Flextronics and Contract Manufacturing

Flextronics and Contract Manufacturing

Flextronics is a major company in the electronics manufacturing services industry, or EMS for short. This particular industry is incredibly competitive with regards to pricing, product and service quality, and overall customer satisfaction. Contract manufacturing, a term synonymous with electronic manufacturing services developed from small job shops that would assemble equipment for their clients. In the early start of this industry, EMS companies were not extraordinarily important because original equipment manufacturers dominated the production side.

IBM was an early adopter of electronics production because of the rapid demand for personal-use computers and printers. In turn, this led to a new market that grew exponentially in the 1990’s; contract manufacturing. The companies that began to outsource their production to EMS companies enjoyed parts that came at a much lower cost than in-house production. The idea was to employ contract manufacturers outside of the United States, where wages were much lower and thus resulting in extremely high margins for the parent. With that being said, the EMS companies operated at relatively low margins.

Flextronics is one of the largest EMS companies, and they have had a very profitable run along with some major companies, such as Kronos. Kronos was a giant in the data and communications industry. Kronos caused a problem for Flextronics because they demanded Flextronics hold excess inventory, which greatly reduces profit margins for Flextronics. The $30 million in excess inventory that was held in Flextronics hands became a problem that the CEO of the company tried to settle. He met with Kronos’ EVP of operations and procurement and he was assured the problem would be fixed. On the contrary, the problem actually became worse than it had been months prior to their meeting. Kronos decided that they had the power to tell Flextronics no, essentially eliminating 10% of Flextronics revenue. Flextronics CEO had to dcide whether to write off the money that would not be received and try to continue grooming the relationship with their client, or completely eliminate the client from their business plan.

Jensen Corp was another large consumer that bought products from Flextronics, making up another 10% of Flextronics’s revenue source. Jensen and Flextronics had a good business relationship, however, Jensen had been known for mistreating their clients if the ball doesn’t go their way. An executive at Jensen addressed Flextronics with what was said to be a “warranty” problem. Jensen expected Flextronics to pay a warranty expense of $10 million before the end of the quarter, only three weeks away. Flextronics tried to explain that their warranty expense was a little outrageous considering how different Jensen’s margins were in comparison to Flextronics. The CEO had to decide whether