Outsourcing: Joe Lawler, Chairman, President And CEO Of ModusLink (Part 4)

Sramana Mitra: Got it. The question that I would like to drill down upon is the business you are discussing is the people-intensive business, right? Is that a correct statement, or is the business highly automated?

Joe Lawler: No, it is absolutely a correct statement because of the size runs that we typically do there. It typically makes more economic sense for our clients if we have people-intensive operating lines as opposed to a lot of expensive automation that changes fairly rapidly as products change. So, yes, you are correct.

Sramana Mitra: OK. Given that characteristic of the business, I guess the question that I would like to drill down on is how do you organize these large people-intensive operations in different regions, and what is the philosophy that you use to decide how close you want to be to the customers versus how much of a cost structure advantage you want to get because of these high labor charges or large labor requirements?

Joe Lawler: Let me try to do this both at a site level and then at a global level. At site level, we are executing a program for a client. Think of that program as packaging some sort of a product for them or doing the returns management of some set of products for them. At the site level, we typically have a business manager who would be a direct customer interface with our clients. So, we may have agreed in our service level agreements that we would report out to them hourly, daily, weekly, or monthly, depending on the customer and the volume of business; that we would have visibility into exactly what we were executing if we were meeting SLAs previously described. We have somebody on the ground that would do that. At the site level , somebody is there to ensure that there is good communication.

Sramana Mitra: Where is that site geographically? Where do you put that site? If you are working with Best Buy, let’s say, would you put the site that caters to Best Buy next to a Best Buy warehouse? How do you decide on that?

Joe Lawler: More often than not, when we are selling a new piece of business we are working with a client to put it into one of our existing 25 facilities. So, the client has a particular need. Let’s say the client is Best Buy, and let’s say Best Buy is bringing product in from Asia. If we are going to do the receiving and postponement work, we might talk to them about two locations that we are going to receive that in. One would be in California, and we could service the West Coast out of our Riverside, California, operation. The other one will be on  the East Coast, in Raleigh, [North Carolina]. It really depends. Each time we go through a proposal with a customer we would look at the optimum footprint for them. There are instances where we would open up a unique site for our customers. So, we have operations in Miami that service a couple of specific client requirements. We are exporting a lot of business out of Miami into South America, and it is the most economical way to do that. More often than not we are leveraging our existing sites.

Sramana Mitra: These existing sites are they, by design, located at the lowest-cost locations? Are they located near ports? What is the algorithm behind how you choose these locations?

Joe Lawler: Yes, it is a good question. It’s also why we refer to our overall business model as kind of an asset light, highly flexible business model. We use optimization modeling in our business where we can literally take dozens, sometimes hundreds of factors, which would include things like labor costs, freight rates, time to market requirements, customs duty, VAT taxes and dozens of other variables. Based on the inputs on a particular client program, we could then determine whether site A or site B would be a more optimal fit for that client, to actually use that model to determine the best location for our client’s product within our network. At the same time, we find that there are times when a certain node in our network is not appropriate and will shut it down and move it to another node. A good example is that we were in Scotland six years ago and not in Eastern Europe. Today we have major operations outside of Hungary and  Prague.

Sramana Mitra: That is primarily because of the cost structure of the labor force?

Joe Lawler: Yes, and you balance cost structure with time to market and some of the other variables I was referring to.

I also want to say that part of the way we run our business is heavily focused on lean manufacturing. One of the ways we get commonality through our 25 facilities around the globe on behalf of our clients is we go in and we execute lean manufacturing principles in all of our facilities. We would run kaizen events in all of those facilities, based on specific opportunities. Based on the outcome of that kaizen event, we would rapidly deploy other findings of that into all of our centers across the globe to try to improve costs for ModusLink as well as for our clients. So, that is another core competency that is kind of mission critical on a global business like ours.

This segment is part 4 in the series : Outsourcing: Joe Lawler, Chairman, President And CEO Of ModusLink
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