Jabil Circuit’s announcement last week that it plans to buy Nypro is one of the biggest plastics stories in years because it signals the sweeping changes taking place in global manufacturing. Big chunks of the American plastics processing industry moved to Asia 10 or so years ago, and Nypro led the way, becoming a major supplier to the consumer electronics industry.
Much of the plastics processing industry in the United States remains small in scale, weak in business skills, and struggling to raise enough capital to invest in new technology. Nypro, one of the biggest independent injection molders in the world, decided to find a buyer because even it felt capital constrained. Jabil–like other players in the global Electronic Manufacturing Services (EMS)–industry is well capitalized and very advanced in design and manufacturing technology. One example: Jabil is financing the $665 million tab for Nypro almost entirely through cash.
What Jabil decides to do with Nypro will be an indicator of how the rest of the American plastics industry may need to change in order to remain competitive on the global stage. There will be issues like becoming closer to very big customers–in fact virtually integrating into their operations. Another big issue will be development of world-class supply chain skills, developing expertise in areas like procurement and should costing that are virtually non existent in the plastics processing business today.
Here’s is one reporter’s opinions on what may be happening:
1. There will be a careful review in the next two months of where the two companies have overlapping capabilities. The most focus will be on China where Nypro is taking a beating in the highly competitive mobile phone consumer electronic business. Jabil unit Green Point is in the molding business and has consumer electronics plants in some of the same cities in China where Nypro had plants. Green Pont has some sophisticated plastics technology (e.g., insert molding, overmolding). Look for consolidation favoring the Green Point assets. Nypro’s plants in the United States are profitable, and focus on markets where Jabil wants to grow: rigid packaging and healthcare.
2. Look for a careful review of the overall underperforming consumer electronics business. Jabil Circuit is a publicly held company and there is careful attention paid to margin performance on a quarterly basis. That kind of approach will be a culture shock to Nypro management, which is used to operating as a private company willing to take big bets for potential benefit.
3. Look for investment, in some cases significant, in the rigid packaging and medical parts of Nypro’s business. Emphasis will be on developing capabilities that better fit the trend toward customers who want global turnkey service. Anticipate in-depth meetings with target accounts to see how Nypro can develop additional downstream capabilities to meet customers’ needs. That’s the Jabil model. If a customer wants a focused plant in a new location in Eastern Europe or Indonesia, that plant will be built. Most likely Nypro will add molding capacity in plants Jabil already operates.
4. Look for more key customer focus than is traditionally the case in plastics processing operations. In the EMS industry, business units generally are dedicated to one customer and operate with autonomy to maintain customer confidentiality. I’ve been in EMS plants that are divided into highly confidential zones dedicated to different customers’ highly proprietary product lines.
5. At Jabil Circuit, business units have direct responsibility for manufacturing results. That will be a major culture shift for Nypro line managers, who in effect will be reporting up through end-market business directors–not production people.
6. Both companies put a significant emphasis on manufacturing technology. But in the molding business that often means precision control of the press and press-side automation. The EMS industry looks at the issue very differently, with an emphasis on the full flow of manufacturing, not just the capabilities of a given cell. Jabil prides itself on having highly automated, continuous flow manufacturing process technologies for system assembly.
7. Look for a dramatic upgrade of the business side of Nypro. Plastics molders are famous for strong engineering, particularly on the tooling side, but weak on back-office sophistication. Look for superstars in supply chain management to do a big-time makeover of Nypro and merge it into Jabil’s MRP and other software rapidly. Look for immediate efforts to move Nypro’s indirect purchasing (IT, travel, office equipment) and logistics into the Jabil consolidated purchasing and PLM systems, which you can imagine are top-drawer. Indirect procurement savings? That’s a very foreign concept to the American plastics processing community.
The term is probably even unknown. And there’s a lot more opportunity than that. Jabil uses an electronic commerce system/electronic data interchange in conjunction with Web-based tools for customers and suppliers. Customers share demand and product forecasts and deliver purchase orders. Jabil uses these tools with most of its suppliers for just-in-time delivery, supplier-managed inventory and consigned supplier-managed inventory.
8. Look for investment in design capabilities at Nypro, already a strength. Jabil’s global customers in medical and other markets need partners that can help them develop new, highly differentiated products.
Still an open question:
The future role of proprietary products at the new Nypro remains to be seen. Nypro was always an outlier in the medical custom molding business because of its own product lines, in effect making it a competitor to some of its customers. While EMS providers love design-heavy products, they do not develop their own proprietary products.
How Nypro won’t change:
There will not be sacking of assets or employees. This is not a situation where a Bain-type company takes over an underperforming company. Nypro is a jewel. That’s why Jabil, which makes relatively few acquisitions, was interested. There will be pruning where there is overlap or little hope for margin improvement. It will be minimal. You can bet your bottom dollar that Gordon Lankton made sure of that.