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Electronics Production | March 23, 2009

Riverwood Solutions: we will see forced consolidations in the EMS industry

The founders of Riverwood Solutions spend a great deal of time within the EMS-industry and found that there are a few issues in the industry, which are begging for solutions. evertiq spoke to Ron Keith, COO and Matt Ryan, CEO, about the company’s HOST (Hybrid Outsourced Services Team) model that aims to improve EMS and OEM relations.

Why did you start Riverwood Solutions?
Mr Keith: The main reason why we started this business is the fact that – on paper – the business model of dividing certain core competencies between EMS-providers and OEMs makes a great deal of sense. But it seems like OEMs have never fully realised the value or “promised value” from these outsourcing relationships.

These relationships tend to be a little contentious, because of the structure of the business model. The parties seem to be perpetually haggling over a nickel, while they are simultaneously throwing away dollars everyday. What we used to say in the EMS-business is “If I save you a dollar Mr OEM, it will cost me a nickel”. So the model is inherently designed to be contentious as the two parties tend to spend all of their time figuring out how divide up the pennies. And because the margins are so thin, the OEMs do not always get the level of service that they desire or expect. But the industry also suffers from – what we call – the rule of large numbers. This involves a lot of material purchasing within the EMS-business that tends to overstate the actual value-added margins (VAM) of the business. If an OEM awards a large piece of business - perhaps a $50 million; a $100 million or even $500 million project – these fairly large numbers tend to distort the actual VAM, which likely is just 10% to 12% of the total award. But due to the fact that the OEMs are making awards of fairly large numbers, a certain perception exists around what the OEM should expect. Lost is the math of the deal that suggests the expected profit on the business is somewhere around 2%. What the OEM often focuses upon is the perception that an award of this size should position the OEM to demand whatever resources it desires – after all, it is $100M of business.

The OEM goes to the EMS and says – I just gave you $100 million worth of business and I need an extra resource here and an extra resource there. And with that the model keeps changing and morphing. In the end, you have a piece of business where the EMS profit is reduced to zero – and the OEM is still disappointed that they are not getting more service and more shared risk.

When we created Riverwood Solutions, we wanted to build a business that works with OEMs and EMS providers to create a new way for people to do business. So we created our HOSTSM model which actually provides OEMs some of the resources, processes and tools that they need to help manage their supply chain partners. In this model, the goals are well aligned between the parties.

Mr. Ryan: Squeezing the last penny out of EMS-providers has driven a lot of inefficiency and mistrust into the system. Companies look to us as professionals in the industry to help them build strong relationships with EMS-providers. We know the pitfalls, have individuals experienced in operations and engineering, and can help clients build long-term strategic partnerships that actually realize many of the promised benefits of the outsourcing model.

Can you describe this a little bit more?
In the past there were basically two ways of managing your outsourced supply chain. 1) The OEM hires a bunch of people to closely manage their EMS-provider and manage everything around them or 2) The OEM hires very few people and expects the EMS-provider to manage absolutely everything: the long-term contracts, the strategic procurement, the service level agreements with component suppliers, etc. Neither of these models works particularly well and each has very specific drawbacks that we observed first hand for many years. So we created a model that will help OEMs to optimise their operations, their supply chains and maximise the benefits that they can get out of their EMS-relationships.

We help OEMs to select the right EMS-providers, to establish the appropriate “rules of engagement”, to put effective and well balanced contracts in place, and to implement the necessary metrics for managing their EMS-partner. But we also provide them with our own independent resources – both in the innovation centres of the world and in the low-cost manufacturing centres – which helps them to manage their EMS-providers on an ongoing basis. For instance, we have people on the ground in Mexico and China that spend their days with EMS-providers managing things on behalf of our customers.

How do your regional support centres work (you have one in Stockholm)? Do they visit local EMS-providers or are they established more to attract and inform possible new clients?
Mr. Keith: We are relatively new to Europe and our centre was only established in October of last year. We started it to support a couple of client engagements that we have in Europe. But over time we want to spread to other European locations as well. We will have relatively small offices in Western Europe and those will be operated by very senior, highly skilled people, as well as program and project management employees. Those people will be the front-end of our operations. They will work with the European OEMs on the strategy of their supply chain – on selecting providers, on defining supply chains, on designing distribution systems and working on their specific needs. We will also have regional support centres in Central and Eastern Europe where the manufacturing generally takes place – perhaps in Romania, Hungary or Poland. In those locations we will have people who work more closely with production at the EMS-sites.

