Zentech: Expanding EMS Solutions and Supporting Innovation
Zentech CEO and President Matt Turpin sat down with me recently for a wide-ranging discussion of the state of both domestic and global manufacturing. We also touched on a recent acquisition that will significantly expand their capabilities. Other topics covered were supply chain issues, automation, regulations, and the importance of STEM education in the U.S.
Barry Matties: Matt, thanks for joining me today. You've been the CEO and president of Zentech since 2006. What were you doing prior?
Matt Turpin: Prior to Zentech, I was with a large OEM, Spirent Communications, which acquired a company that I was with for a long time, Hekimian Laboratories. We made test equipment for the telecom, service assurance hardware, and software industries. I managed product development, marketing and the operations group with them. All told, I’ve been in manufacturing for more than 30 years.
Matties: I see that you are pretty active in your local government and are now on the IPC Government Relations steering committee for the national level, plus you are focused on some of the reshoring issues as well.
Turpin: I try to stay current. That's a really good way to be current and be around other like-minded people. Assuring peace is fascinating at the local and national level. Things have really changed during the last 10 years. It's interesting to watch how reshoring is evolving, both on the electronics side and outside of electronics, too. The economics have really changed over the years.
Matties: The interesting thing to me is the way that you are approaching manufacturing and the re-shoring effort. It looks like you are building the American workforce by region, beginning with your local neighborhood, where you are supporting local suppliers for sheet metal and all the other supply chain items that you need. This looks like an interesting model that could really bring infrastructure back into America, one neighborhood at time.
Turpin: I would agree, and add that this is particularly true with regard to how transportation costs play into it, both in terms of wallet costs and lead-time costs. Even though there is still a ton of manufacturing that moves offshore and is completed offshore, most of the innovation and product development activities are still taking place in the U.S. Unfortunately, a lot of those have migrated closer to the manufacturing in Asia, both for regional reasons and cost reasons, but the majority of it is still being done in the U.S.
Having a regional model with the ability to help these innovation centers execute on the design and assembly side of the printed circuit boards, plus a regional model where we can leverage quick tooling to the plastics, sheet metal design, cabling, and ancillary requirements, makes the whole development process faster and more efficient.
Matties: It also gives you a competitive advantage.
Turpin: Certainly it helps with what I refer to as the innovation center and the people doing the innovation. Most times it's the company, but sometimes the company is outsourcing the innovation effort to a larger design house, too. We come in by being close to that and helping them to succeed, both on cost and time-to-market. But you're right; if done correctly it does create a sticky relationship that is harder for them to go outside of, because they won't get the price and the lead-time support that they've come to enjoy.
Matties: I understand that you have recently made an acquisition. Are you ready to make some announcements about that or name names at this point?
Turpin: Yes, we are very excited to announce our acquisition of Colonial Assembly & Design (CA&D). They are well-embedded with the DOD, particularly the Navy, and also have an excellent portfolio of customers in the commercial aviation sector. Their DOD role is interesting (contrasted with Zentech’s traditional contract manufacturing role) as CA&D has traditionally functioned as a prime contractor for electronics system design and manufacturing. We also pick up a very experienced, dedicated and talented workforce. From a capabilities standpoint, it significantly broadens our solutions offering by adding circuit design, mechanical engineering, cable and wire harness expertise, machining and a whole systems level approach to customer engagement. Zentech was recently recognized as the premiere contract manufacturing organization in Maryland, but our larger goal is to be the dominant player in our space in the entire mid-Atlantic region. So the acquisition of CA&D, located in Fredericksburg, Virginia is also strategic from a larger footprint and regional build-out perspective.
Matties: It looks like Zentech is doing about 45% in aerospace and defense and the rest is medical, communication, and so on. What sort of capacity or market are you targeting with this acquisition?
Turpin: The rationale for the acquisition has more to do with expanding our capabilities than it does with expanding into a specific industry segment. Currently, I think we're over 50% defense and aerospace. This particular acquisition is also heavy on the big defense and aerospace side and, like us, has a thriving commercial piece. When you have a blended model like that, it helps keep the overhead costs down on the defense side, making you more cost competitive on a lot of the defense programs because you are not just a pure defense play. You've got to keep your costs in check to compete on the commercial side as well. It's kind of a self-regulating model.
The main reason for this current acquisition is to expand our capabilities. Getting back to the previous conversation about helping these innovation centers succeed and get to market faster, we've done a really good job of supporting customers on the design side as well as on the manufacturing side. Where we want to expand our capabilities is being able to be faster on prototypes. We do prototyping now, but as you get more and more of your work on the prototype side, you really want to make sure you can stay ahead of the curve from a capacity standpoint. The best way to say it is that we want to be able to add quick-turn capacity, and we want it to be a more efficient delivery model.
