John Sammut is a seasoned manufacturing pioneer whom I have known over the years from my first connection to his Colorado company, EPIC Technologies LLC, a onetime supplier to Respironics. Sammut built EPIC from a small $3-million board producer with 50 employees to a $300 million company with over 3,000 employees. But when Sammut’s little boy, Chase, developed fatal brain cancer, John left the company, and we didn’t hear from him for a while.
Well, Sammut is back, performing another manufacturing miracle at Firstronic LLC in Grand Rapids, Mich., just a few miles outside Detroit. There he’s making electronics for some very special customers and proving that sometimes 'you gotta get small to get big.'
The Firstronic team is doing so well at growing manufacturing in the U.S. that they not only have prevented business from going offshore, they export 75% of production to Korea, China, Mexico and India.
“Overall, most of our industry is offshore, a whole range of products for the auto and medical industries,” Sammut says. “We've been investing in more automation -- we do high-quality products -- to be more competitive with offshore. We’ve seen business re-shored from off-shore competitors -- our customers have moved orders from offshore suppliers to Firstronic in Michigan.
And he is thinking bigger.
Firstronic is actually winning programs that were previously off-shore, or slated to go there, by using lean manufacturing and flat overhead. It seems to work -- customers love it, and we're growing rapidly, doing very high volumes.
John Sammut, President & CEO, Firstronic
Sammut plans to build the business from approximately $8 million in revenue to over $50 million, and will add around 200 jobs in the U.S. alone. After that, he says, “we will likely launch a plant in Mexico for the higher labor content products. …There will be increasing demand for domestic production... I think we're on the early end of a trend that is coming in our industry -- we're blazing the trail to demonstrate that U.S. manufacturing can be done competitively...
"Firstronic is actually winning programs that were previously off-shore, or slated to go there, by using lean manufacturing and flat overhead. It seems to work -- customers love it, and we're growing rapidly, doing very high volumes.
"Our industry (electronic manufacturing) moved off-shore too rapidly and for many customers it simply wasn't the right move... They're starting to figure it out and are looking to migrate back -- with the right suppliers who can competitively supply with lean manufacturing and flexible delivery."
I spoke with Sammut as he prepared for yet another packed day, and followed up with the company as it built its strategy and made critical manufacturing, sourcing, IT and supplier decisions. Small may be an advantage -– there is, as the balloonist quipped, “no place to go but up" -- and despite the recession and aftershocks in the automotive sector, which now makes up about 50% of Firstronic business, the company is well positioned for growth.
Rightsizing the Customer Base?!
A counter-intuitive strategy forms the basis for business growth
Moody: A lot has happened since we spoke when you were in Colorado. Tell us about the first things you tackled at Firstronic.
Sammut: Although Respironics is not one of their customers today, we took that experience and learning [from how EPIC worked with Respironics] to Firstronic. We started on a small scale again and gained a lot of momentum, first streamlining the customer base.
I use a lot of tools developed early in my career, tools that I learned in grad school –- the customer matrix, for instance.
With the Customer Rationalization Matrix, we developed criteria that would describe the best business and the most attractive revenue that would fit in our sweet spot -- the volume mix, the product life cycle, etc. We score customers on each of those criteria, calculate a favorability score and display the magnitude of the relationship as well. When you break down the business elements this way and display it visually, the answers jump out fairly quickly.
We found that by doing the Matrix, we could streamline and focus on the right customers -- plus we use the same model going forward to target new business. We get a lot of introductions and leads through our component suppliers and distributors, and that’s great, but we needed a way to figure out pretty quickly if something was a good fit or not -- we see it as a thorough assessment before taking the time and effort to develop a quote.
The customer is impressed because they understand what we are good at -– the matrix allows us to develop close customer relationships. We’re out to help them reduce costs, and we’ve demonstrated this over the past year with several key customers that have ramped up. We shared this strategic matrix with Kongsberg, for instance.
What [our customers] see in Firstronic is that we are laser focused, different from the typical contract manufacturer that is chasing any business they can get their hands on. We say, “Let’s make this work,” and by the time we get to the proposal and quote, they are helping us partner.
Here’s an example: In a $5-million-year contract we were off by 10% to 15% on a couple components, and the customer showed us right in our quote, “Here’s what you have to work on, here’s where you can improve material prices,” so by time we got to the final numbers, they decided they wanted to work with us.
[Overall] the customer rationalization strategy reduced the number of customers and increased revenues. It's a system that I put in place at EPIC, and it worked, once again.
... the customer rationalization strategy reduced the number of customers and increased revenues.
Moody: So it sounds like the objective is to form customer partnerships from the idea stage.
Sammut: That’s the business we want to be in. We’ve got 35,000 square feet; we’ve upgraded with automation and got a grant from Michigan… But we’re also changing the operating philosophy, the way our capacity is utilized, laid out and scheduled--a lean manufacturing approach.
Revenue: $30 million
Bookings Backlog: $75 million
Compound annual growth: >50%, projected to continue at this pace for the next three years
Customers: 15 right-sized partnerships
We know that to differentiate ourselves we have to be very flexible. For example, we’ve got a lean kanban system that allows us to chase volume fluctuations of customers, and that allows the customer to order differently. They see that as a big advantage in a domestic supplier –- it’s hard to put a price tag on that.
Moody: So your team decided to become very valued by a smaller group of customers.
Sammut: That’s right. We decided to offer a higher degree of service to the end customer by establishing customer-focus teams, starting with a program manager who’s very experienced in the industry. Then we use the same team to drive improvements in quality, yield, and throughput as well as locate lower cost components, design for better manufacturing by co-developing the design, and help finalize the component selection. It’s working very well. When customers look at the total cost of ownership, we are more competitive.
And of course we've been very very selective about customers. We don't want to fill capacity with business that is not a good long-term fit. We’re being pressed on these programs -- volumes exceeded forecast for everyone in the automotive industry, domestic and transplants, Ford, GM, Chrysler, Hyundai, Daimler, VW -- their volumes have risen dramatically.
Moody: So how many customers did you settle on?
Sammut: Fifteen. We pared back our customer base to seven initially and grew the revenue by focusing on fewer customers and finding ways to secure more of their business. Now we're back up to 12 with plans underway to launch three more over the next year.
We plan to get back to fifteen customers, but they will be fifteen right-size partnerships at about $50 million to $100 million. Right now we’re at $30 million, and we are adding customers slowly, essentially making the same selection decisions a Venture Capital Firm or a Private Equity investor would -- because when you fast forward, when you engage with a customer, you are invested as much as a bank would be in inventory, receivables, etc. So we make slow and careful decisions looking five to 10 years out because can’t afford to pick bad customers –- just one could take us off a cliff.
We used the [Customer Rationalization Matrix] chart to pare back customers that weren't a good fit, and focus on the good ones for partners.
We’re doing 20 to 25 electronic assemblies. That’s pretty pared -- in the past we would have had over 50 -- so we pared back the complexity as well as the number of customers.
We also reduced variety, down from hundreds or thousands of unique components to a few hundred line items, which means we can focus on succeeding with the type of customers that are in our sweet spot.