Pinpoint Production

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..in's m anufacturing strategy p.44 Trends in MPUs and MCUs p.50www.my-esm.com DECEMBER 2004E l e c t r o i ;

Supply&R/lanufacturingF O R O E M A N D E M S M A N A G E R S W I T H G L O B A L I N F L U E N C EVOLUME 1 NO. 9

World Peace Group'sglobal distributionambit ions ^page 38

D o c u m e n t i r ^ ^ ^
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XB r i a n P o k o r n y , G a r m i n ' s d i r e c t o r of o p e r a t i or e f e r s t o t h e c o m p a n y ' s m a n u f a c t u r i n ga s " s t r a t e g i c i n s o u r c i n g . "


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from 2002. Likewise, i ts revenue in2003 was up 23 percent over 2002while prof i ts grew 25 percent .

Ron S tearns , an analys t wi thFros t & Sul l ivan, pegged the Nor thA mer ican marke t fo r G P S p roduc t sat $315 billion in 2003, and p red ic t sit will mo re th an tr iple to $9.5 billionby 2010.

S p l i t t ing the G P S equ ipmen tbus ines s in to s egmen ts he lps tod e m o n s t r a t e Garmin's d o m i n a n t p o s i t ion . In the recreat ional handheldbusinessthose GPS receiversa imed a t h ike r s and hun te r s Garmin enjoys a 70 percent marketshare, said analyst Peter Friedland ofFulcrum Global Par tners .

Garmin also holds a 60 percentshare in af termarket automotive receivers , wh ere it compete s with Magel lan , a uni t of French Aero space g ian t Tha les , N e the r lands -bas edTom-Tom and Cobra Electronics ofChicago. In the mar ine bus inessGPS receivers used by boatersitcompetes with Lowrance Electronics(Tulsa, Okla.) and N ew Zea land ' sNavman. Garmin ' s share for the sector hovers between 30 and 40 percent, said Fulcrum's Friedland.

But Garmin truly shines in civilaviation, where the "Garmin stack"a combinat ion of GPS navigat ion andc o m m u n i c a t i o n s equipmentis th ego ld s t andard among p i lo t s andplane manufacturers . I ts market sharethere is about 90 percent , wi th Honeywe ll i ts only real comp etitor, Friedland reckons. Garmin's latest aviationproduct , the G1000, combines locat ion , navigat ion , communicat ion andidentification data into large flat-panel displays.Unique s trategyWhile mos t of i ts compet i tors havetheir produ cts bui lt by contract m anufacturers , Garmin is notable for vert ical ly in tegrated manufactur ing . Nomanu fac tu r ing i s ou t s ou rced . I tsmain compet i to r , M age l l an , ou t s ou rces manufac tu r ing to K inpoElectronics Inc. , a contract manufacturer in Taiwan.

GarminInternational Inc.Headquarters: Olathe, Kan.lumber of em ployees as of Dee.31,2003:2,0212903 Revenue: $573 million2003 Net income: $178.6 millionUnits sold in 2003:2.07 millionManufacturing locations:Olathe: 240,000 square feet for aviation products with constructionnearing completion on a 575,000-square-foot expansion.Shijr, Taiwan: 249,326 square feetGarmin occupies 218,662 squarefeet and leases the rest to th irdparties.Gardner, Kan.: 25,034-square-footaircraft hangar at New CenturyAirport for development, testingand certification of aviation products.Salem, Ore.: 52,000 square feetand a 6,000-square-foot a ircrafthangar on 15 ac res. A 15,000-square-foot expansion of thishangar is under construction.Romsey, England: 28,358 squarefeet.Tempe, A riz., and Wichita, Kan.: Acombined 3,233 square feet.SOURCE: COMPANY REPORTS

"People of ten ask [Garmin]w hen they ' r e go ing to ou t s ou rce , "said Jo hn B raatz , an analys t w i thKansas City Capital. "But at the endof the day , the company does n ' th a v e t h e v o l u m e p e r SKU [s tock-keep in g un it ] tha t o the r c om pan ie sthat typical ly use a contract manufacturer have."

Fulcrum's Fr iedland saidG armin ' s h igh marg ins and cas hholdings g ive i t the abi l i ty to pourlarge amounts of cash in to researchand deve lopm en t , w h ich he lps it de v e l o p i n n o v a t i v e n e w p r o d u c t s .R&D expend i tu res in 2003 w ere$43.7 mil l ion , or about 7 percent ofsa les . By contras t , r ival Lowrancespent only $5.2 million, or less than5 percent of sa les on R&D.

Covering the globeGarmin ' s manufactur ing s t ra tegy ist ru ly g loba l . I t s cons umer -o r ien tedproducts l ike the S treetp i lo t 2620dashboard receiver for cars and theEtrex l ine of handheld receivers forhikers are assembled at a 249,000-square-foot facility in Shijr, Taiwan.By the end of las t year , Garmin employed 975 people at this facility.

Garmin ' s avionics gear , used inthe cockpi ts of pr ivate p lanes , isman ufac tu red a t a 240 ,000- s quare -foot facility employing 997 and sitting on a 4l-acre s ite in Olathe, Kan.,a suburb of Kansas Ci ty . The company i s add in g mo re than 500 ,000square feet of capaci ty a t th is s i te .Avionics products made in the Unit ed S tates hav e an eas ier t ime ge t t ingcertif ied by the Federal Aviation Administration, Garmin executives said.

Other facilities include a 25,000-square-foot aircraft hangar in Gardner, Kan., s ituated on a 148,000-square- foot s ite use d to dev elop andtes t avionics products . Another par tof the avionics bus iness is hou sed ata 52,000-square-foot facility plus a6,000-square-foot aircraft hangar areain Salem, Ore. The co mp any operatesa 28,000-sq uare-foot dis tr ib utionwarehouse in Romsey, England.

The spl i t between faci l i t ies inTaiwan and the United S tates pres en t s s ome log i s t i c s and p lann ingchal lenges , not the leas t of which iscommunicat ion . CEO Kao, h imself ana t ive o f Ta iw an , s pends much o fh i s morn ings in K ans as thes e daysanswer ing e-mai l f rom managers inTa iw an .

"Our Taiwan facility has its owncomplemen t o f t a l en ted eng inee r s ,purchas ing and mater ia ls s taf f thatare capable of par tner ing with theircol le agu es in the U.S . to work toward the same goal ," he said .

Bu t ow ning a m anufac tu r ingplant, regardless of location, has ones ignif icant advantage: You neverhave to compete for a t tent ion . "Thebenef i t of having our own factory isthat i t i s accountable to no one elsebu t G armin , and has the company ' s

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Whence it came

Though fo r many of its customersGarmin International Inc. is a re l at ively new na me, its roots in theaviation a nd na vigation electronics

business run deep. Its origin goes backto a dinner that found ers Gary B urrel l,now retired, and M in Kao, now CEO,had one night in 198 9.

At the time, B urrel l had just left ajob as vice president o f engineering a tKing Radio, the legendary ma nufacturerof aviation radios. Launched by Ed KingJr. in an Olathe, Kan., farmhouse in1957 , King Radio grew rapidly and, by1969 , had landed a major contract tosupply radios for the Boeing 747. Burrell joine d K ing Radio in 1963 and,aside from a brief stint at LowranceElectronics, had spent h is entire p rofessiona l life there .

Burrell lured Kao to King Radio in1983 from defense co ntractor Mag -navox, where Kao had been developingmilitary navigation systems using athen-ne w system o f satellites alternately kno wn as Navstar and the Global Positioning System.

But by 1989 , King Radio was goingthrough wrench ing chang es. Its found erhad sold the company in 1 984 to Ben-dix Aerospace, a unit of wha t was thenAllied Corp. Allied later merged withSignal C orp., becom ing All iedSignal.

