Outsourcing: Joe Lawler, Chairman, President And CEO Of ModusLink (Part 3)

Sramana Mitra: I have two questions about the market and its size: What does the rest of the market look like? Who are the players? If it is a $25 billion market, you are $1 billion.

Joe Lawler: Well, the biggest chunk is those that are doing these packaging or returns management or fulfillment services in-house. We have reported that Sony is a new customer with us, and we are one of the first outside suppliers Sony has ever used. They have always done their supply chain activities in their own operations. They began by outsourcing select packaging to us. The in-house piece would be a big part of it. We estimate that this is probably still about 70 to 75 percent of the overall market. Then there are the contract manufacturers like the ones you just mentioned. They would represent somewhere in the 10 to 12 percent range, and there are the folks who look just like us who would make up the remaining 10, 12, or 14 percent.

Sramana Mitra: OK, fair enough. What is the business model? How do you charge your clients?

Joe Lawler: It depends on the service. If there is a packaging component there, first of all, we would receive a bill of material from that customer. We would take that bill of materials and  enter it into our system. We often procure those or some number of those component parts, which would include packaging materials. It might also include things like power cords, keyboards, flash memory, batteries, or any other item that might get loaded with that product. We get paid for the procurement activity of those materials. We would get paid for the number of touches. We refer to the process as touches on a production line where we would bring component parts to an assembly line. We package those component parts and probably shrink-wrap the final product. We then bulk it into a pallet. We ship that, and we get paid for each of those activities.

Sramana Mitra: So, would it be fair to characterize your business model as a transaction-based business model?

Joe Lawler: Yes. A big part of what we do is very transactional based. With some of our clients, we get paid a fee, which is typically paid quarterly, for doing planning for them. We actually take that bill of material, take their demand forecast, explode it out and show them what the demand plan looks like over an extended period. Sometimes, we go in and work with our customers on packaging. We haven’t talked about sustainability and the importance of environmentally-conscientious packaging, but we will go in and work on projects to help our clients fit more product on a pallet, for example, to downsize their package to  have less of a carbon impact in our overall model. We will get paid for helping them actually do that redesigning.

Sramana Mitra: There is a component of your business that is consulting services, and there is the other component which is transactional?

Joe Lawler: Yes, that’s right.

Sramana Mitra: Now, in terms of the operational architecture of your business, how do you organize these factories, these assembly lines? How close are you trying to get to the customers, and how are you optimizing that against the core of structures of different locations and so forth?

Joe Lawler: Yes, that is a big question. Let me see if I can break it down a bit for you. You can dig deeper where you would like to dig deeper, but first of all, let’s talk about how we organized up until last year, we were a heavily matrixed organization. Everything was really done globally. Our operations were run globally. All operations, all solutions were managed globally and were very centralized. What we did last year is move to a business unit structure that still requires a lot of collaboration across the business units. Our biggest businesses are supply chain businesses. The supply chain businesses, which does some of the postponement work that we have talked about, operate as global businesses. They are responsible for the solution centers and the coordination with clients work that is typically done in one, two or three regions. We have an e-commerce business that also is global. All these businesses are global businesses, but the e-commerce business really focuses on bringing e-commerce solutions to our clients. They are often managing a landing page, website processing financial transactions, executing contact centers work for our clients. Sometimes there is a fulfillment aspect, and that would be coordinated through our solution center activities. Our third business is our repair business in the aftermarket service space, and this is where we do repairs. We would bring products in from retailers and some OEMs. We repair those products. Sometimes, we will return them directly to a consumer. Sometimes, we will send it back to the retailer, and sometimes we will liquidate it on their behalf. That also is a global business, but it is done primarily in the United States with a bit of that business being done in Europe.

The final business, an Americas-based business, is a recovery services business. I would encourage you to go to Techforless.com. You will see what is an open box return business. We go out, buy a product, bring it back in, refurbish that product and resell it to consumers and to B2B channels for substantial discounts over what the products would sell for retail. Let me just make one more comment [about] those business models. There are standard platforms that the business operates on. For example, there is an IT infrastructure, SAP business and IT infrastructure. All of our businesses sit on top of our core IT infrastructure. Finance is heavily centralized and planning and procurement are heavily centralized, even though they are all executed regionally. Human resources is also heavily centralized. Our functional activities are heavily centralized and made available for each of the businesses to leverage.

This segment is part 3 in the series : Outsourcing: Joe Lawler, Chairman, President And CEO Of ModusLink
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