Outsourcing: Joe Lawler, Chairman, President And CEO Of ModusLink (Part 2)

Sramana Mitra: I see. So, the Flextronics and the Foxconns are doing the hardware part and they are sending it to you. You are doing the software and the packaging, I suppose, the outside packaging that is localized, and then you are shipping it to the retailers or the distributors?

Joe Lawler: To be precise, Flex and Foxconn and all the others that are located over there, do do a lot of this packaging in the regions themselves. Sometimes that is absolutely economical, but the point is that forecasts are never 100% right. Oftentimes you wouldn’t postpone 100% of a particular product. You might postpone 20%, 30% or 40% of that product. The model that we take to the OEM basically says, we can do 100% of the packaging region. Often times that does make sense, but sometimes it is to take the peaks and the valleys and really try to level out your demand requirements in the region as opposed to try and anticipate months before the demand really hits.

Sramana Mitra: That makes sense. So, the 14 centers, your regional centers that you talked about, would you talk about where those are? That will also help us understand more of the business.

Joe Lawler: Sure. We are actually in 14 countries with 25 solution centers and those would be throughout the Americas and Mexico. We are in Japan, China, Taiwan, Singapore, Europe, and in Australia. In Europe, we are in Eastern Europe and Hungary, in the Czech Republic, the Netherlands, France and Ireland.

Sramana Mitra: I have one question about the Americas. Some of the premise of your business is in that there are diverse power interfaces, there are diverse language interfaces and that makes a lot of sense in Europe, especially on the language side but why in the Americas? In the Americas, the language requirements are fairly uniform, the power interfaces are fairly uniform, so what is different, what customization are you able to do in the Americas?

Joe Lawler: Yes, that is a very good question because the postponement model is indeed particularly attractive in Europe. In the United States when postponement becomes attractive, it has more to do with this idea that you never get that forecast a 100% right, and the cost of reworking product can be excessive. So, rather than thinking about it as a language configuration, think about it in terms of Costco and Wal-Mart versus Best Buy and Target. The packaging requirements for those clients can be markedly different because they want a different look and feel they might have on-pack or in-pack promotion that they want to execute differently. They want to maintain some flexibility to do that, so that is where we come in. We say bulk a certain amount of that product in and then take those demand signals and package accordingly.

Sramana Mitra: Got it. The customization is more at the packaging level?

Joe Lawler: That is right. Now, we do a certain amount of customization in terms of content load and software as well, but that is a relatively smaller part. The packaging would be a big part of it.

Sramana Mitra: In terms of your history, the two companies that you brought to put ModusLink together, were they in the same business or did they have different roots?

Joe Lawler: They are very much the same business. They were complementary businesses. One had its core footprint in the Americas and in Europe. The other one had its core footprint in the Americas and in Asia. By bringing them together we really were able to extend and improve upon our footprint. There are people who do some of what we do in the region today, but there are very few players. There is nobody who does it across all three regions, and there are very few who are able to do it across multiple regions. So when we work with these large customers who need to flex their production and their packaging from region to region — depending on what is happening with freight rates and labor costs and certain other risk factors — we offer a pretty comprehensive platform for them to be able to flex it. And because we have standardized capabilities such as IT capabilities across that platform, it makes it relatively easy for us to move things pretty quickly for them where as others can’t do that.

Sramana Mitra: The business that you are in, how big is this business worldwide? I am not counting the contract manufacturing piece of it. I am asking you about specifically the kind of customization outsourcing that you are doing.

Joe Lawler: We estimate that our market size is about $25 billion for the work that we do for our clients. Now, that is how big we think the market is, so we are about a billion dollars in revenue. You can do the math in terms of what percentage of that addressable market we are. But I think a somewhat more interesting number is that we handle as much as $80 billion of our clients’ actual products. So, while we are adding value, which might be packaging or loading content — I haven’t mentioned returns management or repair services, which we also do for them — the fact of the matter is that we are influencing a significant amount of revenue for our core client base in the way that we are executing their supply chains for them.

This segment is part 2 in the series : Outsourcing: Joe Lawler, Chairman, President And CEO Of ModusLink
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