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Avoiding culture shock after acquisition: one EMS provider shares its integration experience.

Outsourcing is a significant and growing trend for many businesses. It can be likened to a dynamic and intricate industrial dance. For it to be successful, both parties must move to the same tune and beat. As such, cultural compatibility between outsourcing partners is vital to the mutual success of the relationship.

In the electronics industry, outsourcing also generally means that an OEM shares control of the resources for production at the electronic manufacturing services (EMS) provider's site. OEM evaluation teams carefully audit EMS providers to ensure that the facilities' capabilities, processes and culture are aligned with their requirements because this is a supplier that literally becomes an extension of the manufacturing organization.

When an EMS facility is acquired by another EMS company, that cultural "brand" can be misunderstood or underappreciated and may change dramatically after acquisition. Acquiring companies must take great care to ensure that compatibility, culture and customer expectations fully are understood prior to acquisition. For example, an OEM may have a product with low-to-medium volumes and a high mix of product configurations that is being produced by an EMS provider that values that type of project. If the EMS provider is acquired by a company that prefers high-volume projects, the OEM customer may find its pricing being raised or service levels being lowered. In some cases, the new EMS provider may even request that the OEM find a new supplier, because this type of project doesn't fit the new business model.

Acquisitions that are a poor fit also can impact strategic planning.

Medical device manufacturers value EMS providers that pursue FDA certification and ISO 13485 registration, because it allows them to outsource the manufacture of complete units in a quality system environment compatible with their regulatory environment. An acquisition of an EMS provider on that path by a company not interested in medical industry specialization may derail a registration or certification process and, over the long term, make that EMS facility a bad choice for final assembly.

Even when an EMS provider considers customer compatibility issues prior to making an acquisition, there are still adjustments to be made. EPIC Technologies' experience illustrates lessons learned by many companies after an acquisition, in terms of managing both internal expectations and customer expectations. In the example cited in this article, after EPIC acquired Siemens EMC operations in Tennessee and Ohio in February 2005, this EMS provider won Siemens Medical Solutions USA's Supplier of the Year award.

Following is an examination of EPIC's strategy for facility acquisition in terms of operational assessment, customer needs alignment and communication. What processes enabled EPIC to actually enhance performance during acquisition integration? How were customer needs assessed? What points should OEMs consider in ensuring their requirements continue to be addressed in the acquisition integration process?

Opeational Analysis and Alignment

To understand EPIC's approach to evaluating the operations of newly acquired facilities, it is important to understand its approach to manufacturing. The management team began implementing Lean manufacturing principles in 2000, and the end result is a company-wide system known as Synchronous Flow Manufacturing (SFM). The SFM approach involves four key areas:

* Detailed process mapping to understand the key processes involved in transforming production inputs to customer-desired outputs

* Identification of constraints in key processes that limit flexibility

* Elimination of constraints through the development of strategies that included working with equipment suppliers, material suppliers and employees to develop unique solutions for maximum flexibility

* Development of simple tools that ensure rapid exchange of real-time information

This approach resulted in a comprehensive philosophy that includes some basic concepts.

First, processes should be aligned with customer needs. This includes tactics such as teaming with suppliers to optimize supply chain practices, appropriately sizing raw material kanbans to align with likely customer needs and partnering with customers to optimize the finished goods transfer methodology.

Next, waste should be minimized. Areas that could be improved include travel time of inputs, work in process (WIP) and finished goods. Furthermore, excess WIP or finished goods could be eliminated through smaller lot sizes, and underutilized equipment additionally could be eliminated by standardizing processes, minimizing changeover time and "right sizing" production capability.

Third, employees must be empowered in the process to ensure success. Some strategies for achieving their sense of empowerment included standardizing operating procedures across the organization and cross-training employees in multiple jobs; using visible production status indicators to provide real-time indicators of operational efficiency; and having operators control factory scheduling based on visibility into current needs.

Finally, results are measured. This can be accomplished in several ways. Standardized reviews can be used to measure a consistent range of efficiency metrics in all facilities. A continuous improvement program was implemented to look at reducing total cost; it includes a focus on both measurable costs and opportunity costs driven by inefficiencies.

