VideoTo high-tech companies, outsourcing and alliances are old hat; the pace of technology makes going it alone difficult for even the largest businesses. But EMC Corp., in Hopkinton, Massachusetts, is pushing these strategies to new lengths. Since 1990, the maker of enterprise data storage systems has drawn closer and closer to its 25 top-tier suppliers--so close that it's sometimes hard to discern where EMC stops and the suppliers begin.
"Hardly a day goes by that there isn't an EMC person in our design facilities, and vice versa," says Charles Pope, CFO and senior vice president of finance at Seagate Technology Inc., in Scotts Valley, California. Seagate makes the multigigabyte disk drives that are the guts of EMC's flagship product, Symmetrix. Seagate recently unveiled the Elite 47, a drive that was designed in close collaboration with EMC engineers. "We probably would not have done the product if EMC had not wanted it," says Donald J. Kelly, senior vice president, worldwide product-line management.
But EMC wants more from suppliers than custom-designed products. In return for its business, the company expects suppliers to keep their costs and prices rock-bottom low. To that end, EMC keeps close tabs over suppliers' financials and often monitors the prices and availability of raw materials. EMC will even broker discounted prices with its suppliers' suppliers, which it then uses to negotiate margins and prices. And the company will follow up by setting continuous cost-cutting and quality-improvement goals, which suppliers are expected to meet.
EMC, in short, is the brain of a many-limbed organism, which functions as one to conceive, create, test, and market products. It has essentially transferred the costs of manufacturing and continuous technological advancement to its suppliers. The company maintains design, specification, material sourcing, testing, and marketing control, and it works hand-in-hand with suppliers to perfect production techniques. But it carries no inventory other than finished final product, thanks to just-in-time (JIT) delivery arrangements.
How effective is this business model? It has enabled EMC, a mere upstart with $190 million in sales in 1990, to outmuscle giant IBM in the market for data storage systems. The company, boasts CFO William J. Teuber, can ship product faster than its competitors, consistently satisfy its customers, and fill orders as quickly as they come in. In addition to product capability, Teuber proudly credits this fleet-footedness for EMC's phenomenal growth. Sales rose from $386 million in 1992 to $2.9 billion last year, and net income rose from $29.5 million to $539 million in the same period. Inventory turns climbed to 4.5 this past February, the highest level in company history, while inventory levels decreased by $44 million in the last quarter alone. EMC, which now has 6,300 employees, had a gross margin for 1997 of 46.5 percent--one of the highest in the industry, according to Teuber.
Sound too good to be true? There are, in fact, potential drawbacks to these collaborative customer-supplier relationships, which have been variously dubbed virtual corporations, keiretsu, or, perhaps more persuasively, micronetworks (see "Micro-networks," page 90). Micronetworks may fall apart because one or more of the participants can't deal with the intimacy. Suppliers may resent the intrusion of big customers breathing down their necks, and the bargaining for mutually acceptable prices can become heated. Failing health of one or more suppliers can put inconvenient kinks in the supply chain.
But EMC has shown that these highly integrated, trust-based relationships can be a win-win proposition for all involved. Here's how.
A RISKY DECISION
EMC was still a small memory-board manufacturer when it was ready in the late 1980s to go into production with Symmetrix, a high-capacity enterprise data storage system. According to Gerry McAndrews, EMC vice president of supply-based management-technical, the decision to create a micronetwork wasn't hard. All founder and chairman Richard Egan and president and CEO Michael Ruettgers had to do was look around at the Massachusetts minicomputer companies--Wang, Prime Computer, Apollo Computer, Digital Equipment Corp.--that were slowly sinking under the weight of huge manufacturing facilities and large work forces.
Once the decision was made, EMC moved fast. By 1990 it had set up its new micro-network partnerships, and later closed the Puerto Rico facility at which it had started assembling boards for Symmetrix. The first batch of Symmetrix systems, made completely within the micronetwork, shipped in December 1990.
In hindsight, the decision to create a micronetwork was sound, but at the time it was risky and almost untried. Finding healthy suppliers was crucial; any weak links in the supply chain would mean missed deadlines and loss of quality, and the resulting financial exposure. EMC, therefore, set up a system for rigorously analyzing a potential supplier's finances and production processes, going far beyond the standard reference and background checks that most customers require.
For instance, EMC reviews a supplier's overall financial position, evaluates its relationships with its other customers, examines its margins and production overhead, charts internal metrics, and, in some cases, conducts a physical review of the supplier's factory. "We know what the costs of production are," says Teuber, "so it's not hard to see if a company is doing things right."
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