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Supply Chain Management of Elamex, S.A. de C.V.

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Netra Shetty
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Supply Chain Management of Elamex, S.A. de C.V. - December 30th, 2010

Elamex, S.A. de C.V. provides manufacturing services in Mexico and the United States to original-equipment manufacturers--primarily U.S. companies, mainly in the appliance, telecommunications, automotive, confectionery, and medical industries. It focuses on the effective management of assembly processes, ranging from assembly-only services managed by the customer or by Elamex, to full materials procurement and assembly contracts. It also operates a metal-stamping subsidiary in Louisville, Kentucky, and takes part with General Electric Co. in a joint venture for plastics and metal stamping in Mexico. Elamex is majority owned by Accel, S.A. de C.V., a Mexican holding company. Although it is incorporated in Mexico, its common stock is traded in the United States, and it moved its headquarters from Ciudad Juarez, Chihuahua, across the Rio Grande to El Paso, Texas, in 2001.

Fledgling Contract Manufacturer: 1972-90

Elamex International was founded in 1972 and was owned for 17 years by Charles Dodson, who was its chairman of the board and chief executive officer throughout this period. Elamex was a pioneer in the maquiladora concept, in which, starting in 1965, real estate, originally, and later also labor, were provided to foreign original-equipment manufacturers. Under this Mexican program raw materials could be imported into Mexico in-bond, transformed into a finished component or product, and exported without duty. To take advantage of Mexico's cheap labor, manufacturers would design or partly manufacture a product in the United States, then send it to Mexico for further assembly, usually labor-intensive, before shipping it back to the United States.

The first maquiladora law was passed in 1971. It allowed plants in Mexican cities along the U.S. border and along the coasts to be totally owned by foreigners, to employ foreign technicians, and to import raw materials, supplies, and machinery duty-free. A 1972 law extended these provisions to the entire country. As a result Mexican entrepreneurs began to build large industrial parks, stimulating the growth of maquiladora factories and employment. U.S. and other foreign firms began to move the labor-intensive aspects of their manufacturing operations to Mexico. The dominant businesses were apparel and electrical assembly plants.

By 1979 the maquiladora industry was employing 106,000 people on the Mexican side of the U.S. border. The major site was Ciudad Juarez, just across the Rio Grande from El Paso. Half of the economically active population was working, directly or indirectly, for a maquiladora enterprise. Prominent among the entrepreneurs there was Jaime Bermudez Cuaron, a former president of the local government. Grupo Bermudez, S.A. established several large industrial parks in Ciudad Juarez. Its director general was Francisco Barrio, who worked closely with Elamex and, from 1983, ran his own construction company, Constructora Lintel. During the 1980s the maquiladora industry continued to grow, in part because of the sizable depreciation of the peso, which resulted in Mexican wages falling below those in Asia and the arrival of such large non-U.S. employers as Sony Corp., Matsushita Electric Industrial Co., Ltd.,, and Samsung Corp. A single new factory now might employ 3,000 or more workers.

Expansion in the 1990s

A majority interest in Elamex International was acquired in 1990 by a subsidiary of Accel, S.A. de C.V., a Mexican holding company. In the early 1990s Elamex increasingly changed from being a contract manufacturer supplying manufacturing services for a client who retained responsibility for parts procurement, to a so-called shelter operator that performed most tasks required to operate a manufacturing facility in Mexico. It provided the industrial space, hired all workers and administered payroll, coordinated labor relations, obtained all permits and paid all utility fees, imported the foreign manufacturer's raw materials, equipment, and machinery, and exported the finished products. Net sales came to $50.9 million in 1991.

Elamex International, in 1992, reached 33rd place among Mexican exporters and 201st among reporting Mexican firms in terms of sales. Its exportations were principally electronic and electromechanical products. In 1993 Elamex was also 12th among Mexican importers, indicating the high volume of raw materials, equipment, and machinery being obtained for its shelter operations. The company was employing more than 4,000 workers in 1994. Elamex reached its zenith in 1995, when it was the fifth largest maquiladora in Mexico and the largest shelter operator, since the four maquiladoras that ranked above it were subsidiaries of foreign companies such as Sony and Motorola, Inc. Elamex was the world's fourth largest contract manufacturer in terms of square footage. Assembly of electronic products accounted for 82 percent of its revenue.

Elamex International became Elamex in 1995. The following year Accel sold 49 percent of the shares of Elamex's common stock on the NASDAQ exchange. Elamex was operating or directing operations at 17 manufacturing facilities. The company's headquarters and many of its manufacturing facilities were located within nine miles of the U.S. border and the international airport, rail, and truck depots in El Paso, Texas. Eight of these plants were in Ciudad Juarez. Two were in Nuevo Laredo and two in Tijuana. The plants in the interior included one each in Guadalajara, Monterrey, and Torreon.

Elamex's operations were primarily the assembly of electronic equipment and of electromechanical, avionics, and medical products. Some 28.5 percent of Elamex's net sales came from contract manufacturing, but the remainder was from shelter operations in which the company was responsible for delivering the completed product. Some 77 percent of net sales was derived from electronic products. The company specialized in assembling high-quality, technologically advanced printed circuit boards with computer-automated equipment using surface-mount and pin-through-hole interconnection technologies. Elamex customized its assembly lines for each client by assigning a separate workforce, team leaders, supervisors, production engineers, managers, and quality-control personnel to each project.