We currently do a lot of Aerospace Specification 9100 and medical ISO 13485, which is heavier weight, quality system work, and having a model that's more of a straight ISO9000 model like CA&D’s can help us be a little bit more cost-effective on the smaller volume, quick-turn prototype stuff. And that leads to earlier engagement and positioning within emerging programs. That was attractive to us. I have tasked our VP of Sales and Marketing, John Vaughan, with rolling out a ZenPRO (Prototype and Rapid Order) service near term to our combined customer set, to leverage these new capabilities.
CA&D has a much more extensive cable assembly and wire harnessing offering than we've had at Zentech. We are IPC-certified for cable assembly at Zentech and have IPC-certified operators and inspectors, but we have traditionally limited our cable assembly to supporting box builds for our current programs and not pursuing stand-alone cable assembly opportunities. Now, having a more mature organization that's used to doing high-complexity cable and wire assemblies is certainly going to open up that market to us. On the machine shop side, we currently rely on outside support for machining and sheet metal at Zentech, but when you're trying to shrink the overall lead time of a project, particularly on a prototype, having a captive source can dramatically shrink the lead times. Those are some of the capabilities and growth we’re targeting.
Matties: That will help with overall quality as well as lead times, because you then control every facet of the quality in each step.
Turpin: Absolutely, although to get your supply chain right you have to make sure you deal with suppliers that have good quality. But certainly any time you're collapsing the lead time, which you are oftentimes forced to do because of customer requirements, quality is generally the one area that is at risk. And you're right, having that under your own control helps mitigate that risk and the collapsing lead times.
Matties: It's interesting because we are working on an upcoming issue that is focusing on the supply chain. So we’ve been conducting surveys, and overwhelmingly we are finding delivery times are a huge issue in each area, and quality is also an issue. You mentioned that, if you source it right, your quality is there, but I'm finding that with regard to sourcing, it is very difficult to get delivery and quality in a complete package. Not saying it is not achievable, but it seems to be one of the largest obstacles we face in the industry. We’ve also found that supply lines with obsolete components or base materials such as laminates are also challenging. Do you see that in your own supply line?
Turpin: We do. Certainly, when you have to do things quickly and are enabling people to innovate faster and more efficiently, that's generally where you get caught. In a five-year program, you can generally set up your supply so that you mitigate all those risks and shortages and such. But when you have a new product that's coming out and the engineering group doesn't necessarily have their supply chain set up, if you have designers working with that innovation center and know ahead of time what materials or issues you can expect, you’re able to do the pre-planning—particularly if you have direct control of the supply chain.
In a perfect world, you don't need to vertically integrate if you are using a good supplier. In a perfect world, you can set up all your systems so you don't have to worry about quality. But we don't live in a perfect world and the world becomes a lot more imperfect when you're collapsing lead times in a robust, innovative environment, where you're trying to get six weeks of work done in two weeks. Generally that is where things fall apart. In that model, vertical integration does make sense.
Matties: It sounds like this is where your acquisition comes into play, bringing all of those features in-house and giving you control.
Turpin: Correct, and certainly it is a benefit to us, but the ultimate beneficiary is our customers. The customer set that we have, fortunately, are investing heavily in new product development and design, particularly as compared to, say, four years ago. The level of design activity is a magnitude higher.
Matties: That is great news.
Turpin: It's great news for everybody and I think it's a sign of a resurging economy too, because it's not just our customers, but people I talk to in the industry. It seems to be a consistent sign that people are doing more and more new product development and investing in things like this. It's in the news; there are more companies, like Zentech, making investments, not just in capital, but in other businesses to help accelerate that whole process.
Matties: As you're making your acquisitions and looking at your competitive position in the marketplace, do you see automation as a key factor in your future?
Turpin: Absolutely, we do see automation in that light. Going back to the re-shoring discussion, there are a couple of things that have helped drive re-shoring and one is the financial industry. The interest rates in the U.S. are a lot lower than they were 15 years ago. Certainly, as compared to Asia, they are a lot different. The labor rate, fortunately or unfortunately, depending on which side you are on, has been more or less stagnant in the U.S. for the last 15 years—but not in Asia. They've grown by leaps and bounds, so that has helped normalize the labor cost. Of course, there is still a labor cost disparity between China and the U.S., and then certainly between the U.S. and Mexico, Indonesia, Vietnam and some other countries. Automation is the number one thing that people like Zentech and our machine and cable shops must do to maintain that productivity advantage compared to China and the other countries. That's the best way we can compete—by being more productive, investing in automation, getting it right the first time and then offering other cost advantages like time-to-market, speed-to-market, and so on.
