Unlocking Profitability in EMS : How Fabrinet’s Low-Cost Model Drives Margins

 Unlocking Profitability in EMS : How Fabrinet’s Low-Cost Model Drives Margins

How Fabrinet able to maintain its leadership in EMS space

·        Key KPI :

o   Consistence growth in revenue and Margin

o   Margin leadership with 13 % Gross and 9 % Net  Compare to Competition 8 % Gross and 2.5 % Net

·        Strategic Partnerships:

o   Fabrinet has a strong partnership with Nvidia, a major player in the data center ecosystem. This collaboration has driven Fabrinet’s recent success, especially in its Datacom business,

·        Datacom Growth:

o   Fabrinet’s Datacom revenue has grown significantly over the past two years, from $88.8 million per quarter to $242.0 million in the most recent quarter. Datacom now constitutes 35% of Fabrinet’s total revenue1.

o   The company’s focus on optical-based connections and networking cables within data centers positions it well for future growth as AI and cloud computing continue to expand.

·        Efficient Execution:

o   Fabrinet’s efficient execution has contributed to excellent operating margins during the fourth quarter, leading to record levels of operating income and net income for fiscal year 20211.

o   The company’s ability to manage costs and optimize processes has positively impacted its profitability metrics.

o   Low cost Model

·        Vertical Integration:

o   Fabrinet’s In house components capability

o   In house Manufacturing capability ( most of its competitors yet to get wafer handling capabilities )

·        Early On boarding :

o   Fabrinet considered high potential start ups

o   Get involved in early stage of Development with

Area for improvement

 Cash conversion cycle improvement by

 

1.      Inventory Management:

2.      Accounts Receivable (DSO):

3.      Accounts Payable (DPO):

4.      Supply Chain Optimization:

5.     Technology and Automation:

 

 

Summary

EMS Sustainable Profitability Mantra

·        Early on boarding of customer product

o   Alternate sourcing/Optimized BOM with your preferred suppliers

o   Partner of choice

o   DFX address early – Better VA

o   While emphasizing early on boarding, ensure a robust process for customer collaboration from the initial design phase.

o   Incorporate feedback loops for continuous improvement and flexibility to accommodate evolving customer needs.

·        Vertical integration( try utilized your components)

o   Opt for components critical to competitive advantage or significant cost savings when produced in-house.

·        Leverage Volume through Global SCM for making better pricing with OEM than your customer control Components

o   Focus on building strategic alliances with global suppliers to negotiate favourable terms beyond pricing, such as technology access, co-development, or exclusivity for certain components.

·        Automated# manufacturing# for better cycle time /Inventory control

·        Continues# improvement# culture for better efficiency

o   Establish a structured methodology like Lean Six Sigma or Kaizen to institutionalize continuous improvement, ensuring that it's not just a philosophy but a systematic approach to drive efficiencies and innovation.

·        ERP/MES integration# for end to end visibility of inventory and information flow

o   Focus not only on integrating systems but also on data analytics capabilities for real-time decision-making. Use predictive analytics to optimize inventory levels, production schedules, and resource allocation.

·        Slim organization# avoiding overlapping roles

o   Ensure clarity in roles and responsibilities while avoiding unnecessary bureaucracy. Develop a culture of empowerment to enable quick decision-making and agile responses to market changes.

·        Support start-up# with high potential ( better margin and long term revenue growth)

o   Systematize the evaluation process for identifying start-ups with high potential. Establish clear criteria for selecting partners to ensure alignment with long-term sustainability goals

·        Sustainability# Integration: Incorporate sustainable practices in manufacturing processes and supply chain operations to meet growing market demands for environmentally friendly products.

 

 

Appendix -1 :Margin Comparison

 

·        Fabrinet (FN):

o   Gross Margin: 12.54%

o   Operating Margin: 9.42%

o   Net Margin: 9.35% 1

·        Jabil (JBL):

o   Gross Margin: 8.67%

o   Operating Margin: 4.19%

o   Net Margin: 2.36% 2

·        Celestica (CLS):

o   Gross Margin: 8.38%

o   Operating Margin: 5.01%

o   Net Margin: 3.25% 3

·        Flex (FLEX):

o   Gross Margin: 8.38%

o   Operating Margin: 5.01%

o   Net Margin: 2.56% 4

·        Sanmina (SANM):

o   Gross Margin: 8.38%

o   Operating Margin: 5.01%

o   Net Margin: 3.25% 5

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix -II Cash Conversion Cycle

·        Fabrinet (FN):

o   Cash Conversion Cycle: 92.50 days

o   Days Inventory Outstanding (DIO): 102.52 days

o   Days Sales Outstanding (DSO): 70.88 days

o   Days Payable Outstanding (DPO): 80.90 days1

·        Jabil (JBL):

o   Cash Conversion Cycle: 34.07 days

o   Days Sales Outstanding (DSO): 39.93 days

o   Days Inventory: 61.92 days

o   Days Payable: 67.78 days2

·        Celestica (CLS):

o   Cash Conversion Cycle: 113.91 days

o   Days Sales Outstanding (DSO): 72.36 days

o   Days Inventory: 103.92 days

o   Days Payable: 62.37 days3

·        Flex (FLEX):

o   Cash Conversion Cycle: 68.48 days

o   Days Sales Outstanding (DSO): 47.57 days

o   Days Inventory: 98.73 days

o   Days Payable: 77.82 days4

·        Sanmina (SANM):

o   Cash Conversion Cycle: 35.64 days

o   Days Inventory Outstanding (DIO): 85.14 days

o   Days Sales Outstanding (DSO): 52. days

o   Days Payable Outstanding (DPO): 102.18 days5