For many years, Canberra was rife with rumours that IBM wanted to close its PC, workstation and server assembly plant in Wangaratta in country Victoria.

The plant had started life as a typewriter factory. The only reason it was still there was so that IBM could demonstrate its commitment to upholding its end of the industry policy pacts it made with the Federal Government in the 1980s, specifically, the Partnerships for Development program. As soon as the Government incentives were removed, IBM would be out like a shot.

That, at least, was the received wisdom.

So when IBM announced it was selling the factory to a local contractor and would no longer manufacture on its own behalf in Australia, there were understandable concerns in the IT&T industries across the country.

Here, it was feared, was the beginning of the end. Here was a means for IBM to gracefully withdraw from Australian manufacturing and not wear the opprobrium of job losses when the plant was stripped out, the assets sold overseas and the doors finally padlocked.

But, according to Paul Zuber, president of Bluegum Technologies, that's far from what is happening. Bluegum Technologies is the Australian company that took over the plant in 1997.

Rather than presiding over the slow death of a business, Bluegum is riding a wave into the future of manufacturing, where multinational electronics giants will concentrate on developing products and brands and rely on specialists to actually make their products, he says.

His vision was fleshed out in 1998 when Bluegum took over Alcatel's telecommunications factory in Sydney in a similar deal. And IBM's commitment to the same vision has been demonstrated by deals done in other parts of the world, not least its decision to sell its notebook assembly plant in Austin, Texas, to contract manufacturer and logistics management specialist Solectron.

Zuber says the companies that have contracted out their manufacturing have been motivated by two things. "One is they've decided those parts of manufacturing are not core to what they do. Their core is really the more the product design, system integration, marketing and service. And that's what's really fueling the growth of the business." The second is that "it frees up a lot of cash and a lot of management focus".

Bluegum can wring more value out of the same manufacturing assets because it can focus on the processes that are not central to the previous owner. "[The businesses] are viable but they become more profitable and more efficient when you get more customers to spread out the overhead", Zuber says.

He says Bluegum has been profitable from its birth, although he will not reveal the margins. It is running at the industry standard level, which would mean less than 10% and its revenue is more than $500 million. He aims to increase revenue at a rate of 40% to 50% a year, excluding further acquisitions. Bluegum is also considering buying a plant somewhere in Asia to expand its client base.

Bluegum's customers now range from IT to automotive to general industrial companies and total about 15, all served out of plants that once supplied only IBM and Alcatel.

"The skill of a contract manufacturer is it's a service business more than anything, and if you're good and flexible and fast you can build anything that goes on an electronic circuit board", Zuber says.

"If somebody says, I'm going to go from building a PC to a WebTV, that for us isn't a big change. What's critical today in manufacturing is not brute force and scale and big plants. What's really crucial is flexibility and speed and that favours small to medium sized plants with really flexible workforces.

"Anybody can get a factory, anybody can buy the equipment, but it's really the speed and flexibility that you can execute orders, respond quickly to changes in demand and technology, managing a very complex supply chain."

Zuber says Bluegum plays to these strengths by seeking contracts to manufacture products where the cost of labour is low as a proportion of total costs and there are frequent design specification changes. It avoids, for example, consumer electronics. This keeps it out of commodity markets where it would be competing with low labour-cost countries.

"There's a kind of a myth that everything's going to go to China or Mexico. If you actually look at what's going to those markets, what's going there are things that are really either less complex, with very little change, or you're looking at a product that's for the market in China. Or a product that's matured where most of the complexity is out, the changes are out. Everything we do is a batch of one."

Bluegum exports to about 40 countries, but these are typically small, complex and cheap-to-freight products. Other product lines, such as PCs, are built for the Australian market, exploiting freight cost and time-to-market advantages against importers.

To succeed in its business model, Bluegum has had to accommodate a very high rate of change in product specifications. "We refresh most products every 90 days. It may look the same to the consumer, but it may have a different design, it may have different configuration. So what you are seeing is constant changing of product, a constant changing of specification."

Most of these are design changes that are delivered to Bluegum from its clients. Its own involvement in design is confined largely to consulting with it clients to ensure the product is easier to manufacture.

Zuber says one of the advantages of acting as an independent company is that it helps overcome the "branch office mentality" that has plagued Australian manufacturing. "I think both plants we acquired expressed that frustration... split decision making, decisions being made far way."

But Bluegum still encounters branch office problems in its clients. "We often go out and customers say gee, we don't do this, when in fact they do it all around the world. So there's a lot of education that needs to be done."

While all this may be a radical process for the high tech world, outsource manufacturing is nothing new to the printing and packaging industry. Printing companies, for example, have often worked on contract to packaging brokerage companies, which in turn supply on contract.