Matties: That is the area we have to really focus on here in America. I spend quite a bit of time in Asia, and China in particular, and I see them writing into law that they have to bring automation into factories, because they already realize that labor cost is the variable that is going to drive the market away. Obviously, it's not going to disappear in China; there are a lot of low-cost producers still there. But I look at their national strategy and they're already making adjustments. When I look at America, back in the ‘80s, when I published CircuiTree Magazine, we were talking about automation; at the time it just didn't seem to be important as a national strategy to lower labor costs. Everybody was fat and happy, making lot of money; and then we know what happened.
It feels like there's this new mentality taking hold in America now and a whole new infrastructure that's being built, and Zentech is a part of this; it's a really exciting time.
Turpin: It is exciting, and as part of the national manufacturing strategy, which compared to China and other countries, the U.S. does not have, we're trying as a nation to get our act together in terms of trade policy and at least are looking at some of the currency issues and things like that. But the U.S. is doing a much better job at what I call the ‘basic blocking and tackling,’ like STEM education for example, at the state level and the national level. STEM education is getting the next generation of the workforce into companies like Zentech, and they will replace people like you and me, who grew up in the ‘80s in this business and will be checking out in the next 10–15 years.
We need that next generation, and fortunately, manufacturing is becoming popular again. Ten years ago, schools just weren't promoting manufacturing, but things like 3D printing—which is not the panacea that the news media seems to think it is right now, but it is an interesting and enabling technology—have created a hook for students to say, “Wow, there are some really cool things going on in manufacturing.”
Matties: I saw a quote on your website that says you are turning your customers into raving fans. What does that mean and how does that work in your company?
Turpin: At a high level, it's a belief that a transactional relationship is generally not a healthy relationship. In other words, whether it's the supply side or the customer side, transacting is doing business like you do business at CVS, Walmart or McDonald's, where you come in, it's impersonal, there’s an exchange of value and you're done, without knowing anything about either side of the relationship or what the expectations are. You don’t know how they do business, where their pain points are, how you can solve their problems, etc. If you are just focused on the transaction, on either side, in my view it's not a healthy relationship. It's short-sighted and does not consider all the variables.
Whereas, if you can foster a relationship, either as a supplier, or as a customer with your suppliers, where you're exchanging information, you both know what you need out of the relationship. You both know where you're going in terms of a product development roadmap, what technologies you're looking at adding, and those are generally a result of conversations with customers about where their technologies are going.
To that extent, we have an open dialogue with all of our customers. If we know where their products are heading and what their needs are going to be in the future, we can better support them and enable their success and foster their ability to innovate in a way that a transactional relationship doesn't. The output of that are customers who have become raving fans because they can look back and say, “Man, we killed this quarter and we did it because we had a partner that was able to anticipate our needs and had ample capacity to take care of what we needed. They hedged the inventory, understood our forecasting, executed properly, and had engineering support available when we needed it. And this is the result.” On the other hand, if they tried to get that same result through a transactional relationship, my view is they would fail nine times out of ten.
Matties: I completely agree with that business strategy. How do you keep your employees tuned into that philosophy and what sort of training do you have?
Turpin: There are two parts to that. We are big on training. We tend to use IPC as the reference point for all of our training, and there has been a lot of action lately. Obviously, IPC has always been focused on standards and documentation, but about two years ago they came up with a model called the IPC Trusted Source or Qualified Manufacturer, where they engage in an audit program very much like the quality management system audits. You go through an ISO audit or an ISO 13485 audit, where you have an audit team consisting of one or two people, who come out and turn everything upside down for five days. But as we all know, especially people on the supply chain side, just because somebody has a registered quality system doesn't necessarily mean they are producing good quality. Whatever they are producing is consistent, but it may not be all that good.
What IPC has done is to use that same auditing and registration model, but against IPC standards. They have an audit process called the Qualified Manufacturer Listing (QML), IPC's Trusted Source, where they come in and do that same level of auditing against J-STD-001, IPC-A-610 and other standards.
With that in mind, the QML process has helped us establish a training and communication program, using IPC standards as the reference point—like a curriculum. We then graduate the staff and the employees from a training perspective by getting the organization and all of our processes certified to that. We've always had certified operators and inspectors through J-STD-001 and IPC standards and such. But going to the next level and having the processes certified has been an interesting exercise. It has also resonated with our customers. We've done that on the training side and also on the other employee engagement activities. Just having consistent and repeated messaging on what we're doing, why we're doing it, and what is going on with our customers is important. We have had customers come down and address the employees in an open, “all hands” format. That has been very powerful too.
