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In February, Electronic Systems Inc. (electronicsi.com) captured Service Excellence Awards for responsiveness and value for the price. The Sioux Falls, SD-based EMS company has a history of success in the SEAs, but vice chairman Leo Reynolds says it's the customer comments that feed growth and improvement. In late March he spoke on Lean manufacturing, procurement and RoHS warranty with editor-in-chief Mike Buetow.

CA: How many employees does Electronic Systems have and how close to peak levels are you?

LR: Electronic Systems has about 250 employees; close to peak level, but we are at much higher revenue levels because we've become more productive. ESI has two SMT lines and an automated PTH line, and a good deal of box-build capability.

CA: What does your Lean Enterprise initiative entail and what changes has it sparked in the plant?

LR: For over two years we've been in a formal Lean mode. We started by training all associates, which continues with new hires. We started with some high profile successes on higher impact programs, which gave everyone a taste for what is possible with the application of the basic tools of Lean. These tools include mapping a process, analyzing non value-added steps and redesigning the process. From these initial successes we went on to apply these principles in all areas of the operation, including administration and management where we had some of our biggest percentage improvements. Changes were made in how we pull and supply materials to the lines, how we process checks and even how we pay for MRO items.

CA: How did you initiate the Lean program?

LR: We looked at the challenges, particularly from offshore competitors. Our competitors are the some of the best and the brightest in industry. In fact, I was at one time a customer of this industry and was so impressed with the people we dealt with I wanted to be a part of it. But the waters are fast and deep. We knew we needed to make continuing and substantial improvements. Lean encompasses the best of all the programs that came before it: it's really about the elimination of waste. The decision to go Lean was a corporate decision, and we hired a manufacturing manager who had a lot of experience in Lean. You really need that: a Lean champion in a line position, where they are responsible for making things happen. We also hired an outside consultant to train Lean principles to all associates, and then later hired that consultant as an employee. We trained everybody and gave each team something bite-sized. Using off-the-shelf software, we also immediately did a value-chain map of the entire organization. The map rated projects by the amount of resources required and we attacked the low-hanging fruit first. We had one big project that was extremely successful. We think that was important because everyone needed to see that this could produce major results.

We've been careful to call our program Lean Enterprise, not Lean Manufacturing, because I think a lot of these programs get foisted on the back of the production people as if they are the only ones who add cost. In reality the management and touch labor adds as much or more.

We have continued with a Lean steering committee, implementing ad hoc teams based on individual challenges that appear to have the biggest benefit. In addition to specific program improvements, we have lowered our material burden, labor burden and SG&A percentages - those are improvements that affect our overall ability to compete on all programs.

CA: What problems, if any, have you encountered with parts that are mislabeled either leaded or Pb-free? Are you buying direct, or primarily from distributors?

LR: Electronic Systems took a proactive approach from the beginning, not necessarily agreeing that RoHS is a good idea, but that it would be inevitable in some form. We've had an RoHS steering committee for a year and a half guiding the company in every aspect of RoHS including component issues, process issues and formal compliance reporting procedures, none of which is entirely "settled law," as they say in judicial hearings.

We observed early on that most OEMs were not taking the deadlines seriously and we felt it was necessary that we be able to guide our customers through this when the time came. We have presented seminars to both individual customers and to industry colleagues in preparation for compliance. We are currently running several programs with full RoHS compliance and have several more in pilot stage.

As for specific components, several connectors that have been labeled to be RoHS have failed to withstand the elevated temperature in the reflow ovens.

CA: What approach to indemnity or warranty are you taking for RoHS compliant product?

LR: We have a formal policy statement that we've discussed with each customer that lets them know that 1) they still have design control and must approve all changes, including each new RoHS compliant part and 2) that they must comply with certain specific time constraints to ensure availability of RoHS parts and the purging of existing leaded parts. We will go so far as to scrub the BoM, but the customer still has to approve it. Many parts have been converted to lead-free and are shipping under the same part number. When this happens we note that the part is now lead-free, even though it may be going into a leaded assembly. Compared to conventional product warranties, we treat RoHS product as conventional product.

CA: Electronic Systems has won several Service Excellence Awards, including two this year. What, in your opinion, is the net effect for the employees and the company of entering awards programs?

LR: First, the reason we enter Circuits Assembly's SEA program is to get an annual objective, third-party look at our customer's true perceptions of our organization. We also do a mid-year in-depth customer service survey. Both of these surveys are part of our overall customer service program, the results of which feed into our corporate measurement program. Therefore, the company receives a benefit whether we win or not. For the associates, it's a great feeling to know that your work is recognized as superior in some categories when compared to a national yardstick.

Upon receiving the results, we have an all-plant meeting, and graph the results and post them. We show our latest scores against our overall score over the years. We also show our score in each category compared to this year. It's a main criterion of our corporate customer service program. Winning is great, but if someone scored you 5 out of 5 you have not learned anything. The value for growth and improvement are in the negative comments.

CA: As regional player, Electronic Systems is representative of many North American EMS companies. What do you see as the advantages of the niche market, and how do you keep up with changes in the broader marketplace?

LR: The obvious advantage of the niche market is that we can be more time-responsive than other players outside the region or outside the country. This is, to some extent, a temporary situation for a lot of EMS businesses as offshore competitors become more fleet of foot. Regional players will have to continue to improve quality, technology and productivity to keep market share.

We keep up with the industry through trade publications like Circuits Assembly, IPC meetings and the SMTA.

CA: How do you find customers?

LR: We use sales reps in the Midwest and have a director of sales in the Minneapolis-St.Paul area. A lot comes from word of mouth. Electronic Systems has been in business for 26 years and has a solid reputation. The Midwest market is a large market but a relatively small community and word gets around.

CA: Do you ever get overload work from other EMS companies?

LR: We will pick up jobs from larger EMS companies when a customer isn't big enough for them. In one case where this happened, the customer was a Fortune 50 company but the program was too small for the larger EMS company to handle.

CA: Many EMS companies are launching repair depots.

LR: We have always had a fairly significant repair and refurbishment business. We don't work direct with the Dells or the Gateways, but typically work with their suppliers doing refurb, and it is an important business for our mainline customers too. Sometimes OEMs forget to settle on an out-of-warranty program, and we have helped some customers design a refurb program. We perform order fulfillment and ship a lot of finished goods ourselves.

CA: You have spent several years on the board of IPC. As associations try to keep up with members that are becoming increasingly global, how should they go about working with related organizations abroad?

LR: Each trade group has a primary responsibility to its membership. In the case of IPC, its membership was already global. I think it's in the best interest of everyone in our business, when it comes to global business, to engage, engage, engage. I wish I didn't have as many Chinese competitors, but what are the options? I can also buy things in that market and that helps me be a better supplier for some of my customers.

In a technology business you have to be prepared to change. I think the U.S.-based trade associations have to engage with the overseas trade groups, and it is way better to get our standards promulgated around the world than to let others take charge of writing them.

CA: Have you looked into offshore procurement?

LR: A few years ago I took a list of component materials to Shenzhen. I met with some suppliers, but they weren't able to get better pricing than I was at that point. We do have several suppliers there for PCBs. We have looked at having some China suppliers to do some higher volume assembly work, but so far haven't actually executed there.