Supply chain management (SCM) tools are supposed to reduce the complexity of the supply network and streamline the process of procurement, assembly and product distribution. When erroneous forecasts occur or market conditions change, organizations can theoretically react instantly to redistribute materials and eliminate excess product. While this has great appeal as a concept, it rarely is the case in practice. This is because the ones who purportedly manage the supply chains, CMs and more recently CDMs (contract design manufacturers – sometimes called original design manufacturers), do not always have the ability to manufacture on a real-time demand basis. Most suppliers organize their operations to manufacture and procure parts in a ‘batch-mode’—buying parts direct so they can gain cost advantage and then producing all of the finished goods as fast as they can. Running an operation on this basis requires weeks of advanced forecasts and schedule planning with no changes allowed. If there are substantial variances to the forecast or spend, penalties are charged to the OEM for the change, unless the CM has purchased inventory independently as Solectron did in 2000 in anticipation of a continued upside. This later resulted in significant inventory write-offs and SCM tools only exacerbated the problem.

It’s probably true to say that the problem of bad forecasts will never go away since it is inherent to the current manufacturing paradigm. There are simply too many custom and specialized parts that are difficult to acquire without getting in line through forecast allocation. The majority of CMs cannot structure their operations to work without them, requiring 4-8 week lead times to obtain materials and to produce products. The ‘best guess’ approach to predicting product demand and procuring/scheduling/manufacturing has ultimately established a level playing field for the EMS industry with CMs/CDMs vying for the slightest competitive edge in operational efficiency. It has also exposed many of these firms to tremendous risks in the long lead times on Work In Process and finished goods inventory as well as liability on obsolescence and quality issues. One might ask, ‘Has anything fundamentally changed from the days of OEM manufacturing besides CMs perfecting the technique of 23-hour equipment utilization and high velocity manufacturing?’

A Singularly Unusual Company
One very remarkable CM has emerged out of this industry that avoids the pitfalls of forecasts by producing only real-time product orders on a daily and weekly basis (i.e., no firm production scheduling). They can do this because their manufacturing operation is able to scale in resources (labor and materials) in real-time and their supply chain management system can deliver materials almost instantly. (Such an environment provides the biggest advantages for products that are low-to-medium volume and high mix.) Thus forecasts are practically obsolete since every day’s production schedule is met and shipped independent of the variances. This naturally suggests a very dynamic environment which requires special cooperation and organization of suppliers, manpower and manufacturing equipment. Yet once in place, it yields extraordinary results in production metrics not found in most manufacturing operations. For example, inventory turns average approximately 12 a year whereas most CMs in the industry average 4-6 turns, and only 8 in special situations (inventory turns are a highly misquoted metric within the EMS industry). Since product assembly doesn’t occur until consumption generates actual demand, the obsolescence risk is greatly mitigated. Product cycle time usually occurs in just one day and on-time delivery by the company exceeds 98 percent.

Electronic Product Integration Company (EPIC) is headquartered in Rochester Hills, Michigan and has plants in Norwalk, Ohio and Juarez, Mexico (distribution and final assembly in El Paso, Texas). The company has developed a manufacturing process technology that runs without advanced forecasts (only daily/weekly schedules) yet provides its customers with what is wanted when it is actually needed. EPIC does this with an end-to-end ‘lean’ manufacturing system that achieves a new benchmark in terms of flexibility, productivity and turnaround time. And it has achieved this for nearly all of their customers who give them high marks for their quality, speed and cost-competitiveness. How is this done?

The first step was to develop a “pull” system within the EMS operations. EPIC had to conduct extensive layout changes to establish a cellular-based flow to improve capacity utilization and increase equipment and process flexibility. Through these changes, the company increased component placement activity by 3X without adding additional equipment. Ultimately, EPIC developed and implemented a revolutionary approach combining Synchronous Flow Manufacturing with a Lean Operating System. According to Jochen Lipp, V.P. of Operations, some of the breakthroughs included:
• A significant reduction in set-up/change-over times of 15 minutes average versus greater than two hours normally. This enables the company to conduct multiple product change-overs per shift with very small transfer quantities.
• Increased first-pass yield at in-circuit test and functional test through the transfer of very small quantities which permits real-time feedback versus large batch processes.
• Reduce the average production cycle times from 4-5 days to less than one shift in a high-mix environment (e.g. producing 25-50 assemblies simultaneously in each work cell), with work-in-process of less than one shift within the system. This has the added benefit of reducing obsolescence risk associated with engineering changes.

The next step was to get cooperation from EPIC’s materials suppliers—principally distributors such as Avnet, Arrow, Future and TTI—to provide components through an in-plant warehouse store that is replenished on a weekly basis. Standard EDI interfaces are used to order materials and since the company only requires what it needs for the week ahead, so there is virtually no scrap or obsolescence. This flexibility saves money because it eliminates inventory and bulk procurement costs. As one of EPIC’s distributors puts it, “It is inflexibility that is expensive in the electronics manufacturing business,” meaning that long lead times in procurement and product turnaround cycles have many hidden costs. Karl Keller of Future Electronics works with EPIC by providing materials on a consignment basis which allows them to pull materials in real-time. “EPIC has used their BTO system to great success when people want quick turn manufacturing. They can finish a product in a day whereas the competition will take weeks.”