Do you have a particular focus regarding the OEMS that you are working with? Is there a specific type of industry sector?
Mr Ryan: As our team is made up of people who have been working in different industry sectors, we are able to provide for the specific needs of each industry sector. We neither focus on nor do we specialise in a specific sector. The experience we have is broad enough to accommodate many sectors. We believe that a well designed supply chain – and although there are certainly slight differences – will work in all sectors.

How did 2008 develop for your company in light of the economic downturn and the financial upheaval in the industry? And with this in mind, how do you see 2009?
Mr. Keith: We started to pull everything together in 2007, so last year was basically our first full year in operation. If you look at it, we closed the year about 30% above our internal sales projections. Relative to our expectations – 2008 was a pretty good year. If you look at our sales forecast for 2009 – we already have bookings for about 35% of our full year revenue forecast with just eight weeks of the year behind us, so I would expect that in 2009 we will again come in quite a bit ahead of our own expectations.

But I believe that the economic situation is a double-edged sword. I think there are some customers that are clearly worried about their financial situation. What we are offering is a new way of doing business. Some companies mistakenly believe that bringing us in adds additional costs, but that is just plain wrong. If you look at what we do – our average customer realizes a first year ROI north of 400% on the fees they pay to Riverwood Solutions. In this economy, anyone that takes the time to understand the payback becomes a customer.

But when people are cutting back on spending and there is a new way of doing business – you will see two groups of people. On one hand you have the OEMs that recognise the situation and realise that they have to find a new way. On the other hand you have those OEMs that try to stick to what they are doing and just do the same old thing incrementally better.

As an overall point of view, I would say the situation for Riverwood will stay neutral – maybe a little bit positive. Should the economic situation not improve for awhile – that will clearly drive more business our way. Purely because there will be a lot more turmoil in the EMS-industry and people will be a lot more focused on cost saving.

Are there obvious specific needs in the various geographic regions?
Mr Ryan: This is something that we are still trying to understand better at the moment. Most electronic products that you find in the highly industrialized countries are built in lower cost regions such as China, Malaysia, Eastern Europe or Mexico. A great many products that you find in the west are built in China. Because of this huge geographic dispersion and the different time zones – many of our clients find it difficult to manage suppliers halfway around the world. So we provide the on-the-ground services in these regions. Our people don’t work for the EMS-provider, but for Riverwood as an independent party looking out for the interests of our OEM clients. That is one reason why our model works very well for the OEMs and why our model seems to resonate with our clients.

Our model is slightly different for European OEMs that produce in Central or Eastern Europe. Although it is always difficult to manage these kinds of remote operations – the fact that there are only one or two hours time zone difference makes it a bit easier. Having said that – there are a great number of European OEMs that build in Asia or even Mexico – and our model is very effective for them.

How does the HOST model work?
Mr. Keith: The HOST model looks very different for different companies. It depends on the location of each company and the supply chain evolution that each company has been through. Although we do not talk about specific companies that are our customers – because this is part of our business confidentiality – let me explain the HOST model in a broader way. By way of an example, we are working with several start-up companies right now. This type of company usually has designed a product and they have some level of customer demand. What they don’t know is how they can connect the product design with that demand. We can provide them with the resources and tools to do just that. We work with their product design, their marketing people and their senior management to develop a manufacturing strategy – as opposed to them hiring these resources from outside. We design a supply chain for them. Early on they can use our Hybrid Outsourced Services Team for supply chain design and operations strategy development, so they can outsource the initial work of establishing a supply chain.

Other companies that use our services currently operate a purely domestic supply chain, but they are thinking about off-shoring some of their production. But they are relatively small – maybe $150 million. Rather than hiring internal people in the west to manage a new supply chain off-shore, they will come to us to help them establish and manage an off-shore supply chain. We help them during the entire process – from selecting an EMS-provider, negotiating contracts, establishing rules of engagement, designing a supply chain and transitioning product overseas.

And then there are really big companies. These companies come to us because of the strategic flexibility of our resources – we act as an extension of their operations team. Riverwood can help these companies to overcome the supply chain challenges of a product launch, optimize their internal operations function, or assist with global operations re-alignment. Rather than expanding their internal team, they can hire us and we will provide the resources, relationships, processes and the know-how. This means that the OEM company does not need to add staff today and possibly announce layoffs tomorrow, which in times like these, is essential to their image.

The HOST model is really this: giving each customer the right resources at every stage, and at every level as they design, implement, manage, or reorganise their supply chain. We are part of the OEM’s team and they see us as just that.

Thank you for the interview.

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