assembly, but the larger question of where to get materials. The critical issue was the total cost
of getting the items they needed, fully built and ready to go to the customer, when and where it
was needed. This took much more into account than just procurement and manufacturing, as
worldwide logistics became extremely important. If parts were sourced from one part of the
world to be used in products for a customer in another part of the world, the transportation costs,
tax, and duty for the parts might be greater than the labor cost of the assembly.

Previously the barrier to entry had been the capital cost of SMT equipment; now there were
many companies with this equipment. Solectron’s competitive edge now resided in the ability to
execute quickly and across international borders, using its global network of facilities. The
expertise was now in more than manufacturing, it was also in developing a global network of
suppliers, and in moving goods efficiently around the world. Often more time and money would
be spent on logistics than on assembling components.

The company’s operations in Romania exemplified this situation. The Romanian operation had
begun in 2000. The facility was used primarily to manufacture items destined for customers in
central Europe, a region expected to grow rapidly due to pent-up demand for electronic products.
Labor was inexpensive, at about $.50 per hour, and Romania had an excellent workforce with a
strong work ethic. However, it took a full day to get materials to the factory from western
European countries, and two days to get completed products out of the country. Thus, there was
a tradeoff between labor and logistics costs due to infrastructure maturity.

Organization for Global Supply Chain Integration

To facilitate end-to-end supply chain management, the company organized into three business
units: Technology Solutions, Global Manufacturing, and Global Services. The Global Materials
Services group supported the business units.

Technology Solutions

The Technology Solutions business unit provided modular and embedded systems design and
manufacturing systems, offering a wide range of memory and I/O products, as well as embedded
boards and systems that provided OEM customers with technology building blocks that could be
used to quickly get products to market. This unit was built around the Solectron’s largest wholly
owned subsidiaries, Force Computers (acquired in 1997), and SMART Modular Computers

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(acquired in 1999). In 2000, the Technology Solutions business unit had revenues of $1.5
billion, or 11 percent of the company’s total sales.

Global Manufacturing

The Global Manufacturing business unit provided manufacturing services to Solectron’s

customers. This was the largest of the business units, with revenues in 2000 of $12.4 billion, or
88 percent of the company’s sales. In addition to the traditional contract manufacturing services,
this unit provided new product introduction services and pre-manufacturing capabilities such as
design for manufacturing, concurrent engineering, and prototyping.21

Solectron’s work with start-up companies, which was housed in the Global Manufacturing
business unit, reflected one aspect of these services. In 1996, Solectron acquired Fine Pitch
Technologies specifically to work with small emerging companies that required quick-
turnaround prototyping and a high level of engineering support in order to launch products. Fine
Pitch was designed to provide a level of support that was not available from larger EMS firms,
and to provide a path to volume production. However, the company had to carefully choose
which start-ups to work with, as there were many more that wanted to establish relationships
with Solectron than the company could service. Each of these relationships was a strategic
investment, as the payoff would come later as the start-up grew. Solectron evaluated the
suitability of these relationships much as a venture capital investor would, and chose only those
that had a good strategic fit and offered the potential for high growth. Brocade Communications
and Juniper Networks were two examples of companies that based their operations around
Solectron’s services.

Global Services

The Global Services business unit offered product repair, upgrades, and maintenance services
through factory and service centers worldwide. It also provided services such as warehousing,
logistics, returns management, engineering change management and end-of-life management. In
2001 this was a small part of the business, with 2000 revenues of just $233 million – less than 2
percent of the company’s revenues. However, it was growing rapidly and promised to be an
important area of future growth. Its revenues in 2000 were nearly three times the 1999 sales.

Global Materials Services

These three business units were supported by the Global Materials Services group, which
interacted with suppliers, handled procurement, was responsible for optimizing inventories,
prepared market forecasts, and provided worldwide logistics support.

