Outsourcing: Brad Heath, CEO of VirTex Assembly Services (Part 2)

SM: What are the repercussions of that?

BH: Well, we go ahead and work with our supply chain in the same manner, to minimize our risk and our liability. So, we’re not taking any risks that our customers aren’t taking, but we’re working with our supply chain to minimize that risk for our customers. There are certain things that if you buy them, you have to take them, and there are certain things that you don’t. If we can go ahead and get forecasted information, have that through a managed inventory programs with our supplier partners, we can minimize that risk for our customers.

SM: What about financial engineering needs?

BH: As you might expect, this is a fairly capital-intensive business, and that requires a very good working relationship with a bank. We have a great partner in Plains Capital Bank, which is a local Texas bank that’s been doing business with us for a number of years. That allows us to have the kind of growth that we’ve seen over the last 12 years.

SM: It’s largely with credit lines that you manage the process?

BH: Absolutely.

SM: Does that require that you have to bank firm contracts? That’s what you get your credit lines against?

BH: We have credit lines against receivables and inventory. We do have contracts – we call them manufacturing service agreements – with most of our customers, particularly the ones that have the higher volumes and the higher dollars, which really goes and calls out who has liability for what and sets all the expectations between both parties.

SM: Can you talk about where your manufacturing is happening in terms of geography?

BH: It’s primarily in two areas. The large majority of it is actually here in Austin, Texas. We have roughly 100 employees here in Austin. We also do some work down in Juarez, Mexico where we have about 60 employees.

SM: What are the trends of your business? Obviously, the contract manufacturing business has largely been in China and Taiwan. What are the trends in the business today?

BH: There’s a trend in some cases for stuff to come back, but again, it’s tied to our kinds of customers, which is customers in areas where they need higher reliability and higher flexibility. That’s the areas of industrial controls, in test and measurement instrumentation, medical devices, things that are higher reliability and typically have a little bit better project margin than making things like cell phones or consumer devices.

SM: What percentage of the contract manufacturing business is that? The rest of the percentage is the cell phones and consumer devices.

BH: To be honest with you, I don’t know. There are a few guys – contract manufacturing is a global business – and there are a half dozen of the multi-billion-dollar guys, but I don’t know what their mix of domestic versus global manufacturing is. Certainly, there’s a large piece of business that will always be done in low-cost regions. The question is where are those low-cost regions occurring? There’s much more parity of labor now between China and Mexico. So, being based out of Texas, we can take advantage of some of the lower cost labor rates for some of the things that do need to be more price competitive. We do that for our customers. That’s why we have a presence in Mexico. But we don’t have that long trip across the ocean where we’re incurring large logistics expenses and long lead times to go do that.

SM: What about expertise? There’s lots of coverage in the media about the expertise in manufacturing, especially in manufacturing, moving to China and Taiwan and Asia in general, and that expertise is not available anymore in the US.

BH: I don’t agree with that statement. The US has always been a great power in manufacturing, has been a large investor in technology. Mexico is the same way. The maquila system has been in place for a number of years, and they’ve supported the automotive industry and the electronics industry. There are a number of Asian manufacturers who have facilities down in Mexico for the exact reason. They need to reduce that logistics expense for the stuff that’s being bought and sold in those regions of the US and Mexico. There’s a right place to do all of the work, and it’s not any one region.

This segment is part 2 in the series : Outsourcing: Brad Heath, CEO of VirTex Assembly Services
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