Both Burrell and Kao had seen thehuge po tential of GPS systemsindeed,Kao led the team that developed the firstGPS receiver ce rtified by the Federal Avi

ation Adm inistration for use in p lan esbut m anageme nt at All iedSignal showedlittle real interest in the nascent techn ology. Burrell and Kao left within mo nthsof each o ther in 1989 .

Over dinner, Burrell revealed tha the was considering devoting himself tothe ministry o f his local church. Bu t Kaoasked a question tha t wou ld set themboth on the course to bu i lding a globalcompany. "I asked if he had ever con sidered starting a business, and he saidhe would only do so wi th m e."

Kao, a native of Taiwan, had beenhearing from old school friends backhome that funding wou ld be avai lableif he wan ted to start a company. Withinwe eks of their dinner, the partnerswe re in Ta ipei, tapping into Kao's netwo rk. Wha t they raised in Ta iwan,combined with their own personal savings, amounted to $4 mi l l i onenoughto set up the new com pany wi thouthaving to rely on venture funding.

They cal led the company ProNav,and the plan wa s to bu i ld GPS receivers first for the U.S. domestic marine m arket and then pu rsue the internat ional ma rket, wi th the g eneralaviation markets to fol low.

The p artners picked the r ight time .The GPS system wa s l i teral ly just ge tting off the ground. The explosion o fthe space shuttle Chal lengerIn 1986set its construction back by 24m onths the shuttle f leet had beenenvisioned as the laun ch ve hicle o f

choice fo r GPS satel l ites an d so thesatellites had to be redesigned to workwith a De lta II rocke t. T he first suchlaunch took place in February 1989 ,and the first o f wha t wou ld become aconstellation of 27 satel li tes w as de clared operational tw o mo nths later.

Burrell and Kao hired a dozen engineers and settled into offices in nearbyLenexa, Kan. ProNav's first product wa sthe GPS 100, a dashboard-mounted GPSreceiver aimed at the marine marketthat sold for about $2,50 0. It wa s a hit atthe International Marine Techn ology Exhibition in Chicago, garnering dozens ofpress mentions. Before long, the compa ny had back orders for 5,000 units.

It wa s a gutsy m ove for a startupthat had no ma nufacturing capa city ofwh ich to speak. After the trade show,Kao set off for Taipei, where the com pany had rented a sma ll ma nufacturingspace. Only 50 units were made thefirst month and another 150 the second.

The com pany remained ProNavunti l 1991 , when a competitor usingthe name NavPro took it to cou rt.Garmin is a combination of the twofounders' f irst names.

"At first, our distribu tors p anicke dwhe n they heard about the namechange," Kao said. "They asked if wehad gone bankrupt o r been acqu ired.There were al l kinds o f questions. Wehad to reassure the m ." Th at's not aproblem Garmin faces today.

Arik Hesseldahl

best interests at heart," Kao said.Benefits of insourcingAnd therein lies Garmin's secret: Thevery idea of outsourcing is anathema for Garmin. Indeed, director ofoperations Brian Pokorny likes tocall the company's manufacturingpolicy "strategic insourcing."

"If you're not willing to invest inthe factory and the technologies thatare required to keep your facilities

up to date," Pokorny said, "thenyour factories finally start to degradeto the point where it is more efficientfor contract manufacturers to buildyour product."

"But when you hire a contractmanufacturer you're dealing withanother company that's out to makea profit," Pokorny said. "We think it'sbetter to have whatever moneymight go to making their profit staywithin Garmin."

Displays are a good example ofGarmin's strategic-insourcing philosophy. Garmin buys displays, thenmodifies them to meet the specificneeds of its various products. ButGarmin had had trouble finding displays that met its exacting standards.