Matties: I would think so.
Turpin: We had a customer not too long ago whom the employees still talk about, because it is part of our message and what we want to be as a manufacturer. So this VP of supply chain came down and he said, “There are 50 other contract manufacturers between my building and Baltimore that I could do business with, most of whom are less expensive than Zentech on a per-piece basis. But, on a value and total cost basis, I feel like I'm getting the best deal from Zentech because I don't have any returns. I always get what I need when I need it, and you always know what we are going to need. When we need to change, you are able to change quickly with us, and that has value.”
Matties: That has huge value.
Turpin: The employees who heard that received the message and the reinforcement that what we are doing from a manufacturing standpoint is not just putting resistors and capacitors and ICs onto a board. It's not just testing that board and putting it into a box, and it's not just putting stuff together. There is a lot more that goes into creating value for a customer.
Matties: That makes a lot of sense and I understand clearly that bringing your customers in and having that communication with your employees is necessary—pretty much in any business today. When you look ahead, what do you think is your greatest challenge?
Turpin: Over time, one challenge that does keep me up as we grow, and this goes back to the maximum manufacturing strategy and STEM, is finding the right people for the right positions, both from a technical competency standpoint and an experiential standpoint, and to some degree from an attitude standpoint. I want to find people who have the right combination of education, behaviors and experience to fit into our environment. I'm happier that there's more focus on STEM at the high school and college level, but that is a concern because we've tripled in size over the last eight years and we're going to at least double over the next few years. You need to grow the team to support that growth and you need to have the people available to support the customers in the way they need to be supported. That would be one of the concerns, making sure we've got the right human resources in place.
I'd say one of the other challenges, though, would be from a regulatory standpoint. This goes back to manufacturing strategy, but there is a time and place for regulation. I'm not saying you don’t need any regulation; certainly there is a reason for environmental regulation. But regulation needs to be smart and, as a bipartisan statement, Congress is not very smart when it comes to passing legislation. They are probably brilliant lawyers, but not necessarily very smart economists who are deep thinkers as it relates to how legislation is going to affect the broader economy. Things like TSCA (Toxic Substances Control Act) and some other pieces of legislation that have passed were well-meaning, but they do things like discourage recycling because of regulatory components that, at a state level, make it impossible to compete. We've got state-to-state regulations that are different from federal regulations. Getting that stuff worked out over time is absolutely necessary, because if we have a regulation that impairs the country’s ability to manufacture, then over time the innovation that currently happens in this country is going to go elsewhere.
Over time, innovation is going to slowly migrate to where the manufacturing is being done. If less and less manufacturing and innovation is being done in the U.S. then it's not just going to be the manufacturing jobs that we're worried about, it will be all the other jobs that go with that innovation cycle. That would be my other concern, but it needs smart regulation.
Matties: I'm in California today and we certainly see a lot of over-regulation here, that's for sure, as do many other states.
Turpin: Since you mentioned it, that's the state I was talking about. California has regulation that is much more stringent than federal regulations. If I was manufacturing in California, and thank God I'm not, I’d say, let me get this straight: I can't just build and design products for California and have a different set for the rest of the country and the rest of the world. I can only do it one time. I either have to say I'm only going to build product for the rest of the world and country and ignore California, or I have to overburden a product with cost and then I'm at a disadvantage to the rest of the country and the rest of the world. That's what I mean by smart regulation, but it is the same thing at the national level, too. If you don't use a science-based approach to regulation, you can put the U.S. at a disadvantage to the rest of the world.
Matties: We've seen bits of that all over, that's for sure. One last thought: In your position, what is the thing that you enjoy the most about your job?
Turpin: I enjoy everything about my job, but I'd say the really fun part is working with customers to be more successful. In other words, as a manufacturer, we do a limited amount of what I’d call R&D. We are doing things to get better; we invest in technology, but those investments aren’t what I’d call true innovation where we're creating products. By definition we are a low margin industry, so we're not making lots of discretionary investments that can go bad. But our customers have to make those to survive, so working with our customers to identify technologies, to identify ways to accelerate the delivery of these new products and to be part of that and then at the end of the day look back and say, wow, we're both successful as a result of our process. That is fun to see, and as we continue to grow, I get to see more of it. So having Zentech be a part of that is fun for me and for everyone here. At the end of the day we all win.
Matties: I have to say that what we're doing right now is one of the highlights of my job—sitting down and talking to people and hearing their stories and their philosophies, and I really appreciate you taking the time today to do that with us.
Turpin: Thank you, Barry. I really enjoyed it.
For a virtual tour of the Zentech manufacturing facility watch this very interesting video that was shot with a drone: