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Supply Chain Management of Electronics for Imaging, Inc.

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Netra Shetty
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Supply Chain Management of Electronics for Imaging, Inc. - December 30th, 2010

Electronics for Imaging, Inc. designs and sells systems and software that support high-quality color printing in an office environment. The company has established itself as a global technological leader in its niche since its start in 1988. Through overseas expansion and the introduction of new technology, Electronics for Imaging was achieving explosive growth in the mid-1990s.

Electronics for Imaging (EFI) was founded in 1988 by Efraim Arazi, a native of Israel who was 51 years old at the time. Within a few years, that company would become a force in its niche. But even before his success with EFI, Arazi had developed a venerable reputation as a pioneer and visionary in the computer graphics equipment industry. Arazi earned an engineering degree in the 1960s at the Massachusetts Institute of Technology (MIT), where he was also exposed to computer science. After graduating, he remained in the United States for a few years and helped NASA develop a digital camera. He then returned to Israel and, in 1968, started a company that became known as Scitex Corp. Ltd.

During the 1970s and 1980s Arazi built Scitex into a leading developer and manufacturer of graphic-design and publishing hardware. Importantly, Scitex is credited with pioneering the electronic color imaging process in 1968, as well as with numerous related breakthroughs in the succeeding two decades. By the late 1980s, Scitex, with Arazi at the helm, was known as a world leader in computerized color printing. The company's products were used to generate high-quality, pre-press, computerized color images that were printed using conventional 'long-run' printing techniques. Before Arazi left Scitex, the company was generating revenues approaching $500 million annually and had sold more than $1.5 billion worth of equipment since Arazi founded it.

By the late 1980s Arazi's inventive and entrepreneurial spirit was making him restless. So, in 1988 he simply walked away from his chief executive post at Scitex, despite the company's surging sales and profits. He decided to start a new company from scratch that he dubbed Electronics for Imaging, or 'Efi' as he nicknamed it. (By no coincidence, the 'Efi' moniker was a universal nickname of his own first name, Efraim.) Arazi's plan was to branch out into a new sphere of the color imaging industry that had been mostly unexplored up until that time. "While CEO of Scitex, I began to see an opening for color software, but discovered there was no way to do it within a $600 million company," he said in the August 20, 1993 San Francisco Business Times. "You don't use a Boeing 747 to go shooting at flies," Arazi wryly observed.

Arazi's specific plan was to develop a relatively low-cost, easy-to-use system that would allow users to process and print high-quality graphics, including photo images, in a low-technology environment. Prior to the late 1980s, high-quality color processing and printing was done only on expensive equipment, like that developed by Scitex, and typically by graphics professionals. The potential for a major shift in computerized color graphics printing technology began to emerge in the mid-1980s. During that time, such major copier manufacturers as Canon, Kodak, and Minolta began developing and introducing machines that were capable of generating extremely high-quality color copies for the mass market. The price of that technology declined rapidly in the late 1980s, putting it within reach of many smaller and mid-size companies.

Arazi wanted to initiate a revolution in color desktop publishing similar to the one caused by the black-and-white desktop laser printer. Those systems, introduced in the 1980s, made it possible for individuals to generate black-and-white text and graphics that could have been created just a few years earlier only on expensive, professional, 'offset' printing equipment. Rather than develop separate color imaging and printing machines that were the color equivalents of desktop laser printers, however, he realized that all that he needed to do was develop software that would allow a desktop computer or workstation to communicate with advanced color copiers. Users could then use their desktop computers and peripherals to print professional-looking color images on their copiers.

Arazi's new enterprise hardly resembled the classic shoe-string-budget, entrepreneurial start-up venture. Aside from his personal hoard of cash, Arazi had access to numerous capital sources. Scitex became a major investor in the company, for example, and EFI was able to get $10.1 million in startup cash in the form of advances on products and sublicenses from copier manufacturers. Indeed, the copier manufacturers eagerly supported Arazi's effort because they realized that his planned system could vastly increase the market for their products. Support from outside sources allowed EFI to show revenues of $3.7 million during its first two years, despite the lack of a salable product.

EFI also differed from the typical startup in that its management ranks were packed with heavy-hitting talent. Experienced veterans on EFI's team included principal scientist Dr. Yigal Accad and director of research Dr. Jacob Aizikowitz, both of whom had worked for Arazi at Scitex. Among other members were: Liz Bond, a former director at Adobe Systems; Donald McKinney, a former vice-president at Silicon Graphics; and David Izuka, a previous WordStar International executive and software industry veteran. In addition its own staff, EFI benefitted from links with researchers at MIT.

The association with MIT was important, because it provided the technological foundation upon which EFI would build its first product. EFI became the exclusive licensee of the W.F. Schreiber U.S. Patent 4,500,919. Issued in 1989 and effective for seven years, that patent was the result of eight years and $4 million worth of research conducted at MIT. The outcome of that research and development effort was the first layman-oriented, color preprinting, device-independent technology. A total of four Ph.D. and 12 masters degrees were awarded to researchers who contributed to the project. The chief advantage of the technology was that it brought under control the multiple variables that made it difficult to reproduce color images: lighting, inks, paper, and computer input devices, among others.