Silicon Valley-based packaging company Cities West straddles both the old and new worlds. Its client base is companies in the software industry and it outsources the production of its products to printing and packaging companies. It has evolved from a manufacturer itself to a contractor, and is about to evolve yet again to become a manufacturer.

President Michael Whitehead worked in finance and manufacturing management for several Silicon Valley companies, and then as a consultant, before buying Cities West. He says Cities West was established in 1972 by a family company, sold in 1993 and sold again, to Whitehead, in 1997.

The business was originally a manufacturer of binders. Today, Whitehead says, it's really not a manufacturer, but "more of a project management company".

It delivers packaging, such as cardboard folders, software, display material, boxes and other printed materials for consumer and corporate products. Unlike Bluegum, however, Cities West operates on a project by project basis, rather than long term supply contracts.

Whitehead says about 70% of Cities West's customers are large businesses that "know how to do it themselves but don't have the time". It has to be flexible in adapting to the level of involvement different customers demand. In some cases the company has a longstanding relationship with its customers and is allowed, Whitehead says, "a lot of control" - often brought in very early in the design of a packaging project. "Those are the customers we love because we have some freedom to come up with the best solution", he says.

Cities West is often asked to structurally design a packaging product after the artwork is done by these client, in other cases a customer "doesn't have a clue at all". Whitehead says small start-up technology companies that have spent all their time developing their technology but have had no time to develop packaging design skills tend to rely heavily on Cities West to develop their packaging project with them from scratch.

The company has its own team of designers and artists and contracts out the manufacturing work to a group of specialist companies with which it has its own business history.

For the core group of companies it deals with most often, it is like their sales force. "We get special pricing from them because they don't have to maintain a sales force and they know that we are a reseller and we have to mark their costs up and still be competitive in the market", Whitehead says.

According to Whitehead, there are both advantages and disadvantages to what his company does. "We can offer a lot of experience. A lot of relationships with printers, die cutters, film houses. Whatever is required to produce a project. We have customers who have needs and we match those needs with a supplier who can provide a solution.

"Once we hold the customer relationship, we're kind of free to move around and they don't really care where we are manufacturing their particular project. They really don't care who we used to get the job done."

This flexibility also means Cities West can scale itself to any project, and never turn work down. "We never say we can't do that for you because we don't have enough room or we don't have the technology or we don't know how to do it. The truth is we do have the capabilities. We don't have any limitations with respect to labor and resources."

A disadvantage, though, is that Cities West is dependant on the quality of its suppliers to maintain its own reputation.

Perhaps ironically, Whitehead says the area where this has caused problems is among its suppliers in high tech industries, despite the fact that outsourcing is rapidly taking off in some businesses there. But Whitehead says many of its suppliers in these industries have sprung up in recent years and do not understand what it means to be truly customer focused.

Cities West has produced software packages on 3.5 inch floppy discs for many years, and Whitehead has in recent years moved into supplying software on CD-R format. CD-Rs are compact discs that look and operate the same as CD-ROMs, but the discs are not impressed with data when the disc is molded. Instead, the data is "burned" on to pre-manufactured blank discs. The advantage of the process is that it lends itself to short runs of 50 to 500 units.

Whitehead says the demand for CD-Rs, rather than floppy discs, for use inside corporations is fueling explosive growth in the technology. He says production is predicted to increase five-fold from 1998 to 1999. An example of potential uses is reprogramming automatic teller machines.

Cities West contracts out the software publishing, but Whitehead says the quality of the suppliers has been disappointing.

"The print industry is very old, very set in its ways", he says. "But they are very reliable and they focus on customer service." CD-R manufacturers, on the other hand, are not nearly so aware of their customers' needs. "They do a job for you and if you don't like it or it's not done right, well, they say, I'm sorry but if you don't like it that's just too bad and we'll just move on to the next customer. Whereas the printer will say to you, oh, you don't like it, we'll do it over."

Whitehead is seeking to get around the problem this causes him in maintaining his relationships with his own customers by getting back into manufacturing. However, he is taking a different approach to integrating it into the business than Cities West's previous manufacturing operations. He is negotiating to buy a CD-R manufacturer, but says it will be managed at arm's length, almost as a contract manufacturer.

Eventually, he hopes that this will establish the business in entirely new markets, such as electronic commerce and electronic packaging of software to be delivered over the internet.

Cities West's experience shows just how far flexibility in modern manufacturing must go both at the contract supplier and the OEM ends of the business. Driven by customer needs, the company with the contract to the end user must itself set the standards and discipline for contract manufacturers supplying it. If the contract manufacturers cannot meet the standards, life can be short.

Further Reading

Manufacturing Market Insider January 1999

Electronic Buyers' News January 4 1999

Business Review Weekly February 15 1999