Outsourcing: Brad Heath, CEO of VirTex Assembly Services (Part 4)

Sramana Mitra: Would you talk a bit about the logistics challenges in shipping and so forth? Of course, there are energy prices and everything, but how has that changed? At some point, it made a lot of sense to manufacture everything in a local destination, and the logistics and shipping charges were not exactly big factors, but they seem to be becoming bigger factors. Would you talk a bit about the trends on the logistics side?

Brad Heath: I can talk to that to the extent that we see that. Obviously, we don’t see much of that in the high-mix, low-volume arena as you would in the high volume, but the piece we see that matters is the piece of, How long do you tie up in supply chain? If you have your supply chain all coming out of Asia and coming to the U.S., you tie up your money from the time that you initially wire the money to place the order, through the lead time of material, through the time of manufacture through the time of transit. That also precludes you from making a lot of changes to your design during that period. So, that logistics time greatly limits your flexibility in terms of what you can order, what you can change, and what you can improve or reduce the cost of in your product.

You may have 24 weeks’ worth of material moving through the pipeline before you can implement a change without significant expense if you’re doing business over in Asia rather than doing it in the U.S. or Mexico.

SM: What about the supply chain? Where is most of your supply chain located?

BH: Our supply chain is very global. We have product that we’re buying from Taiwan. We have product that we’re buying from China. We have product that we’re buying from the U.S. We have product that we’re buying from Mexico. It just depends. Is it easy to ship? Is there a significant advantage to buying it in another region? Is there an abundance of a particular material or something that’s driving that advantage over in that region? There’s not a set pattern that says, I’m always going to buy this in the U.S. I’m always going to buy this in Taiwan. I’m always going to go do this down in Juarez. We go look at a project in its entirety and do the pieces wherever they make sense, whichever place gives us the most flexibility and the lowest overall cost of acquisition.

SM: If an entrepreneur were going to start a contract manufacturing company today, what would you point them toward? What kind of opportunities do you see, open opportunities on your radar screen today?

BH: Boy, that’s tough. It’s a tough business to break into if you don’t have an existing customer base and existing contact base because it’s equipment intensive and material intensive. So, it requires a lot of working capital. If you don’t have the contracts, and you don’t have the employees …

SM: How did your company get into the business?

BH: We got into the business as an outsourcing company, which means were buying parts and having somebody else do the work until we built enough business to do it ourselves. And then we ended up buying one of the two companies that was one of our suppliers and expanded that. Obviously, we did it a long time ago. The footprint has changed a bit in terms of how the world manufactures and what it manufactures. And what we build today is significantly different from what we did 12 years ago. Twelve years ago, we only did printed circuit board assembly. Today, it’s not just about the board assembly, it’s about the entire management of the supply chain. It’s about putting them together in closures, getting the entire thing packaged and doing what we call fulfillment, or “pick, pack and ship” directly to our end customers’ customers. Many of our customers never even touch their products.

SM: What I’m hearing is you say is that you have to start with some very low-end work, build a customer base, build some credibility, cash, and so forth and then go from there?

BH: Yes. There are a number of arenas and tiers of suppliers. We’re still in the lower tier of what’s typically tier 3 or tier 4 manufacturing, which is the under $300 million range. There’s a tier below that that I’d probably equate to a sheet metal job shop type where they don’t have a lot of repeat business. They’re doing little five and ten piece runs of prototype builds for either entrepreneurs or hobbyists, but not a lot of stuff that you can really count on seeing month in, month out. That consistent business and diversity of business is what’s provided health and growth to our business.

SM: What we just discussed is common across the outsourcing business. You know, people start with lower-end services projects and then gradually gain trust and expertise and move up the value chain and work with some of the same customers to do more advanced levels of work. All through the IT services business, we see exactly the same phenomenon.

BH: That makes sense. It’s a service business. Even though it’s manufacturing, we don’t have any of our own products. We’re only as busy as what our customers are able to sell. So, the more products and the more things we can help them with, the better chance we have of staying busy. So, it’s adding those ancillary services and support functions that we can do that feeds a lot of long-term growth.

SM: OK. Thank you, Brad, for taking the time.

BH: Thank you, Sramana.

This segment is part 4 in the series : Outsourcing: Brad Heath, CEO of VirTex Assembly Services
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