The end benefit of having this focused operational vision was twofold. First, management team members evaluating potential acquisitions immediately could see how closely a customer base and operations conformed to their values, because they were comparing those operations to a standard production model replicated in all EPIC facilities. This was important because Lean manufacturing requires a mutually aligned value system between the EMS provider, customers and the supply base. Second, facility operations, once acquired, easily could be evaluated against the standard. Acquired employees had a clear vision of the new philosophy. Staff members analyzing operations for realignment did not have to spend significant amounts of time understanding variances. Customers immediately could understand planned areas of focus.

In analyzing the potential compatibility of the Siemens EMC operations prior to the acquisition, EPIC saw many potential fits. The operation had a good customer base, with project complexity and industry specialization requirements compatible with customers already found in EPIC's model. In addition, the acquisition added both technical capabilities and capacity. Furthermore, the business cultures were aligned similarly in commitment to high quality and implementation of Lean manufacturing principles. The major difference was that while the EPIC SFM model completely lays out factory processes in a total Lean system, Siemens EMC had used Lean principles as a tactical tool to improve processes one area at a time.

Even with the difference in degree of Lean focus, the Siemens EMC acquisition brought operational efficiency improvement ideas, which were embraced in the combined operation. For example, the Johnson City, TN (JoCy) facility had focused on setup time reduction in its Lean implementation process and staged material on extra feeders to speed surface mount technology (SMT) line changeover time. This process was kept and adapted in all facilities throughout the company. Similarly, areas of inefficiency quickly were eliminated. As with many EMS facilities, JoCy had specialized lines for SMT that were configured to build certain types of product. If product demand varied unexpectedly, this could result in some lines being underutilized, while others were overloaded. EPIC's philosophy uses a standard line configuration for all lines, enabling product to be shifted between lines as demand varies. A relay-out of facilities to EPIC's more standardized SMT equipment philosophy resulted in four lines being shipped to other facilities. The remaining two lines produced the same output previously run over six more specialized configurations.

Supply chain management and logistics also have been governed by clear principles:

* Strong focus must be placed on developing and qualifying suppliers that embrace lean manufacturing principles of short cycle times, flexible batch sizes and high quality

* Suppliers must be responsible for managing production to forecast, yet deliver to "pull signals" vs. requiring firm release dates over an extended lead time

* Appropriate buffer sizes for current production rates must be established, maintained and continuously monitored for appropriateness

* Material buffers should be maintained in close proximity to the manufacturing facilities to allow frequent release of small batches to the production floor and maximum flexibility in responding to changing demands

* The material pipeline must be proactively and regularly monitored over the medium-to-long-term horizon through bond reports to identify and resolve potential supply disruptions

Assessing Customer Needs

EPIC Technologies' original systems measured internal performance metrics carefully. Management had developed a methodology for measuring and sharing performance information known as the Plant Operational Review (POR) system; this was developed concurrently with implementation of SFM. The original system monitored approximately 60 metrics company-wide down to the floor level. These metrics formally were reviewed on a daily/weekly basis by project personnel, monthly by the plant managers and quarterly by the senior management team. The JoCy location also had a strong culture of monitoring operational metrics tied to processes developed while integrating the Malcolm Baldrige National Quality Program model.

In blending the two, EPIC developed a revised system that uses the original POR metrics list and measurement frequency and now also considers benchmarks and longer-term performance trends. The current review process starts with a summary of overall company financial performance metrics, then focuses on specific productivity and operational performance in the following functional areas: human resources, quality, manufacturing, sales, purchasing and finance. The functional managers responsible for performance to metrics are also responsible for defining the benchmarks relevant to their areas. Review frequency is consistent with the timing established in the original system.