SITUATION IN THE FALL OF 2001

The technology business boomed in the late 1990s and into 2000, particularly the
telecommunications and networking sectors. Solectron benefited, as it supplied many of the
leading firms. In the fall of 2000, the company realized that a supply glut was likely, as each of
their large customers, such as Cisco, Ericsson, and Lucent, expected explosive growth.
Solectron added the forecasts from each competitor, and realized that they totaled far more than

21
Concurrent engineering is continual product development after the product is already in production.

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 12

any realistic market size, even under the most optimistic scenario. It tried to restrain excessive
orders from the OEMs, and went so far as to demand up-front payments with some orders. The
OEMs insisted that their production plans be met, promising to pay for excess materials.22 The
strong culture to be the best and to continuously improve, and the ingrained belief in “customer
first,” made it extremely difficult to resist the pressure to increase production.

The economy began to soften in late 2000, and by early 2001 it was clear that demand was
falling, particularly in industries with important Solectron customers, such as
telecommunications. The business turned seemingly overnight from one of severe allocation and
struggle to keep up with demand to one of extreme overcapacity and excess supply. New orders
decreased from $6.5 billion in the quarter ending December 1, 2000 to $2.1 billion in the quarter
ending June 1, 2001. Revenue peaked at $5.7 billion in the quarter ending December 1, 2000,
and declined 36.9 percent to $3.6 billion in the quarter ending August 31, 2001. Backlog, which
had been at $5.8 billion on December 1, 2000, was just $2.2 billion on August 31, 2001. The
stock price fell dramatically.

The rapid change in the business environment led to large inventory increases, as Solectron was
unable to stop the orders it had placed with its 4,000 suppliers. Inventory rose by more than $1
billion during the six months ending March 2, 2001. The company was able to decrease
inventory by more than $1.6 billion from the peak level over the next six months, however, by
returning excess material to OEM customers and returning to its previous JIT practices, which
had not been followed during the buildup driven by its attempt to meet increased OEM
production demands.

Solectron also announced a restructuring that included workforce reductions and facility
closures. The company formed a high-level cross-functional team to validate the value
proposition at each Solectron site, develop restructuring goals and plans, and monitor progress.
The team evaluated new cost structures, more efficient organizational designs, and improved
customer relationship management processes. By October 2001, the workforce had been
reduced from its peak of 80,000 to less than 60,000. The number of SMT lines had been cut
from 1,100 to less than 700, and floorspace had been reduced from 14 million to less than 11
million square feet.23 Restructuring charges of $285 million were booked in Q3 (May), and
another $207 million in Q4 (August). Two facilities acquired as part of the Natsteel acquisition,
one in Hungary and one in Mexico, were closed and production moved to other plants.24

Despite the short-term slow-down, and the painful steps that were taken, Solectron remained
optimistic for the long-term. The use of outsourcing as an OEM strategy continued to accelerate.
OEMs were increasingly attracted to Solectron’s value proposition as a global supply chain
integrator. The company believed that the economic and industrial climate favored the
concentration of business in a small number of large suppliers of services to the OEM market. It
expected dramatic growth in Asia (excluding Japan), which it expected to grow from a very
small consumer to one-third to one-half of the total worldwide electronics market. It also
expected that pent-up demand, combined with a rapidly developing disposable income, would
lead to large markets in central and eastern Europe.

22
Pete Engardino, “Why the Supply Chain Broke Down,” Business Week, March 19, 2001, 41.
23
Brian Fukumoto, e-mail communication, October 28, 2001.
24
Chae and Bailey, 15–16. Restructuring charges from company financial releases.

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 13

However, it struggled with the question of how to weather the current storm and ensure that it
was properly positioned for the future.

STUDY QUESTIONS

1. How has Solectron’s value to its customers evolved over time?

2. How has global expansion contributed to Solectron’s ability to move from a contract
manufacturing supplier to a supply chain integrator?
3. How has the company been able to successfully integrate its acquisitions?
4. What was the impact of the company’s culture on the success of the company, on the
business downturn of 2001, and on its ability to respond to the business downturn?
5. What additional products and services should Solectron provide to its customers in the
future?
6. What should the company do in the short term? In the long term?