"In the early days we used to buyfinished display modules," Pokornysaid. "But we decided to take that technology in-house." Taiwan is now Garmin's center for display enhancement.

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VJUFACTURING P I N P O I N T PRODUCTI D D D D D

Action i temsA review of your manufacturing strategy should be aregular i tem in your company's annual business evaluation process. Here are some key quest ions to ask:Does strategic insourclng m ake sense? Could your company savemoney by manufacturing certain products or components in-house ratherthan outsource production to contract manufacturers?Do your engineers se e theassembly lines often enough? Wouldyour company benefit from improving the formal relationship betweenengineering and manufacturing? When production problems arise thatrequire the input of engineering, is there a process in place that makesthat happen quickly with your contract manufacturers?How responsive areyour EMS providers? Does the contractorrespond quickly when you need to make a sudden demand-driven production change? Are you properly equipped and prepared to respond tounanticipated demand changes with your own resources?Can you save mo ney through product redesign? Component capa bilities can change over time, making it possible to eliminate parts overthe life of the product, saving on the component count and on the bill ofmaterials. Are you reviewing designs regularly with this process in mind?Are your contract manufacturers responsive to your plans for productredesign?How long has it been since your last MRP software update?Are disparate manufacturing sites able to respond quickly to productionchanges? If not, ensuring that everyone involved is getting the sameinformation in real-time, using powerful new MRP tools, m ight makea difference.

But to keep costs under control,Garmin builds many products usingmodular designs. "We try to reuse designs throughout our pro du a lines asmuch as possible," Pokorny said.This helps with forecasting,should demand for finished products shift unexpectedly. "It's a loteasier to change a production schedule when you're using a supply ofcommon parts [at your own plants.]Wh en you use a contract manufacturer, that change bec omes more dif-ficult," Pokorny said.

Design-manufactur ing connect ionW ithin that practice of modular de-signs lie chances to reduce costs.Pokorny said Garmin would often redesign a product over its lifetime to

save on component cost and count."Most peop le w on't notice a dif-ference, but the GPS 12 has been redesigned six or seven times," hesaid, referring to an older but still-popular handheld GPS receiver."W e're constantly re-evaluating pro cessors and other products that weuse, and we're quick to redesign toreduce cost."

And that redesign and other production changes tend to happe n easily at Garmin beca use manufacturingand engineering all work together atthe same facilities."If we have yield problems withone of the units, our manufacturingpeop le have only to walk 20 feet, andthey can talk to an engineer," Pokorny said. "If there is a problem on the

line, you might run into an engineerin the hallway. They're there in minutes. That's not something you getwith an outside supplier."W hen Garmin launches a newconsume r product, engineers from itsOlathe plant typically go to Taiwanand spend two weeks overseeing apilot run of the pro duct. Garmin findsthis close interaction between engineering and manufacturing goes along way toward cutting the lengthof time between a product's designand its deployment.O n its manufacturing lines,Garmin follows a continuous-flowmethodology. Employees are cross-trained to perform several production jobs as needed."If we get an order for 500 GPS12s, which is one of our oldest prod ucts, an outsourced manufacturerwould laugh and say come backwhen you get an order for 10,000,"said Garmin spokesman Pete Brumbaugh. "But we can build that.You're always in that battle of prof-

it and efficiency. The contract manufacturers say they want to have acertain lot size and can't just build 50or 100 units. In our environment wecan build that lot."Pokorny just saw Garminthrough a migration from its oldmanufacturing resource-planningsystemit had used business planning and control systems (BPCS)from SSA Global since 1995to a

new installation of Oracle's E-Business Suite that went live this year."W e had BPCS in Olathe and inTaiwan, but our operation in theU.K. was on Sage, and none of thosesystems talked to each other," Pokorny said. "Now w h en we make achange in Olathe, they see it in Taiwan the next day.""It's really about efficiency,"Pokorny said.

Arik Hesseldahl is a senior editor atForbes.com. He can be reached [email protected].

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