Lessons from a chaotic EMS warehouse.

Many years ago, after punching out of a negative-culture electronics manufacturing services company, I interviewed with a smaller, family-run EMS. After numerous phone interviews, I flew to their facility and met with the president and the newly hired COO. After spending some time addressing a Q-and-A session in the president’s office, we took a facility tour, starting in the warehouse.

We never made it to the SMT lines before things went off the rails. What happened?

In the warehouse, the team demonstrated a robust incoming inspection process. Well done! But it quickly became clear that chaos ruled the day once kits began to be pulled.

Too many partially “dropped kits” awaited parts or line time. Racks were staged among the stockroom aisles, in the walkway and in every corner of the expansive warehouse. Never have I seen so many kits waiting to be pulled into the manufacturing floor.

When asked about details behind their clear-to-build process, they proudly replied that the plan was to “drop $1 million worth of inventory (kits) a day, build $1 million worth of finished goods a day, and to ship $1 million worth of finished goods a day.”

Having never heard such a simple edict implemented, all I saw in the warehouse were partial kits with parts missing, poor staging as jobs were stacked side by side awaiting parts or line time and unauthorized personnel walking around with clipboards looking for “their part” on shelves and – shockingly – in other, partial kits. One employee in a smock of a color not used by warehouse personnel actually removed parts from a staged kit and walked them to another.

Figure 1. Inventory management makes all the difference in low-margin industries.

Sound bad so far? It only gets worse.

As we moved from the warehouse into the SMT area, all I could see were staggered kits waiting line time. On one hand, most of the numerous SMT machines seemed to be in use, but everywhere I looked, all I could see was a “sea of green”: racked PCBs.

The president proudly told me this was the beginning of the $1 million-a-day build process. I walked to one rack and found the tracker (back then, it was paper, not digital). It had been on the floor for more than a week.

I couldn’t take it anymore. I asked the president if he understood this didn’t count as WIP, and my “sea of green” comment didn’t refer to green PCBs but rather his cash (dollar bills) idling on a manufacturing floor, as materials sat without a plan to convert them in a timely fashion to finished goods.

Oh, the fight was on. The response was defensive and indignant: I was “slick,” and as a salesman, wasn’t knowledgeable about industrial manufacturing.

The COO, who had been quietly taking this all in, told the president he would finish the tour with me. After the president huffed off, I asked the COO to walk me out so I could catch a plane home. Instead, he convinced me to finish the tour. Later, over lunch, the COO asked me to join him, as the family was about to be bought out of the business, and he wanted a partner experienced in both business development and in business.

The turnaround we executed will be told another day. My point is to show how a poorly run inventory process can demolish an EMS company. In fact, if we look back at all the failed EMS companies over the past 30 years, the root cause usually boils down to running out of cash and/or depleting new orders. In a low-margin business, cash is king. For businesses like EMS, inventory is by far the largest cash drain in the industry.

How component deliveries are ordered and scheduled, how full kits are dropped (and I agree that a secondary process missing a component but that has a FedEX tracking number and can “catch up” to that kit as it travels through the initial manufacturing stages makes it an in-play kit drop) and how high overhead SMT lines are scheduled to start the manufacturing cycle should be considered if you want a robust inventory management system that optimizes cash preservation.

While numerous other actions can be taken to conserve cash in the EMS space, this highlights a real-world issue encountered in one of the turnarounds I have been a part of. And, it can be a relatively easy process fix, provided you know what you are doing.

Jake Kulp is founder of JHK Technical Solutions, where he assists OEMs and EMS companies with optimizing demand creation offerings and deciding when and where to outsource manufacturing. He previously spent nearly 40 years in executive roles in sales and business development at MC Assembly, Suntron, FlexTek, EMS, and AMP Inc. He can be reached at jkulp@cox.net.

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