Outsourcing: Joe Lawler, Chairman, President And CEO Of ModusLink (Part 5)

By Sramana Mitra and guest author Aditya Modi

Sramana Mitra: The optimization you are talking about, the technology behind that kind of optimization, is that off-the-shelf technology or is it something you have custom built for your business?

Joe Lawler: It is a little of both. The core product is an off-the-shelf optimization model that is heavily customized because the value of these models is really only as good as the data that is entered in them. So, hundreds and thousands of data points are now entered into a model, and there is a certain amount of customization we have done over time in that model. We have something that, while not totally proprietary, would be proprietary if you put the value of the content that is uniquely ModusLink.

SM: And does SAP provide those models or are they coming from a third-party provider?

JL: It is a different source, it is not an SAP source.

SM: Got it. In terms of headcount, how large are each of these 25 regional centers?

JL: We have about 4,500 full-time equivalent employees and about another 4,000 flex labor employees who are FTEs who also work with us. One of the real keys to our business is to be able to use flex labor based on construction runs, so we might bring in two assembly lines for four hours, four assembly lines for eight hours, and be able to flex labor accordingly.

SM: So, across the 25 centers you have 4,500 on payroll and another 4,000 flex labor employees?

JL: Right.

SM: What are the dynamics of your business? What is happening in terms of broad trends in your business? You talked earlier about Sony, which had most of their business internally just come on board as a client. Would you talk a bit about what are trends along those lines?

JL: Well, there are trends that are affecting the overall outsourcing space and therefore our business. One is certainly form factor. We talk a lot about form factor, and the simplest way to think about form factor is the size of the package. But it also has to do with what is inside the package; the OEMs and our direct clients are looking for ways to take out costs, to drive a lower price that consumers are constantly demanding. One of the ways to do that is to reduce the package size: take out content, take out CDs, take out printed materials and embed them into the technology device itself.

Another driver for that form factor in addition to cost is sustainability, just being environmentally conscientious about what is being consumed as a part of all these packaging requirements; is certainly a trend that we are continuing to see. A third one is the amount of inventory that is being carried in the supply chain itself. A year or two ago, just pre-recession, in the Americas the statistics show that there was $1.46 of inventory for every dollar of sale of consumer electronic product. That number last year had moved to about $1.27, about a 13% drop in the amount of product that retailers were carrying in support of sales. What that really means is there are two things at work: One is just the speed of the supply chain, so the speed of a supply chain has picked up, and we are getting more efficient in the way we execute the supply chains. Second, the cost of running out of a product and therefore taking a markdown on a product it is being viewed differently today from how it was a few years ago. Retailers are more willing to run out of a product today than they were a year or two ago.

All of that impacts the kind of work that we do. There are one or two other trends. There is an interesting one that certainly has been highlighted because of what is taking place in Japan. I think there were a lot of people who didn’t realize just how much sourcing and what types of products were being sourced in Japan. It is not a new trend to folks like us who run the business and are trying to help our clients ensure they have an acceptable level of risk when it comes to sourcing, packaging, and getting products to market. So, when we talked about the optimization model, we were talking about overlaying risk management into that optimization model. It’s an important component. It is going to get a little more press in the months ahead because of what is taking place in Japan.

I would say that the other thing we see it about the term “vertical integration,” and it is sort of an old term where people used to talk about how a company was completely vertically integrated. I just used the example of Sony’s being completely vertically integrated. They are starting to move select aspects of their supply chain externally, but what we are seeing is what I think I would call “selective in-sourcing” and “selective outsourcing,” and the people are just getting smarter about in-sourcing those things that are mission critical and that they conclude and only they can do. And then they are outsourcing things that they feel somebody else is just better at.

A good example that was mentioned to us recently. As I think most of the world knows, Apple is sourcing chips uniquely designed for their requirement, but you would not have seen that 10 years ago. People were buying generic chips from Intel and embedding them but now because of unique design requirements, they feel like they have not only got to uniquely source them but in some instances buying the facilities to actually do the manufacturing. Whereas when it comes to packaging or other e-commerce activities, you knew they are more willing to outsource some of these things to qualified partners and to qualified suppliers.

This segment is part 5 in the series : Outsourcing: Joe Lawler, Chairman, President And CEO Of ModusLink
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