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 14

Exhibit 1
Selected Financial Data
(All dollar values in millions)

2001 2000 1999 1998 1997

Revenue25 18,692 14,138 9,669 6,102 3,694
Cost of Sales 17,206 12,862 8,733 5,436 3,266
Gross Profit 1,486 1,275 936 667 428
Operating Expenses (1,585)26 (571) (420) (298) (192)
Operating Income (loss) (98) 704 516 369 236
Taxes, interest, other 26 (217) (166) (118) (78)
Net Income (loss) (124) 497 350 251 158

Total Assets 12,930 10,376 5,421 2,411 1,876

Inventory 3,209 3,787 1,197 789 495
Accounts Receivable (net) 2,444 2,146 1,283 670 419
Employees at year end 60,800 57,000 33,00 22,000 17,000
Square footage at year end 11 10 7 5.5 3
(millions)

Q4 2001 Q3 2001 Q2 2001 Q1 2001 Q4 2000

Revenue 3,595 3,983 5,419 5,696 4,736
Cost of Sales 3,387 3,678 4,930 5,211 4,323
Gross Profit 208 308 488 485 413
Operating Expenses (314) (277) (295) (209) (170)
Restructuring and impairment (207) (285) - - -
Operating Income (loss) (313) (254) 193 276 243
Taxes, interest, other 63 68 (71) (85) (72)
Net Income (250) (186) 122 191 171

Ending Backlog ($ billion) 2.2 2.5 4.4 5.8 4.9

New Orders ($ billion) 3.3 2.1 4.0 6.5 6.5
Total Assets 12,930 13,293 14,605 14,027 10,376
Inventory 3,209 4,201 4,882 4,584 3,787
Inventory turns 3.7 3.2 4.2 5.0 5.5
Accounts Receivable (net) 2,444 2,391 3,188 2,688 2,146
Days Receivable Outstanding 61 63 49 42 38
Employees at period end 60,800 65,800 79,800 71,900 65,300
Accounting Calendar: Q4 2001 ended August 31, 2001
Q3 2001 ended June 1, 2001
Q2 2001 ended March 2, 2001
Q1 2001 ended December 1, 2000
Q4 2000 ended August 25, 2000
Source: Solectron Corporation

25
Results from 2000, 1999 and 1998 include acquisitions made during 2000 and accounted for by a pooling of
interests. These acquisitions are not included in 1997 results. In 1998, they accounted for $813 million of revenue
and $52 million of net income.
26
Includes acquisition, restructuring and impairment costs of $547 ($207 in Q4, $285 in Q3, and $55 in Q2).

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 15

Exhibit 2
Solectron Stock Price

Solectron’s weekly stock prices and volumes for the ten years ended September 26, 2001 were:

Source: www.bigcharts.com (with permission)

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 16

Exhibit 3
Solectron’s Vision, Mission, Beliefs, and “5 Ss”

MISSION27

“Our mission is to provide worldwide responsiveness to our customers by offering the highest
quality, lowest total cost, customized, integrated design, supply-chain and manufacturing
solutions through long-term partnerships based on integrity and ethical business practices.”

BELIEFS

Customer First Strengthen customer partnerships by providing products and

services of the greatest value through innovation and
excellence.

Respect for the Individual Emphasize associate dignity, equality, and individual
growth.

Quality Execute with excellence; drive to six-sigma capability in all

key processes; exceed customer expectations.

Supplier Partnerships Emphasize communication, training, measurement, and

recognition.

Business Ethics Conduct business with uncompromising integrity.

Shareholder Value Optimize business results though continuous improvement.

Social Responsibility Be an asset to the community.

VISION

“Be the best and continuously improve.”

THE FIVE SS

When traveling to benchmark Japanese companies in 1988, Dr. Saeed Zohouri, the company’s
vice president of technology, observed a sign at a Yamaha motorcycle factory describing the
“Five S” practices .28 They were embraced by Dr. Nishimura, who felt that they were useful for
achieving his vision of combining the best of Japanese techniques with American innovation.

Seiri (Organization)
• Distinguish between those things that are needed and not needed.
• Keep only needed materials at the job site.
• Throw away all unneeded items immediately.
27
Revised 1997.
28
Dr. Zohouri later became Solectron’s chief operating officer.

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 17

Seiton (Orderliness)
• Put things in the right order in the designated area.
• Store all materials and information in an orderly fashion at all times.
o Tidy
o Ready to use
o Organized according to frequency of use
• A place for everything and everything in its place.

Seiso (Cleanliness)
• Problems are more visible when everything is neat and clean.
• Find minor defects while “sweeping clean.”

Seiketsu (Standardized Cleanup)

• Clean tools, equipment, and job site immediately after use.
• Equipment that is kept clean runs better.

Shitsuke (Discipline)
• Use and follow standard procedures.
• Follow company rules and regulations.
• Follow safety procedures at all times.

Source: Solectron Corporation

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 18

Exhibit 4
Business Integration Template
A small portion of the acquisition business integration checklist:
SOLUTION
F
AM ACCOUNT MANAGEMENT
U COM CORPORATE COMMUNICATIONS I LEGEND:
FAC FACILITIES/EH&S I D S
M
N FIN FINANCE H = Required by Day 1 D V O I R = RED (Far below expectations; potential showstopper)
P
HR HUMAN RESOURCES M = Required by Day 100 E E C G Y = YELLOW (Behind plan; needs more focus)
C L = Can wait until Day 1000+ L G = GREEN (On target)
IT ITSS N R U N
E X = Complete
T MAT MATERIALS T I M E
M / = Not applicable
NPI NPI/TECHNOLOGY I F E D
I OPS OPERATIONS
E
F I N
PM PROGRAM MGMT N
O I E T O
QA QUALITY T
E D E F
N LOG PROCESS PRIORITY SLR (XXX) DUE E ACTUAL
D D F COMMENT
NO L/M/H LEAD LEAD DATE D COMP DATE

Account Management Tasks

AM 1 Cust. Acct. list review / comparison
AM 2 New entity communication to cust.
AM 3 SLR letter to all customers
AM 4 Develop account structure
AM 5 Review quotes
AM 6 Review contracts
AM 7 Review forecasting methodology
AM 8 Prepare training materials
AM 9 CSI Process training
AM 10 Account management training

Facilities Tasks
FAC 1 Establish facilities maintenance services
(janitorial, landscape, maintenance)
FAC 2 Establish services contracts as needed
(security, mail, café, coolers, etc.)
FAC 3 Lease contracts other than building lease
FAC 4 Solectron address
FAC 5 Road and building signage
FAC 6 Solectron philosophy visuals-local language
(tenets banners map case)
FAC 7 Transfer or set up Utilities contracts (elec,
gas, vacuum, air, etc)
FAC 8 Insure insurance coverage set up as required
FAC 9 Badging & facility access
FAC 10 Transfer or execute building lease

Finance Tasks
FIN 1 Accounts Payable
FIN 2 Account Receivable
FIN 3 Assignment of applicable leases
Source: Solectron Corporation

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 20

Economics

EMS companies were able to achieve far greater asset utilization than OEMs, since they could
use the same assets to produce products for many companies. This resulted in significant cost
savings for the OEMs. In addition, the risks of product changes, short product life cycles, and
other sources of inefficiencies were reduced because the EMS company could balance the effect
of schedule changes with production demand from other products and customers.

Technology

Manufacturing process became increasingly more complicated and expensive throughout the
1990s. The impact of SMT has been previously described, but the issue was continually present
as product and manufacturing technologies rapidly developed. Access to the latest
manufacturing technology might be impossible for most OEMs, because of both cost and
complexity. However, an EMS would be able to offer the technology to meet the production
needs of many customers, and develop the required skills to effectively utilize the new processes.
Thus, outsourcing offered the potential for an OEM to access important new technologies
without incurring high start-up costs (both economic and in training), nor paying excessive
production costs.

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Solectron: From Contract Manufacturer to Global Supply Chain Integrator GS-24 p. 21

Exhibit 6
Global Enterprise and Resource System (GEARS)

The GEARS Application Architecture is shown below:

Web Publishing

Suppliers
Supplier/Customer
Info thru the Web

Sites

WW Mat’ls
Data Report Writer

“Core”
“Core” ERPApplications Fast “What if”
-- Materials
Materials
-- Manufacturing
Manufacturing
PDM -- Finance CRM
Finance
-- Service
Service
Other Financial
Apps
Customer Financial
Applications
Applications consolidation
Connectivity -- Multisite
Multisite Integration
Integration Model
Model

Shop Floor Warehouse Mgmt

Control System

CRM – customer relationship management

ERP – enterprise resource planning
PDM – product data management

Source: Solectron Corporation

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