The biggest hurdle by far is on the operations side which required a complete restructuring. Wally Johnson, Vice President of Supply Chain Management at EPIC put it this way: “Going to China is the easy choice for most OEMs seeking cost reductions. We had to create a new and dynamic organization that was fast, flexible and competitive. A lot of people talk about lean manufacturing but most stop short of a full lean program. The difference in our system is with our execution.” To facilitate this new model, EPIC has perfected a Kanban system in its operations. Cooperative distributors are pivotal to providing the necessary component response time for their factories to execute and give its comparative cost advantage. Because the model lacks the overhead associated with traditional materials resource planner systems and production scheduling, EPIC is frequently able to offer a cheaper total solution to its customers—even when competing against much larger 1st and 2nd tier EMS companies.

All of this requires a dedicated and highly trained work force. Most EMS operations have people coming in on fixed shifts and completing specific, task-oriented production schedules. At EPIC, what makes this situation unusual is that everyone is trained to operate any piece of machinery and for any task on the floor. This creates a situation where the entire work force is a fully independent and mobile ‘asset’ available to tackle any given problem. As such, people flow to the area of most urgent need such as when demand increases or when replenishment is needed. A simple but straight-forward colored coded card system alerts workers to daily production requirements (green indicates business as usual – produce the next pull quantity; yellow indicates a higher priority such as an upside order, and; red cards are the highest priority, such as two bins are empty). Manufacturing equipment is streamlined and made flexible so that it can handle any assembly needed, making utilization high and the cost per assembly low. This includes utilizing state-of-the-art soldering machines and vapor phase reflow ovens from EPM in Switzerland, which enables very rapid changeovers “on-the-fly”.

A Satisfied Customer Base
How well does EPIC's manufacturing service work in practice? “EPIC has done an outstanding job in meeting our lean manufacturing initiatives and helping to support our Kanban system to meet customer demand” states Travis Cline, Electronics Commodity Manager at Respironics, Inc., based in Murrysville, Pennsylvania. The company sought out suppliers that would achieve its lean internal manufacturing goals and selected EPIC on a number of performance criteria. “As a company, we only want to keep minimum inventory, and as a bin goes empty, they get it replenished very quickly. This is all part of our Demand Flow Technology™ manufacturing setup.” notes Cline. Respironics uses EPIC's Norwalk, Ohio and Juarez, Mexico facilities for production and finds that these sites allow for a faster response than off-shore options.

Another customer, Ingersoll-Rand, runs a lean procurement operation in which EPIC maintains a minimum stocking level but responds to actual demand with replenishment planning. Michelle Stark, Supply Chain Manager, calls this program SOMI (Supplier Owned and Managed Inventory) whereby the inventory is owned by EPIC until the point of disbursement to the factory from the SOMI warehouse. EPIC closely monitors Ingersoll-Rand's disbursement rate to get a true sense of demand and feeds their replenishment accordingly to maintain the minimum stocking level. “The SOMI program gives our operations a lot of flexibility” states Stark. “Ingersoll-Rand no longer has exposure to expediting fees or inventory liability but the supplier gets quicker payment terms in exchange for the reduced liability and improved inventory turns” she continues. “Payments are processed weekly from a disbursement record. The process is paperless because we don't provide a purchase order and the supplier doesn't provide an invoice.” EPIC has maintained a very high on-time delivery performance for Ingersoll-Rand through the implementation of this program while substantially increasing inventory turns.

Attention to detail has emerged as one of the key success factors for EPIC and in its ability to execute at such a high level. “Just take a look at our cash conversion cycle which is probably the lowest in the industry ” states John Sammut, President and CEO of EPIC. “Most CMs typically are in the 50s to 60s days whereas we are in the low 30s. This means that we are giving our customers a level of flexibility and performance that tier ones and twos can’t even begin to match.” This performance has translated into phenomenal growth over the last several years in a period when the overall EMS is contracting and consolidating. Revenue for EPIC grew at a greater than 25% compounded annually over the past four years, and the company has business on the books to sustain this rate into 2004 according to EPIC’s Director of Business Development, Todd Baggett. Moreover, the company has achieved a return on invested capital that most CMs in the industry can only dream about thereby bucking the trend that EMS is only an anemic, low-margin business that cannot be competitive in North America.

What conclusions can we draw from this? First, that innovation and profitability are not dead in the EMS business. EPIC’s customers are obviously getting good value from its lean manufacturing service offering, otherwise, they would do it themselves or go to another supplier. EPIC has found a way to give its customers superior performance, quicker turnaround time and a lower cost product offering—yet still make an attractive return on its sales. Secondly, EMS production does not need to go off-shore or into China to be competitive. This is a zero sum game in which suppliers are engaged in a feeding frenzy for fractional pennies. The winners will be the ones that can survive on the lowest margin and there are many ambitious Chinese CDMs willing to play this game to the death. A solution in North America has come from people willing to break away from the old paradigm of batch-oriented manufacturing and purchasing. EPIC has defined a new model that gives them and maybe others a way to compete against low-cost, off-shore suppliers by being more efficient in all aspects of production. While EPIC’s model may not suit every customer and every product situation, it is heartening to find at least one company in the industry that has found a unique way and methodology to succeed. Necessity has once again shown to be the mother of all invention.



Abstract
The forecasting of product demand and the impact that it has for manufacturing is profound. Yet forecasting is replete with false and unrealistic assumptions since people must 'guess' demand based on estimated or real patterns of consumption. The exercise of forecasting introduces unnatural and emotional hedges that get multiplied throughout the vendor supply chain. What if forecasting could be eliminated and replaced with a 'real-time' demand system that gave customers (and manufacturers) just what they wanted, when they wanted it? Is it possible to develop a frictionless supply and manufacturing system that works in this way? Apparently so, and there is at least one EMS supplier who has many happy customers to prove it. This story is how one company is changing the face of electronics manufacturing and making forecasting on all levels of the supply chain, obsolete.
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