When Chris Lewis was named CFO of Jabil Circuit Inc. in 1996, the electronics manufacturing services provider had three U.S. plants, seven major customers, and about $1 billion in sales. Most of the production work for a single customer took place in a single facility. The tools used to plan and measure performance were primitive at best.
But during the past five years, with the historic growth in computing equipment and the nation’s telecommunications infrastructure, Cisco, Dell, and other companies have increasingly turned to Jabil to outsource their circuit-board manufacturing and systems assembly. The St. Petersburg, Florida-based firm now serves 40 key clients and has 22 factories in nine countries on four continents. Even with the recent technology-sector downturn, revenues topped $4 billion for fiscal 2001 ending August 31.
Although now larger and more complex, Jabil has staked its competitive advantage on a decentralized, customer-oriented organization, rather than one built around products or manufacturing sites. Each major customer is served by an independent business unit, and each business unit has its own P&L and relies on numerous plants around the world to meet its customers’ production needs. “We were spreading vertically, horizontally, and globally, but we wanted to preserve the same customer-centric business model,” says Jabil CEO Tim Main.
Jabil has done this successfully, Main contends, thanks to planning tools and disciplines developed by Lewis (the recipient of the 2001 CFO Excellence Award for Planning and Performance Management). These tools and disciplines permit managers to draw on resources throughout the company at a moment’s notice, and to keep everyone focused on working-capital metrics. “He gave us the dashboard to see what we’re doing–not just at the executive level but also on the front lines,” notes Main.
The result: Jabil has, for the most part, kept its inventories lean, its receivables up-to-date, and its costs in check, even as sales have soared. Perhaps more significant is the fact that as Jabil’s high-tech customers have retrenched and revenues have declined (down 14 percent in the most recent quarter), the company’s latest results have it bettering most of its peers on such measures as inventory turns and days sales outstanding, all while generating $32.3 million in cash. “Below Chris’s warm, humble exterior is an icy-cold competitive person who keeps a close eye on how we’re doing compared to others,” says Main. “He can deal with revenue loss, but negative cash flow would be failure.”
A SYSTEMS APPROACH TO COSTS
Lewis initially joined Jabil as treasurer in 1995, when the company was growing rapidly but was thinly capitalized and reporting negative cash flow for the year. One of his first tasks was to help raise some $50 million to build up the capital base. By the time he was promoted to CFO a year later, he had begun stressing the need for a planning and measurement regimen to ensure that the new money wasn’t wasted.
The backbone of this effort is a systems architecture that links all of Jabil’s customer-oriented business units and its manufacturing sites, along with financial statements that roll up by both customer and plant. “Because so much of our growth has been organic,” explains Lewis, “we have been able to roll out one overall IT platform over several years. Everybody looks at the business and captures data the same way.”
That effort has not gone unnoticed by Wall Street. Unlike some competitors that take a factory-centric approach and have disparate systems, “Jabil has concentrated on making sure its infrastructure is fully integrated,” says Jim Savage, an analyst with Thomas Weisel Partners. “This clear leadership,” he adds, “allows better capacity planning and better visibility on how the market is moving.”
Jabil’s systems approach, according to Lewis, promotes greater precision in assigning costs, with some 94 percent directly pegged to individual business units. This “resolution,” as he calls it, extends to costs related to scrap, shop supplies, and the amount of paste on a circuit board. More important, it also includes investments in long-term assets and working capital. “Everybody knows there are costs associated with everything they do,” he says. “This resolution gives people a ton of accountability.”
In recent years, Lewis has supplemented the technology with additional finance expertise in the form of controllers who have an operations bias (“not easy to find”). These new hires, in turn, have been deployed to work with the business unit leaders on the fundamentals of capital allocation and return-on-capital requirements. The effect, Lewis avers, has been to foster an “intensely communicative culture.”
What makes planning such a challenge at Jabil is the volatility of the electronics manufacturing services business. Forecasting by customers can often be haphazard at best, and their mistakes and inaccuracies could end up squeezing Jabil. The goal, observes Roger Norberg, an analyst at J.P. Morgan H&Q, is “to think ahead of the customer,” and he praises Jabil for knowing “what a forecast really means.”
How does Jabil protect itself from surprises? Planning at the company starts with a six-month rolling forecast that is updated every three months. “We don’t have a yearly operating plan that we work to, because things change too quickly,” notes Lewis. But the crucial planning mechanisms are weekly and monthly processes that allow for consistency in tools and metrics across all units and plants.
A weekly snapshot of sequential trends in margins, inventory levels, asset returns, and sales cycles by plant, customer, and vendor helps detect variations and allows for more efficient use of production resources and available inventory. In addition, a monthly analysis of actual operating performance compares each business unit on the basis of return on net assets, forecast accuracy, and asset utilization.
Rather than create a separate planning group, Jabil manages this effort through an ongoing collaboration among operations, business development, and finance. Along with the managers of the business units and individual plants, Lewis and his corporate colleagues review the weekly and monthly numbers to see how the businesses are performing in relation to the company’s weighted average cost of capital and return on invested capital metrics. And, because negative trends and underperforming areas are identified early, corrective actions can be taken immediately.
RIDING THE TECH SLIDE
Until 2001, things were fine indeed, as revenues had grown at an annual rate of 40 percent for the previous five years. Furthermore, costs didn’t escalate faster than sales, and Jabil consistently ranked in the top quartile, if not number one, among its peers in such metrics as noncash working capital as a percentage of sales, inventory turns, and cash conversion.
By last fall, however, as the tech slide began, inventories started to balloon at Jabil, rising $170 million to a peak of $640 million in the fiscal first quarter ending last November. Along with its second-quarter results, the company announced that it would reduce its staff and incur charges of $25 million to $30 million. It also reduced its outlook for the second half. Not surprisingly, its stock price has dropped 60 percent, from a 52-week high of $68 last September.
“With the falloff in demand, no one has been able to get out of the downturn,” says S.G. Cowen Securities analyst David Foropoulos. “But as feast became famine, [Jabil’s] business-unit approach has proved more flexible relative to the competition. They’ve had minimal restructuring charges, and they’ve managed to outperform their peers” on working-capital metrics. Jabil, he adds, remains “the best pure-play operator in the space.”
With the construction of a plant in China and the acquisition of five others in the United States and Europe so far this year, Jabil is already anticipating a recovery. “There will be plenty of opportunities to make this company larger in the next three to five years,” says Lewis.
WORKING CAPITAL KINGS
Even with the recent tech downturn, Jabil remains among the top players for working-capital metrics in the electronics manufacturing services industry.
|June 2000||June 2001|
|Noncash Working Capital (as % of sales)||1. Jabil Circuit = 8.1%
2. Flextronics = 10.2%
3. SCI Sysems = 11.2%
|1. Flextronics = 12.5%
2. Jabil Circuit = 12.7%
3. Manufacturers’ Svcs = 15.1%
|Inventory Turns||1. Jabil Circuit = 9.1x
2. Flextronics = 7.8x
3. Sanmina = 7.7x
|1. Flextronics = 7.5x
2. Jabil Circuit = 6.6x
3. Manufacturers’ Svcs = 6.1x
|Cash Converson (in days)||1. Jabil Circuit = 34.8
2. Flextronics = 40.0
3. SCI Sysems = 40.5
|1. Manufacturers’ Svcs = 22.6
2. Jabil Circuit = 41.7
3. Flextronics = 54.4
Source: J.P. Morgan H&Q