Elamex dropped to eighth place among maquiladoras in 1996 but was still first among shelter operators. Its net sales came to $118.92 million (compared with $60.22 million in 1992) and its net income to $7.93 million (compared with a $45,000 loss in 1992). Both figures were records and seemed to indicate that the investors who bought company stock at $9 a share in the initial public offering had made a wise decision. Thomas N. Cochrane of Barron's warned, however, that in spite of "the company's fine growth over recent years, it's well to remember that Elamex is primarily an assembler of electronic devices, not a manufacturer with a producer's potentially large margins. ... The Mexican government has decreed a 21% increase in the minimum wage, and a 26% boost in utility charges, but the effects of these added expenses aren't yet reflected in Elamex earnings." In 1997 Elamex raised its sales by 11 percent, but its net income began to decline, and company shares rarely traded as high as the initial $9 in ensuing years.

Elamex acquired Eurotec S.A. de C.V. in 1997 for about $3.9 million. This company owned a plant in Ciudad Juarez dedicated to plastic molding and metal stamping, with revenues of $7.9 million in 1996. The purchase expanded Elamex's capacity for plastic molding injection and added metal stamping and powder-coat painting to its capabilities. In 1998 General Electric International Mexico, S.A. de C.V. acquired a 49 percent interest in Elamex's plastic molding and stamped metal operations in Ciudad Juarez for about $3.5 million. This became a joint venture known as Qualcore, S. de R.L. de C.V., which added a 116,000-square-foot facility in Celaya, Guanajuato, and was offering plastics injection molding, metal stamping, powder-coat painting, and pad-printing services in 1999. Elamex, in 1999, acquired a Louisville, Kentucky, metal-stamping company, Precision Tool, Die & Machine Co., for $20.3 million in cash. The acquisition of this privately held company, with sales that amounted to $54.6 million in fiscal 1998, expanded the company's customer base in the automotive, appliance, and industrial controls industry and added welding, orbital riveting, and machining to its in-house portfolio of capabilities. Elamex also began packaging food products in 1999.

Elamex got out of its chief business--turnkey contract manufacturing of electronic components--in 2000, when it sold these operations, housed in two leased Ciudad Juarez plants, to Plexus Corp. for about $53.7 million in cash. The sold activities accounted for about $82 million of Elamex's $160 million in net sales in 1999. In 2000 Elamex recorded by far its highest net income ($17.38 million). The company actually suffered an operating deficit, however, with its profit resulting from $21.8 million collected from the sale of subsidiaries.

Elamex in 2001-02

Elamex was operating 19 facilities in 2001 with a combined total of 1.22 million square feet of manufacturing space. Eight of these were in Ciudad Juarez, turning out medical, electromechanical, telecommunications, military, and confectionery products, plus industrial bags. The Torreon factory was assembling shotgun parts and a facility in Ramos Arizpe, Coahuila, was assembling ceiling air conditioners. Three plants--in Chihuahua, Ciudad Juarez, and Nuevo Laredo--were vacant. There were three metal stamping and assembly plants in Louisville and Jefferson Town, Kentucky. The company headquarters and warehouse were in El Paso. In April 2001 Richard Spencer became president and chief executive officer of Elamex, replacing Hector Raynal, who remained with the company as its chief operating officer.

Elamex's Mexican manufacturing services accounted for 41 percent of total sales in 2001. This included Qualcore's operations during the first six months of the year, which came to $8.6 million. Qualcore was selling primarily to a single manufacturer of home appliances, and disappointing results were putting its future into doubt. The Precision operations accounted for the remaining 59 percent of sales and were predominantly for the appliance, automotive, and consumer electronics industries. Capabilities in this area included tooling design and repair, fabrication or procurement of tooling, injection-molded plastics, metal stamping, powder-coat painting, pad printing, and plating. Both the contract manufacturing and metal-stamping segments of Elamex's business were profitable, but the company sustained a net loss of $11 million on sales of $131.98 million in 2001 because it lost $7.8 million on the Qualcore joint venture and also took a $2.6 restructuring charge. Accel owned 59 percent of Elamex's common stock at the end of 2001.

Elamex's trend away from maquiladora manufacturing in the late 1990s continued into the next century. Companies that focused primarily on hiring cheap labor had been leaving Mexico to employ even cheaper labor in countries such as Guatemala and China. Maquiladoras employed some 1.2 million workers in mid 2001, but one-fifth of these jobs had been lost by spring 2002 as demand from the United States contracted sharply after the September 11, 2001 terrorist destruction of New York City's World Trade Center. In addition, the strong performance of the Mexican peso in relation to the U.S. dollar in 2001 had caused production costs on the Mexican side of the border to rise. Elamex's number of employees had fallen, in 2001, by two-thirds from its peak of 5,431 in 1998. The company again lost money in the first quarter of 2002 as its Mexican contract manufacturing operations continued to decline.

Elamex, in March 2002, acquired Mt. Franklin Holdings LLC, owner of a general-line candy manufacturer located in El Paso, and also Franklin Inmobiliarios, S.A. de C.V., owner of the candy-manufacturing plant used by Franklin Holdings' operating subsidiary--Franklin Connections LP--in Ciudad Juarez. The purchase was made for about $1.15 million in cash and the issuance of about 1.85 million shares of restricted Elamex stock. Franklin Holdings was 33 percent owned by Accel.

Principal Subsidiaries: Elamex de Torreon, S.A. de C.V.; Precision Tool, Die & Machine Company Inc. (U.S.); Servicios Administrativos, S.A. de C.V.

Principal Operating Units: Contract Manufacturing; Metal Stamping.

Principal Competitors: Manufacturers' Services Ltd.
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Last edited by netrashetty; December 30th, 2010 at 06:20 PM..
   
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