The JoCy facility's focus on the Baldrige model drove a strong customer satisfaction measurement culture. Internal surveys were combined with the company's customer satisfaction measures to create a two-part survey. Within the survey process, key contacts at each customer fill out (via the Internet) a monthly scorecard measuring standard metrics such as quality, on-time delivery and pricing/cost reduction performance. A more detailed annual survey is conducted via e-mail and the Internet, measuring:

* Overall performance satisfaction at EPIC compared to satisfaction with the customer's other EMS providers

* Perception of management and key support competencies

* Relationship with project team

* Responsiveness to problems

* Perception of price competitiveness

* Plans for future business allocation

This annual survey is sent to multiple contacts at each customer and includes areas for detailed comments and suggestions for improvement. Survey data are reviewed at both the plant and corporate level. Program managers are charged with developing corrective action plans related to customer improvement comments or areas that rate low in any survey.

In addition, customers may have their own supplier measurement processes. Siemens Medical Solutions USA, Inc. was measuring delivery, cost and quality on a quarterly basis and technology on an annual basis. Under previous ownership in the years prior to winning the 2005 Supplier of the Year Award from Siemens Med (US) as an EPIC-owned facility, the JoCy facility had received recognition at the individual category level for quality and delivery.

The combination of a clear acquiring company operational vision, adoption of best practices at the acquired facility and strong channels of customer feedback all supported the winning of the overall award in the transition year.

Smoothing the Transition From the OEM's Perspective

From an OEM's perspective, any EMS facility acquisition will represent change and possibly some disruption. The "brand" the OEM has implemented likely will change. What key points can minimize negative impact?

The best way to minimize negative impact is for the acquiring company to buy a compatible brand. Key areas that should be compatible are project scope and complexity preferences, industry focus and operational philosophy.

In the example above, both companies valued Lean principles and most of the customers in the acquired facility embraced Lean philosophies. For instance, the Siemens program already had defined kanbans and supply base focus in line with EPIC's Lean material stocking philosophies. Both EPIC and JoCy had medical OEM customer segments; however, JoCy had focused on Baldrige and ISO 9001:2000 as the primary focus of its quality philosophy. EPIC had focused on enhancing quality through industry-standard programs. As a result, one immediate change after acquisition was a facility initiative to obtain ISO 13485 registration vs. a previous focus on quality frameworks associated with state-level quality awards.

The medical customer base saw this as a positive change because it drove a stronger alignment with its industry-specific quality system focus. EPIC's operational changes, which drove more standardization in manufacturing processes, also were considered positive. A focus on smaller lot sizes actually better supported both new product introduction requirements and the higher mix found in many medical equipment programs.

A final area of positive focus was staffing. There were no immediate changes in program management and the account-specific management systems and processes were changed slowly, if at all. Program management and program team composition consistency helped significantly in the transition process.

It should be noted that not all programs achieve consistently high levels of customer satisfaction. Lean practices require changes in both customer forecasting practices and supply base support practices. As a result, customers less aligned with Lean principles may see greater levels of change in the way their pro grams are managed. Cost savings and efficiency improvements tend to be incremental and proportionate to the level of teaming between OEM, EMS provider and supply base. Consequently, companies just beginning to embrace Lean may not see the same level of responsiveness and cost savings found with customers who have optimized their internal ordering processes and approved vendors.

What It Takes to Achieve Success

Achieving a smooth transition after an EMS facility acquisition is a collaborative effort. In some cases, change driven by the process may be viewed positively. In other cases, lack of change may be the highest driver of continued satisfaction. Acquiring companies carefully should analyze the facilities they acquire for alignment of customer base values and business characteristics, as significant misalignment can be costly both to their and their customers' bottom lines.

A strong operational strategic vision can minimize confusion and wasted effort in aligning a new operation. A robust transition plan that recognizes the value of newly acquired personnel can contribute to minimized staff turnover by minimizing job security uncertainty.

Customers should be prepared to evaluate proposed operational changes in the context of the long-term benefits and provide clear feedback on what they view positively and what is causing concern.

David Jones is quality manager for EPIC Technologies in Johnson City, TN. He has a master's degree in industrial engineering from the University of Tennessee and a bachelor's degree in biomedical engineering from Purdue University. Jones is an ASQ-certified quality manager and engineer and has been a Baldrige Examiner for the past 10 years.
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Article Details
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Title Annotation:Integration After Acquisition
Author:Jones, David M.
Publication:Medical Product Outsourcing
Date:Mar 1, 2007
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