EFI's development team scrambled during 1989 and 1990 to build marketable products based on technology related to the patent. It started out focusing on four products: The Eport Color Server, a system that would move color between different desktop publishing and printing devices; the Fiery Controller, a device that would allow color copiers to function as color computer printers; Cachet, a software product that would allow desktop publishers to preview and manipulate color images; and the Color Receiver, which would effectively link desktop publishing and commercial printing systems. EFI planned to license and sell its technology and products to various software, hardware, and copier manufacturer companies.

EFI introduced its first product in 1991: the Fiery color server, the controller described above. The Fiery server was a box that housed hardware and software. The box could be used to link a personal computer--Macintosh or IBM-compatible--and a high-grade color copier to generate four-color, offset-quality reproductions. As intimated earlier, users could create or manipulate the images using their computers. A major technological advantage of the product was that it offered, for the first time on a nonprofessional system, WYSIWYG (what-you-see-is-what-you-get, meaning that the printer produced a true reproduction of the computerized image).

The Fiery system was a landmark device, and represented the start of a pivotal transformation in color printing. The chief breakthrough was that, for the first time, users could print short runs of color images at reasonable prices (traditional offset-color printers, in contrast, had to produce hundreds or thousands of images to achieve price efficiency). The Fiery system was capable of producing a document or image for roughly 35 cents, whereas the first page printed by a conventional offset system effectively cost $2,000 to set up and print. Furthermore, because the technology was new, that price differential was expected to increase throughout the mid- and late 1990s.

With its licensing and distribution programs already in place, EFI was able to capitalize quickly on demand for its Fiery system. The company generated sales of $16.43 million and net income of $618,000 in 1991, its first year of product sales. Those figures rose to $53.7 million and $2.18 million, respectively, in 1992. In an effort to sustain that momentum, Arazi decided to generate investment capital in 1992 by taking EFI public. He had considered going public very early, in 1990, but the Persian Gulf War had thwarted the offering. Even as late as 1992, though, his plan was criticized, because some analysts believed that the company's short profit history would minimize the cashflow from any stock sale. Nevertheless, the successful October 1992 offering brought nearly $40 million into EFI's war chest.

1993 greeted EFI with a deluge of orders for its Fiery systems. EFI sold the systems primarily to Canon, Xerox, Kodak, and Agfa (of Belgium), which put the systems in the hands of companies that owned or leased their color copying equipment. The Fiery units were priced between $20,000 and $38,000, depending on printing speed and other features. In addition, by 1993 EFI was beginning to introduce other products from its development pipeline. Early in the year it began selling its Cachet software, which allowed a computer user to scan a photograph into the computer and manipulate the image for printing. That shrink-wrapped product sold for $500 to $600.

Strong demand allowed EFI to boost revenues to $89.5 million in 1993 and net income to nearly $8 million. The company's stock price jumped to $24 going into 1994 and then to nearly $30 later in the year. It fell into the mid-$20s later in the year, however, on speculation that the company's sales would slide early in 1995. That speculation was caused partly by EFI's intent to introduce a new, less expensive line of Fiery controller systems in 1995. Some observers believed that the company was trying to dump its inventory before it brought out the new line, thereby artificially raising its stock price. Those critics were undoubtedly surprised when EFI sales and profits continued to surge.

EFI's sales rose more than 40 percent in 1994 to $130 million, and net income increased to a record $21.3 million. Management seemed determined to repeat those impressive gains in 1995. Importantly, the company began selling its new Fiery XJ product line, which was a line of three color controller products, each shaped like a different-sized rectangular box and offering progressively advanced features. EFI executed a pivotal agreement with Canon for that company to market, sell, and service EFI's Fiery XJ products under the respected Canon brand name. That announcement and other positive developments pushed EFI's stock price past $50 by mid-1995.

By 1995 EFI had shipped more than 20,000 Fiery systems. That figure would rise to more than 30,000 in 1996. Sales surpassed $190 million for the 1995 year, and were growing rapidly early in 1996 with units being shipped throughout the United States, Europe, and Japan. EFI's founder, Arazi, relinquished the chief executive and presidency slots in 1995, but remained chairman of the board. He was succeeded by 32-year-old Dan Avida, a talented computer engineer who had joined EFI in 1989. Under Avida's and Arazi's direction, EFI planned to sustain its drive to make cost-efficient, high-quality color printing available to anyone with a personal computer.

Principal Subsidiaries: EFI Sales Corp., Inc.; Electronics for Imaging (Europe) Ltd.; Electronics for Imaging (Ireland) Ltd.; Electronics for Imaging (Israel) Ltd.
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